Goldman Cites EMC, Bites Brocade

Analyst firm dishes praise and brays about corporate governance

July 16, 2005

3 Min Read
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Companies in the storage space have improved their corporate governance, but some continue to lag in the quality of their financial reporting and the independence of their boards, according to a report from Goldman Sachs & Co.

In a note to clients this week, analyst Laura Conigliaro and colleagues at Goldman Sachs Research said the quality of corporate governance among firms in IT hardware space has generally improved since their first qualitative analysis last March (see Goldman Cites Dell, EMC, IBM).

The analysts single out EMC Corp. (NYSE: EMC) as "setting the standard," with financials that stand out for the amount and quality of detail provided. They say Dell Inc. (Nasdaq: DELL) is a close second, but needs to improve in some areas. The analysts say Dell confuses investors by shifting between presenting its storage product growth rates as overall figures and then as Dell/EMC ones, for instance.

Hewlett-Packard Co. (NYSE: HPQ) also gets kudos, though it's not in the top league with EMC and Dell, due to "lack of unit disclosure, customer segment detail, and detail on acquisitions."

Conigliario et al also single out Brocade Communications Systems Inc. (Nasdaq: BRCD) -- for a thrashing. They say Brocade lags behind others in the sector in financial transparency and board members' independence from company ties that could affect objectivity."Brocade's below-average disclosure, including its double restatement relating to its stock options practices, and relatively low level of board independence place it in the bottom tier, even though it recently added an additional independent director," the report states. (See Brocade to Restate , Brocade to Delay Filing Form 10-Q , and Brocade Adds New Board Member).)

Asked to comment on the report, a Brocade spokeswoman says the company is working "diligently to resolve the issues related to our filing delay." There are also efforts underway to make significant improvements in board independence, she says. (Details weren't available at press time.)

IBM Corp. (NYSE: IBM), which fared well in the group's last report, is in league with HP. But the analysts think there's a need for more detail in certain areas. And they say IBM's latest communications with Wall Street have been "increasingly and uncharacteristically vague."

Overall, financial reporting is on the upswing, in Goldman's view. Network Appliance Inc. (Nasdaq: NTAP), QLogic Corp. (Nasdaq: QLGC), Seagate Technology Inc. (NYSE: STX), and Storage Technology Corp. (StorageTek) (NYSE: STK), for instance, now provide full financial statements at the time of earnings. Last year, they made only partial financials available at earnings time. Dell, EMC, HP, and Sun Microsystems Inc. (Nasdaq: SUNW) continue to provide full financials as they did last year.

Brocade, Emulex Corp. (NYSE: ELX), IBM, and McData Corp. (Nasdaq: MCDTA), however, continue to furnish partial financials when earnings come out.Companies might do well to heed the report's words to the wise. "Even beyond helping to avoid the corporate failures of the recent past," the analysts write, "strong corporate governance has been found to have a positive impact on valuations."

Mary Jander, Site Editor, Byte and Switch

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