Forum Archive Index - June 2001

["Peter" <pmaiden@xtra.co.nz>]

This from the New York Times. Apparently the second largest quarterly loss in history.

Another corporation who uses a bad quarter to clean out the closet. Past earnings been inflated?

The subject of goodwill and intangibles etc has been discussed often on this forum.  Some NZ companies have gone on the acquisition trail using shares as payment. Relatively high amounts of goodwill sitting in some NZ company balance sheets.

The dimensions won't be the same but the principle is.

Read in context that NZ's GDP is about NZ$107B.....

Cheers

Peter

 

June 17, 2001

Market Watch: A Company Tested and Found Wanting

By GRETCHEN MORGENSON

he money pit that was once the telecommunications industry became a yawning crater last week. On Friday, Nortel Networks, a company that only a year ago epitomized stock market glamour, said a significant reduction in purchases of its equipment would result in a $19.2 billion loss in the second quarter.

John Roth, Nortel's chief executive, blamed the now-miserly capital markets for shutting off the spigots to companies that used free-flowing funds to buy telecom gear, which everyone now realizes was superfluous. He allowed that the global telecom industry "is undergoing a significant adjustment."

The market shrugged off Nortel's loss, with the Nasdaq down less than 1 percent on Friday. But make no mistake: it is a milestone in the history of mismanagement of shareholder assets.

The $19.2 billion loss exceeds the annual gross domestic product of El Salvador and approaches that of Bolivia. Closer to home, Chuck Hill, head of research at Thomson Financial/First Call, said Nortel's loss contributed more than one percentage point to the 16.6 percent decline in earnings that he expects from Standard & Poor's 500 companies in the second quarter, compared with the same period last year.

Nortel's stock has collapsed. Last July, it traded at $89, giving the company a value of roughly $275 billion. Now, with the stock at $9.86, Nortel has a value of $31 billion. Almost one-quarter trillion dollars in shareholder wealth is gone. And Nortel will discontinue its quarterly dividend, which it has paid since 1965.

Perhaps the most staggering figure in the Nortel news is the $12.3 billion write- down it is taking this quarter in good will on recent acquisitions. Good will is an intangible asset — the difference between the price a company pays to buy another and the value of the target's assets at the time of the purchase.

Nortel's write-down is the best proof yet of how entirely bankrupt the new- economy theory was that fueled the mania of the late 1990's. Because earnings didn't matter in the new era — only revenue growth did — Nortel was willing to pay exorbitant prices for acquisitions to juice its revenues. Never mind doing a cost/benefit analysis.

In 2000, Nortel acquired 11 technology concerns that management said would fulfill its "vision of building the new, high-performance Internet." They included Sonoma Systems, a developer of high-speed data delivery systems, Alteon WebSystems, an Internet infrastructure company, and Xros Inc., a company in the business of photonic switching.

To buy these companies, which had net tangible assets totaling just $167 million, Nortel paid an astonishing $19.7 billion, mostly in shares. In other words, Nortel shareholders, at the behest of management, paid on average 118 times the value of these companies' tangible assets to acquire them.

On June 2, 2000, for instance, Nortel bought Xros for $3.2 billion in stock. Xros's net tangible assets at the time amounted to $3 million. No wonder all that good will is being written off.

The only wonder is that a manager and a board would make such blundering buys. Yes, Wall Street firms were feverishly pitching the deals, and yes, others in the industry were making equally awful acquisitions. But a seasoned executive or board attuned to stewardship of shareholder assets should have just said no.

Nortel explained the write-down as something it must do "in light of the adjustment of technology valuations and the current business outlook." It added that it had derived "enormous value" from most of its acquisitions.

Everybody knows about bull-market geniuses — stock pickers who do well only in a market uptrend. Now, as Nortel shows, shareholders must be on the alert for bull-market managers, executives who have no clue how to manage a business when the economy stops roaring. How many more are out there?