Thursday, May 22, 2008

The Enron of Norway

When Microsoft bought FAST it was clear they were building a search arsenal to compete with Google. What wasn't clear was just how much of a financial mess they were taking on.

The recent article in The Fast and the Curious describes the tangles around FAST's issues: "Three weeks before it embarked on its blundering attempt to acquire Yahoo, a Google-obsessed Microsoft agreed to pay a juicy $1.23 billion for a Norwegian tech company mired in enough accounting problems, regulatory probes, and conflicts of interest that it had become known as the Enron of Norway."

"....Still, Lervik's business appeared to grow steadily until the second quarter of 2007. The company reported revenues of $35 million, $20 million below forecasts, and an operating loss of $38 million. Financial regulators in Norway investigated, and the losses widened the following quarter. When trading in Fast was suspended on December 12, the company said it would review accounting for all of 2006 and 2007. The latest unaudited results show revenue growth of 7 percent for last year, which is far below Goldman's forecast [of 27%]. Steve Papa, CEO of rival search firm Endeca, characterized 2007 as "the frothiest year for enterprise search since 2000." Endeca, he said, grew 70 percent last year.

Goldman Sachs criticized Fast's habit of capitalizing an unusually high level of research and development costs and booking sales based on future licensing revenue, calling it "aggressive.""

Yet another case reinforcing the benefits of taking your revenue ratably as you deliver, not up front, which can so often lead at a minimum to missed revenues, but sometimes to ugly restatements.

But there's one additional insight here which appals me. "The former president Ali Riaz left in 2006 after six years and has started his own company, Attivio. "I left because after six years of outperformance, I and many other people did not have an equitable stake in the company. It was heavily weighted toward earlier investors, instead of people who actually built the company. I didn't feel it was right," Riaz says. "

That takes nerve to say. You run a company that was mismanaged financially so you have to restate revenue back years, and you say you're leaving because you didn't get a big enough share?! What about all the shareholders who lost money as a result of your poor revenue accounting?

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