ADC Woes Raise Venture Question
During a conference call Wednesday morning, ADC Telecommunications Inc. (Nasdaq: ADCT) was confronted with a painful question: How will the company's current cost-reduction plans affect ADC Ventures, its venture capital fund?
The fund has been a source of pride for ADC (see ADC's Power Investment Strategy). It includes securities in public companies such as ONI Systems Inc. (Nasdaq: ONIS) and Redback Networks Inc. (Nasdaq: RBAK), in which ADC invested at early stages. It also has helped launch a fistful of promising optical startups, including Cinta Corp. (see Cinta Aims Big), Northstar Photonics Inc., Optical Switch Corp., Optigain, PacketLight Networks, and Yafo Networks.
But times have changed. In November 2000, the fund's estimated worth was $1.6 billion, of which $1.5 billion represented "marketable securities." At the end of January 2001, ADC said it was worth about $1.1 billion -- 30 percent less, due to market conditions. And like other ADC assets, it's being eyed for present gain and future viability.
"Obviously, [the investments] are a source of less funds than they might have been before the tech sector corrected," CEO Richard Roscitt told analysts Wednesday. He acknowledged that ADC's looking at its options, considering which investments to "monetize" and which to write off.
Analysts say that such situations have no easy solutions. "They'll have to look at each company on a case-by-case basis," says Ken Leon of ABN AMRO. "Unless a startup shows a tenfold benefit -- if it's a me-too proposition in the optical space -- that's not going to be good enough."
ADC may also sell its undisclosed stakes in public companies such as ONI Systems and Redback.
Belt-tightening has caused several large public companies to jettison strategic positions in other public companies in order to raise cash. For example, Ericsson AB (Nasdaq: ERICY) sold its remaining stake in Juniper Networks Inc. (Nasdaq: JNPR) (see Ericsson Unloads Juniper Stock). Cisco Systems Inc. (Nasdaq: CSCO) recently filed to sell 6 million shares of Corvis Corp. (Nasdaq: CORV) stock, an investment that Cisco made in the company at its early stages.
Leon notes that Nortel Networks Corp. (NYSE/Toronto: NT) and other big companies have substantial investments: "They'll have to reconsider these in light of the present bear market."
In the meantime, for ADC, restructuring of the venture fund is just one of many aspects of cost savings plans, following a substantial reduction in forecast earnings for its second quarter 2001 (see ADC Lowers Guidance, Head Count).
Due to "a challenging economic environment and a slowdown in domestic telecom spending," the company expects Q2 sales to be $650 to $700 million -- down 13 percent from Q1 levels (see ADC Boasts Record Q1 Sales). ADC also expects to show a diluted loss per share between 10 and 15 cents for Q2.
ADC plans a restructuring plan, in which 3,000 to 4,000 more employees will be cut from staff (see ADC Cuts 400 Jobs), facilities will be closed and consolidated, and every product in its extensive roster will be re-evaluated.
Executives have picked the market spots for the company's future growth. These include optical networking, cable IP, HDSL and ADSL, and networking software. Products outside these food groups -- including wireless, some cable telephony, and CSU/DSU lines -- may be jettisoned. "ADC may decide to put those properties up for sale," says Alan Bezoza, broadband access analyst at CIBC World Markets.
ADC Ventures' options will be scrutinized over the next several weeks.