The chatter on Wall Street has been about waiting for the other shoe to drop at
. When, ask the skeptics, will Cisco pull a
and write down the value of its botched acquisitions? Only after that day of reckoning, argue the Ciskeptics, can Cisco be buyable.
Unfortunately, due to the vagaries of U.S. accounting policies, the worrywarts are asking the wrong question. Cisco may in fact have to take further write-downs to account for big acquisitions that didn't turn out to be worth anything. After all, it gobbled up companies similar to the ones Nortel bought (often in dueling tit-for-tat purchases) and that Nortel has said are now nearly worthless. Consider that, in just four acquisitions between January 2000 and February 2001, Nortel spent $17.1 billion. Last week Nortel said it would write off $12.3 billion of the value primarily associated with those acquisitions as "impaired assets." In contrast, Cisco, in its big-bath write-down announced in mid-April, took just $289 million in charges for impaired assets, about a third of that for its failed photonic switching acquisition,
So it might appear that Cisco has a jumbo-sized charge coming, even though John Chambers has said in speeches this week that the company doesn't see any need for more write-offs or revisions to its operating guidance. The difference, however, is in the accounting. Before U.S. accounting standards put the kibosh on pooling-of-interests accounting last year, Cisco employed the technique liberally. It simply combined the balance sheets of its acquired companies with its own, creating no additional goodwill, or difference between the purchase price and the tangible assets of the acquired company. Nortel, because Canadian accounting law prohibits pooling, used purchased accounting, which created a heap of goodwill. For example, Nortel added $11.5 billion of goodwill for the four acquisitions listed above, meaning that it's writing off all the intangible value and then some of its late-bubble transactions.
So the real measure to look at here isn't the size of the write-off. Cisco won't have a relatively large impairment charge because it only recently began using purchase accounting. (Having said that, in the nine months ended April 28, 2001, the company did add $1.6 billion in goodwill to its balance sheet for acquisitions of $2.8 billion accounted for as purchases, according to its securities filings. A future impairment charge anywhere near that will say plenty about Cisco's vaunted acquisitions engine.) What is more important than goodwill on the balance sheet, however, is cash and things that look like it. And this is why Cisco's stock is holding its own even as Nortel's plummets. Shares of Nortel closed Thursday at $8.45, down 20% in the week since the company announced its write-off bombshell; Cisco's shares stand at $17.68, down a negligible six cents.)
Says Paul O'Neil, a Toronto fund manager with
Knight Bain Seath & Holbrook
who is employing a hedging strategy that is net long Cisco: "It's about cash. Nortel is burning cash, and Cisco is printing it."
Indeed, despite sales-growth declines and net losses in the quarter ended April 28, Cisco generated $868 million. Including $5.1 billion in cash and another $12.3 billion in restricted and unrestricted investments, Cisco had $17.3 billion in fairly liquid assets on its balance sheet in late April. By contrast, Nortel said last week it would report an operating loss of $1.5 billion in the second quarter, and it had $1.7 billion in cash as of March 31. Nortel announced a new $2 billion credit line, which gives it near-term liquidity. Cisco has no long-term or short-term liquidity issues.
here presciently and specifically bad-mouthing the entire telecommunications equipment sector in February (when Cisco traded for $26.44 and Nortel was worth $19.94), isn't touching Nortel, which he thinks may well not make it. He suggests it's time to consider Cisco, though he sees the stock falling as low as $10 if the climate gets worse still. "We are going to start looking at tech again, but telecom won't be the leader," he says. "In contrast to March 2000, when everything couldn't have been going better, how much worse can it get?"
Perhaps someone should ask shareholders in
In keeping with TSC's editorial policy, Adam Lashinsky doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, frequently guest hosts the TechTV cable television news show Silicon Spin, and is a regular commentator on public radio's Marketplace program. He welcomes your feedback and invites you to send it to