2001 Review: JDS Uniphase and Other People's Money

Goodwill to man indeed.

Wall Street Winces

Big Funds Come Up Big

Restoration Hardware Shakes Off the Dust

Five Stocks That Came Out of Nowhere

Stocks Stuck in the Back Seat

Four CEOs Who Slipped Through the Net

Biotechs Talk Turkey

Enron Avalanche Frosts the Accountants

In Wireless, Few Winners

Slipping in the Oil Patch

This year the lush hills and fertile dales of techland, once home to a veritable cornucopia of synergies and economies of scale, gave rise to a new crop: the megawritedown. This hardy new weed grew out of the realignment of boom-era merger values with the reality of the tech bust, and it threatens to spread like kudzu in the grim new era of tech investing.

The telecommunications travails of 2001 thrust a little-known accounting move called the goodwill writedown -- or the asset-impairment charge, if you prefer -- into the headlines. Companies like JDS Uniphase JDSU and Nortel NT had grown fat during the boom years by acquiring competitors by the dozen, issuing billions of dollars' worth of their own stock in exchange for enterprises that often had few employees or products, let alone earnings and revenue streams. Under the accounting of the day, they carried these assets on their books at the purchase price and slowly whittled the values down over a period of years.

All this seemed to be working out fine until late last year, when telecom stocks suddenly started falling after an inexorable two-plus-year rise. As big telcos stopped spending on network gear, the stock prices dropped and the once-acquisitive companies fell into a funk. Then, with orders drying up and revenues in free fall, the companies came to notice a strange thing: The amount they had paid for acquisitions outstripped their own stock value by billions of dollars.

Austin Carr

By April 2, 2001, for instance, onetime Wall Street favorite JDS Uniphase had fallen 74% in barely three months, to close at $16.69. (It would fall much further still, but that's another story.) Even so, JDS Uniphase advised Wall Street that month that its books were larded with a staggering $56 billion in goodwill -- the premium between the actual value of a property and the amount it was acquired for. JDS was so doubled over by this discovery that it was seeking the help of every businessman's friend, the Securities and Exchange Commission, to figure out how the company could slim down. In spite of the near free fall in its stock, JDS' goodwill totaled nearly five times its market capitalization .

"Companies got cavalier because it wasn't their money -- it was their investors' money they lost," says Ed Schuller, director of equity strategy at Sutro & Co. "JDSU wrote off the equivalent of New Zealand's GDP. It's a little harder to ignore it when you think about it that way."

Zeal and Zealand How the JDS spending binge compares with a certain island nation
JDS Uniphase	Category	New Zealand
$50 billion	GDP*	$49.9 billion
12,000	Population	3.8 million
Optical components, source lasers, transponder and amplifier modules	Top Export Products	Dairy goods, meat, edible offal and wood
San Jose, Calif., and Ottawa, Ontario	Capital	Wellington
*Gross Domestic Product/Goodwill Penciled Down. Sources: Company, government statistics, World Bank.

Of course, because investors already had seen plenty of their money evaporate, JDS' decisions along the way met with little resistance (other than from class-action lawyers, of course). Who wanted to be a bad sport now and get in the way of a rebound?

So in July, after April's bizarre warning, JDS Uniphase proudly rolled out what's believed to be the biggest corporate loss ever, reporting a staggering $46 billion deficit for fiscal 2001. That figure included writedowns of the carrying value of companies such as SDL and E-Tek Dynamics, which JDS had acquired in recent years -- evidently to little avail; by the end of the year, the company would be on course to cut its workforce by two-thirds from its peak level.

Not wanting to miss out on a chance to dump its bags as well, now that the press was spending its fury on JDS, Nortel followed suit in July. In its own memorable earnings moment, it rang up $19.2 billion in second-quarter losses, including a $12.3 billion writedown of premiums it paid for acquisitions.

Of course, the beauty of these charges from an investor relations' standpoint is that they exist on the balance sheet only; the companies simply shift the sums from the unrealized losses column to the realized losses column, in a sense. As such, these massive spasms of red ink get shoved into the one-time events category, shielding Wall Street's preferred metric, pro forma earnings, from harm. Critics call these techniques merely suspended reality.

"The writedown process is just an easy way for companies to sweep things under the table," says Sutro's Schuller.

Broom Hilda

Sweeping won't be so easy in the future, alas. Come Jan. 1, more companies will adopt a new rule, called Statement 142, which was approved by the Financial Accounting Standards Board this summer. Under the new rule, companies will periodically test the actual market value of acquired business and assets and account for the differences in value. Under the old rules, goodwill was gradually reduced over time, or amortized, unless the balance got to be so great that there'd be no way to amortize it all.

Big Losers Telecom's notable 2001 writedowns

Source: Securities and Exchange Commission filings.

Accounting watchdogs argue that the new provision will allow investors to more accurately gauge a company's finances and will force companies to take charges in a more timely fashion. That is, assuming the tech merger and acquisition market ever comes back, of course.

And at the end of the day, that's what the JDS story comes down to. Tech will rise again, investors believe -- or, perhaps, pray.

"People want to believe what they believe," says Schuller. "Tech represents hope. And people still own a lot of it. No one wants to drive that final stake through the heart of technology."