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JDSU's Acquisition Hangover

Light Reading
News Analysis
Light Reading
7/17/2001

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

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Physical_Layer
Physical_Layer
12/4/2012 | 8:05:07 PM
re: JDSU's Acquisition Hangover
What is really news in this article? You seem to be bringing up something that is almost one quarter old, and really not material to the company. We can argue until the cows come home about what the goodwill implies, but the reality is that this is NOT news...and any dilution from overpaying for acquisitions is in the past. Can we actually focus on something important here?
ownstock
ownstock
12/4/2012 | 8:05:05 PM
re: JDSU's Acquisition Hangover
True, but the writeoff of such a huge amount is newsworthy...wish there had been more anaylsis of historicals: size, companies involved, conditions placed on the writeoffs, etc. That would have made a much higher quality story. References to what some dimwit at Trilogy advisors said is pretty weak journalism. Did you bother to check if that same guy kept his portfolio squeaky clean of all (obviously overvalued) optical stocks at the time the bubble was growing? But the comments from the CSFB guy are really disturbing...Monopoly money indeed! Must be one crude rude dude! Let him tell that to all the retirees that invested (and lost) their money in his institution! Can't believe he cleared those comments through PR...amazing and sad...probably going to get himself a reprimand at least...
Physical_Layer
Physical_Layer
12/4/2012 | 8:05:00 PM
re: JDSU's Acquisition Hangover
Actually I don't even think goodwill is newsworthy (forget the fact that this story is almost 3 months old). Two points that are tied together.

1) Goodwill is the result of an acquisition, pretty much regardless of the price. For example, if JDS had bought SDL at fair market value (ie, no premium at all) there would still be an enoumous amount of goodwill. The common mistake about goodwill - people assume it is the diff between price paid and fair value. This is wrong...it's the diff between price paid and BOOK value.

2) The market tanked. Old news. This is relevant because the goodwill gets recorded as an asset. If the market cap of a company tanks, the book value of the company appears inflated because of goodwill being recorded in a higher market. That's it.

All too often people assume a comapny "overpaid" for an acquisition. Why? Just because goodwill sits on the balance sheet? Ok, read point 1 again. People should focus more on the number of shares given up, and the revenue (or other value) gained from the acquisition.
rafaelg
rafaelg
12/4/2012 | 8:04:59 PM
re: JDSU's Acquisition Hangover
The really sad part and bottom line:
All this balance sheet creative accounting is going to eventually return to us, the high middle taxpayers...
tiredofit
tiredofit
12/4/2012 | 8:04:57 PM
re: JDSU's Acquisition Hangover
rafaelg,

Really? That's like saying a private company's bankruptcy also impacts the taxpayer. How do you manage to tie jdsu's goodwill write-off with the taxpayer?

"All this balance sheet creative accounting is going to eventually return to us, the high middle taxpayers"
seabizkit
seabizkit
12/4/2012 | 8:04:56 PM
re: JDSU's Acquisition Hangover
It's amazing that not only was the price inflated but so are the egocentric SDL guys!! They were always very difficult to deal with, walking on water is tricky!!!
rafaelg
rafaelg
12/4/2012 | 8:04:56 PM
re: JDSU's Acquisition Hangover
Where do you think the money comes from? It's paper money as the article says "...It was all done using the Monopoly- money of the time.Gǥ
Yes, it sure was! But 1 or 2 bankrupcies don't amount to billions of dollars written off by these COs( The Nortels, Lucents, Ciscos, etc.) This is money that won't be taxed accordingly. A company with overvalued stock, acquires another overvalued stock company, and then writes it off as goodwill. They cover their losses. Are they real? And yes, any backrupcy impacts the taxpayer. Have you looked at the economy lately?
flanker
flanker
12/4/2012 | 8:04:54 PM
re: JDSU's Acquisition Hangover
Goodwill usually is not tax deductible, unless the goodwill can be attributed to a specific asset acquired. Related to this, someone on this thread said goodwill was the difference between book value and the amount paid. I don't think that's correct. When you consolidate two companies according to US GAAP, you markup/mark down assets acquired to market value, and then the leftover amount paid is recorded as goodwill (which cannot be deducted for tax purposes, only amortized for SEC financial reporting). This creates a discrepancy which accumulates as a deferred tax asset or liability on the balance sheet.
jmd
jmd
12/4/2012 | 8:04:49 PM
re: JDSU's Acquisition Hangover
I ditto what flanker is talking about. To understand goodwill simply take two balance sheets and the aquisition deal and then create one balance sheet. The interesting point is to note that markets care most about pro forma income statments which are closer to cash generation.
ownstock
ownstock
12/4/2012 | 8:04:49 PM
re: JDSU's Acquisition Hangover
Flanker...you are technically correct, but not the whole story... The amortization of GW, required under SEC / GAAP guidelines, is an allowable charge, just like depreciation. Since it is funny money, it is a tax dodge...sort of. The original idea was to force it onto the books at the bottom line, to establish some equality between all-stock deals and those done with cash.

-Own
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