I use various Google products, including Gmail. Yet I do so with the knowledge that Google’s primary business is the sale of privacy, not technology. It is hilarious to see Congress debate privacy issues surrounding Google’s proposed acquisition of doubleclick. And Microsoft’s attempt to block the acquisition misses the key point, a tax loophole Google is skillfully exploiting, just as Microsoft did prior to 2003.
Google is now accumulating vast amounts of cash via non-payment of income taxes and Microsoft has no hope of competing with this. When I first disclosed that Microsoft paid zero federal income taxes in 1999, Gretchen Morgenson, a reporter at the NY Times who went on to win a Pulitzer Prize doing stories from my core research, laughed, saying that was ridiculous. Here is the link to the NY Times front page June 2000 story based exclusively on this research, confirming Microsoft paid no income tax, for which she graciously provided a couple minor quotes at the end of the article. Frankly, I think this is why the NY Times is struggling. It simply can’t accept that news is news, no matter where it comes from.
What Google is now doing is using massive deductions from stock options to reduce its tax liability, thereby creating a cash machine in the form of non payment of taxes, exactly what Microsoft did prior to terminating its options program in 2003, roughly 30 days after my April 2003 article for Barron’s was printed. And the cost of these options for Google is also not fully reflected in Google’s financial statements, fueling the stock price and making it a more valuable currency for acquisitions.
Even after a multi-year heated debate, Congress and the SEC still don’t understand the significance of options accounting and how it corrupts the competitive market landscape. The solution is simple and that is to allow companies to issue all the options they want, provided that the expense is recognized when they are exercised by employees. Recognizing expense on the date of grant, the Black Scholes model, etc. – is all nonsense aimed at hookwinking the public and regulators.
Who would have ever thought that Microsoft would be done in by a scheme it invented, the scheme being the excessive issuance of options designed to pay employees without recognizing the respective cost in the financials, thereby creating vast sums of cash and a more valuable currency, its stock, for acquisitions.
