Sunday, 11 January 2009

"You don't know who is swimming naked until the tide goes out"

(By Richard Holway) Always keen to help the recycling movement, readers may remember that this was a big theme of mine in 2000/2001 when the Y2K and Dotcom bubbles burst. (I don’t claim to have invented the phrase – I have just used it a lot!)

This last week reminded me yet again how apt the phrase is in the current downturn. The Madoff/Ponzi scandal and the Raju/Satyam scandal could only happen in markets that were growing extremely rapidly. Success demanded more success. The Tiger was indeed impossible to dismount. The alcoholic or drug user can solve the fallout from his addiction in the short term only by taking another drink or popping another pill.

The problems of revenue recognisition seem to have haunted the IT sector since its inception. Indeed as an ‘old’ analyst I’ve been reporting them for many decades. Remember that it brought Oracle to knees nearly 20 years ago. If you inflate orders/revenues this quarter in a growing market you (usually) get away with it. In a falling market you always get exposed. Same applies to dodgy acquisition accounting (another of my themes). You can only perpetuate the lie by doing more and more acquisitions. The moment the market (usually occasioned by a share price fall) stops you doing the next acquisition, all the chickens come home to roost.

We are just at the start of this downturn. The next two years are going to be worse than anything we have seen to date. There are many naked swimmers. Expect many repeats of the Full Monty.

No comments: