JDSU's Acquisition Hangover

JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU) is still struggling to digest the billions of dollars in acquisitions it's made over the last year. And it continues to negotiate with the Securities and Exchange Commission about how to account for a potential $40 billion write-off it discussed in a third-quarter conference call.

The issue revolves around $40 billion in goodwill -- the intangible assets of the companies it acquired -- that JDSU said during the conference call it intends to write off. In order to write off the goodwill, the company is likely to have to make dramatic accounting changes, including restating its third-quarter earnings.

JDSU's vice president of corporate communications, Jeff Wild, acknowledged that when the company takes the $40 billion goodwill write-off, it will have to restate its third-quarter earnings. "[The write-off] would only affect our GAAP [Generally Accepted Accounting Principles] numbers, not our pro forma earnings," he says. "It's an issue about where the market was when we announced the merger and where it was when we completed it."

Most of JDSU's $56.2 billion goodwill appeared on its balance sheet between July 10, 2000, and February 13, 2001 -- the time between when JDSU announced it would acquire SDL Inc. for $41 billion and the time the deal closed. The coming write-off of a significant chunk of those intangible assets won't affect JDSU's pro forma earnings -- the earnings numbers Wall Street tracks.

But the balance sheet stirrings are a sobering testament to just how quickly the economy slowed down once the technology bull market ended. "[The goodwill write-off] really highlights the amount by which the company overpaid and how overvalued its own stock was," says Andre Desautels, a principal at Trilogy Advisors.

“At first glance it looks terrible that they paid so much for their acquisitions, but the difference here is that JDSU isn’t writing off $40 billion in inventory or doing something that would be destructive to the company’s balance sheet,” says Max Schuetz, an analyst at Credit Suisse First Boston. “It was all done using the Monopoly® money of the time.”

At this point JDSU won't say when it will write off the $40 billion in goodwill, nor will it give much comment regarding its conversations with the SEC. "We're still telling [the SEC] what we're doing and waiting for their feedback," says Wild.

Separately, JDSU says it's still reviewing all aspects of its business and looking for plants it can close, employees it can layoff, and other ways to cut its operating costs. In April, the company said it would let go of 5,000 employees, 20 percent of its workforce.

Since then, though, JDSU has cut its sales forecasts again, and analysts expect it will adjust its workforce accordingly. The company will announce its fourth-quarter earnings on July 26. It expects sales for its fourth quarter to be approximately $600 million and sales for its first quarter of fiscal 2002 to be $450 million.

JDSU shares were down 0.48 (4.5%) to 10.13 on Tuesday.

- Phil Harvey, Senior Editor, and Chris Bulkey, Research Analyst, Light Reading
http://www.lightreading.com