To make matters a little more complicated about JDSU have a look at this article from Washington Post.
Goodwill Haunting
After Eye-Popping JDS Accounting Charge Comes a U.S. Deluge, Experts Warn
By Steven Pearlstein
Washington Post Staff Writer
Saturday, July 28, 2001; Page E01
By any standard, $50 billion is a big number.
It's roughly the gross domestic product of Hungary.
It's more than the total tax refunds being sent out this month by the U.S. Treasury.
It's four times what it would cost to buy Marriott International Corp. at today's market prices.
And, according to standard accounting principles, it's what one company, JDS Uniphase Corp., lost last year, the most by any company in the history of business.
You might think that with such a loss, JDS was about to shut its doors. Not even close. In fact, the company last year set a record for sales of its high-tech telecommunications components -- $3.2 billion. And at the end of the year, it wound up with about $365 million more than it shelled out for running its factories, offices and labs. It still has $1.8 billion in the bank, no debt and, by all accounts, good prospects as a going concern.
What JDS has a lot less of, however, is "goodwill" -- a somewhat arcane accounting concept that is supposed to reflect the intangible value a company gains when it buys another company for a price in excess of the value of its plants, equipment and patents. But when circumstances change and that intangible value vanishes -- as happened with the bursting of the bubble in high-tech stock prices -- accounting rules require companies to acknowledge that they may have overpaid for those acquisitions and take a one-time charge to reflect that new reality.
JDS is not the only company to be caught in a goodwill bind. Earlier this month, another hot telecom equipment company, Nortel Networks Corp., led off the parade by announcing it had written off $12.3 billion in goodwill. It also warned that further reductions may be likely. And this week, VeriSign Inc., a fast-growing seller of Web addresses and Internet software, and Corning Corp., a maker of optical fiber, also took big charges against goodwill. Experts predict that scores of other, mostly high-tech companies will follow suit by the end of the year, with write-offs that could reach a trillion dollars or more.
"The sheer size of it is staggering -- just mind-boggling," said Robert Willens, an accounting expert and managing director at Lehman Brothers Inc.
No company, however, is likely to take a bigger hit than JDS Uniphase. In a frantic effort to meet the booming Internet demand for servers and routers, JDS bought four companies in deals valued at more than $61 billion. To pay for them, it issued 700 million new shares of JDS stock, which at the height of the stock market boom in March 2000 had reached $153 per share. Because tech firms have very little in the way of tangible assets, nearly the entire value of each of the acquisitions was added to JDS's balance sheet as goodwill, driving the conservative "book" value of the company above $60 billion, or about 300 times its operating profit.
Unfortunately, as JDS's book value was climbing, the value of its stock was plunging on Wall Street -- the same stock it had used to make the acquisitions. The implication from Wall Street was that JDS was overvalued and that it had, in turn, overvalued the four companies it had acquired. The $44.8 billion reduction in goodwill wiped out most of what had been added to JDS's book value only months before and led to the $50 billion net loss for the year.
Anthony Muller, JDS's chief financial officer, questioned just how relevant all this is to investors. He acknowledged that, in hindsight, it may appear that JDS paid more for the four companies than could be justified by the profits they are likely to generate in the coming years. But at the same time, he noted, those "overvalued" companies were purchased not with cold cash but with similarly "overvalued" JDS stock. As a result, he argues, the hit to JDS shareholders from the deals was less disastrous than the $50 billion figure would imply.
Lehman Brothers' Willens agreed. "These charges have nothing to do with the realities of the underlying businesses, which in most cases remain quite strong," he said yesterday. "They merely reflect the incredible volatility of the stock market."
Willens also pointed out that the accounting rules that require write-downs of goodwill are also notoriously, and ridiculously, asymmetric: If JDS stock rebounds, as many expect it will before long, the company will not be allowed to reverse the losses unless it sells the acquired companies at a price higher than now carried on its books.
At the Financial Accounting Standards Board, the college of cardinals for U.S. accounting, Kim Petrone has been heading up a task force on goodwill. She notes that while $44.8 billion may seem like an absurd sum for one company to write off at one time, it's still less than the valuations that companies had been carrying on their books.
"The purpose of the rules is to make sure companies don't mislead investors by having overvalued balance sheets," she said.
And at the Securities and Exchange Commission, Chief Accountant Lynn Turner dismissed suggestions that these write-downs are merely accounting technicalities. He noted that by issuing large blocks of new shares to pay for acquisitions, companies have significantly diluted the value of the stock held by the original investors. And those investors, he said, should be demanding to know why the companies paid so much for the acquisitions and why they waited so long to acknowledge it.
"What's causing the write-downs now has nothing to do with accounting," he said. "The message investors should draw from all this is that companies went out and paid way too much for these businesses and now they have to settle up."
© 2001 The Washington Post Company
http://www.washingtonpost.com/wp-dyn/articles/A62588-2001Jul27.html
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