Dell settled with the SEC for $100 million today for padding its earnings stats with payments from Intel it did not disclose.
Without that cash, Dell would have missed analysts' expectations every quarter from 2002 to 2006. What makes that particularly embarrassing for Wall Street is that they didn't appear to suspect anything fishy. One Washington Post summary of Dell's earnings captures the spirit analysts brought to Dell. After a strong earnings report, shares didn't go wild because Dell was considered so dependable that analysts priced good news into its share price.
Dell shares did not soar with its earnings announcement, as investors "have come to expect good news from the PC giant, analysts say," USA Today noted. "They almost become kind of boring by their success," Barry Jaruzelski of
Booz Allen Hamilton'sBooz & Company global technology and electronics practice told Reuters.
Now, the Dell scheme is obviously a bad practice -- and I already excoriated Dell for it -- but in the wake of the settlement, there's another important angle to consider. Were it not for a fraudulent accounting practice, analysts would have been all over the company for missing its targets. Yet Dell was still a great company with an excellent business that really did innovate with its supply chain management and sales tactics.
Perhaps it is precisely the Wall Street top cover the Intel payments provided that allowed Dell management to innovate without fear that some 25-year-old Goldman analyst's opinion about what might maximize investor returns would hurt their share price.
So, while Dell deserves the lion-share of our scorn, a system that over-privileges quarterly results over a company's long-term needs -- and the analysts who run it -- should share in the humble pie. Our current way of pricing technology companies is broken.
This article has been updated. We originally stated that Barry Jaruzelski was from the wrong Booz.