Friday July 27 2:25 PM ET
TORONTO (Reuters) - A $50.6 billion annual loss at tech giant JDS Uniphase (JDU.TO) was a costly lesson in buying at the top of a bubble market, and an example of the fallout from tech sector excess during a long acquisition binge.
Jozef Straus, JDS's chief executive defended his firm's acquisition spree and the resulting massive goodwill write-downs in an interview with Reuters on Friday.
He said JDS, the world's largest maker of fiber-optic components used to move data and voice traffic, had gained a strategic edge and won customers with its acquisitions, and earnings will make up for dilution when the industry rebounds.
"Had we not done what we did, and told customers when there was a boom that 'I didn't want to do it because I didn't want to fire 5,000 people', some little guy would have got the business," Straus said.
JDS said on Thursday it would boost its planned number of job cuts to 16,000, leaving it with a workforce of 13,000.
Its $50.6 billion loss is bigger than the gross national income of countries like Bangladesh or Hungary, and slightly smaller than that for New Zealand or the Czech Republic, according to World Bank (news - ">according to World Bank ( JDS also slashed the value of goodwill on its books by $38.7 billion to adjust a drop in the value of 10 acquisitions made since September 1999 for about $37.9 billion in stock and a bit of cash.
Industry executives say losses like these are only paper losses because a company is revaluing an asset it bought with costly stock. But shareholders, who now hold stock that is worth a mere shadow of former highs, are not convinced.
NOT REALLY PAPER LOSSES"You can write off the paper goodwill but you can't write off the paper that you used to buy that goodwill: that is the shares, they still exist," said Anthony Scilipoti of Veritas Investment Research.
Goodwill is the difference between what a company paid for an acquisition and its fair value. As companies used overinflated stock to pay for acquisitions, goodwill amassed on their balance sheet and inflated the companies book value.
JDS is not alone in slashing goodwill, and other firms are using the current malaise to clean up their balance sheets after a crash in technology valuations that has seen the Nasdaq fall 58 percent from a March 2000 peak.
Nortel Networks (NYSE:NT - news), the world's largest maker of telecommunications gear, wrote off $12.3 billion in goodwill in its second-quarter, leading to a $19.4 billion loss.
E-commerce services firm VeriSign (NasdaqNM:VRSN - news) wrote down $9.9 billion of the value of acquisitions made near the peak of the Internet boom, and fiber-optic cable maker Corning Inc (NYSE:GLW - news) posted a second quarter loss of $4.9 billion, including a charge of $4.8 billion for the impairment of goodwill.
One problem for investors is that stock-funded acquisitions diluted the value of shares, making it harder for analysts to assess a firm's real worth.
"It's mostly shares these companies issued. The dilution is absolutely real," said one Toronto based buyside analyst.
"Basically companies have never gone on merger and acquisition binges with such overpriced shares as Nortel, JDS, Alcatel and Cisco."
Shares outstanding at JDS have tripled to 1.32 billion, from 427 million before the acquisition binge began. Every dollar of earnings is now divided by three, making it tougher for JDS to show year-over-year per share earnings growth.
WE'RE GOING TO MAKE IT"It is a dilution effect, and sure enough we don't have the earnings to support it now, but we are going to get there," said Straus.
But Scilipoti said it was not that simple. "You can't ask for the shares back that you gave. Now you have more shares outstanding and less earnings per share, which gets exacerbated by having more shares outstanding," he said.
Shares of JDS might look like a bargain at a mere $8.30, down from a year high of $140.50, but savvy investors realize that it now takes triple the earnings for the shares to have the same pre-acquisition price to earnings multiple.
Long-term Nortel investors are holding shares that at $8.32 are worth the same as when Nortel began its acquisition spree. But in that time, total shares outstanding are up 24 percent to 3.3 billion.
"When Nortel was making money last year they had reporting losses. It's unsustainable because the book value is going down all the time and the book value is supposed to represent what the shares are worth," added the Toronto-based analyst.
Companies still have lots of goodwill on their books, a sign that more bad news may be in the pipeline.
Cisco Systems (NasdaqNM:CSCO - news) has grown aggressively by using its stock to buy technology companies, with 41 purchases in 2001-2002 each worth between $20 million and $7 billion. Goodwill on Cisco's books stands at $4.9 billion
Lucent Technologies (NYSE:LU - news) shows about $4.9 billion of goodwill on its books, down from $6.5 billion in 2000, and about 12 percent of total assets of $39.9 billion.
And as net asset values get ratcheted down because of goodwill write-downs, debt agencies are reevaluating the credit worthiness of these companies and cutting ratings.
"People are surprised that Nortel's debt to capitalization ratio is 30 percent. That's a disaster at 30 percent and that's why they are going to be junk bond status," added Scilipoti.