Labrador Retrievers Growth Rate Article

Awake as usual at 6:00 ., Muller sent one of his two yellow Labrador retrievers to go get the morning newspapers, which are routinely returned one by one in the same order: The New York Times, The Wall Street Journal and the local San Jose Mercury News. Tomorrow, his dog would deliver papers bearing sensational headlines of shocking financial loss over articles peppered with Muller's name.

From Muller's perspective, however, the acquisitions JDS made during the capital spending Brigadoon firmed its position as a leading fiber optic component maker, and the mountain of goodwill the company accrued in doing so was justifiable. The employee talent and technologies JDS garnered were invaluable, and if Muller knew then what he knows now, he wouldn't change a thing.

Everyone knew the industry's explosive growth rates were ephemeral, but few could predict when - and how abruptly - the good times would stop rolling. With share prices soaring and unconditional love showering down from capital markets, cash infusions and optimistic best guesses for the future turned telecom into Las Vegas - without the magic of Wayne Newton.

But somehow, it doesn't really matter.

Both the meaning and the impact of goodwill write-downs are wildly exaggerated. Goodwill reflects the premium a company pays over and above the real value of the purchased company's identifiable assets. When goodwill is impaired, the current value is less than at the time of the buy, and the inflated time-of-purchase value is written down as a one-time charge against profits - but not cash earnings. In other words, the argument goes, since goodwill represents intangible assets, the total could range from a buck and some change to $50 billion and beyond. It's the same either way.

"You place these enormous bets and you don't know if it's going to pan out or not," said John de Figueiredo, assistant professor at Massachusetts Institute of Technology's Sloan School of Management. "It's not so much bad management, but it's perhaps a bad bet. These companies were doing what they had to do to stay on top of the market."

Following the Telecommunications Act of 1996, companies up and down the telecom food chain were faced with a Catch-22 predicament to meet skyrocketing demand. As common carriers aggressively built out their networks, giants such as Nortel, Lucent Technologies and Cisco Systems were thrust into production overdrive to supply optical infrastructure equipment. Demand trickled down to optical component makers such as JDS, which scrambled to get the optical puzzle pieces out the door and into the hands of their customers, the largest equipment manufacturers.

To meet the wall of orders before them and expand their corporate portfolios, many companies gambled on risky growth by acquisition, snatching up smaller companies and the competition by the fistful.

And so they grew. And grew and grew, ballooning into corpulent corporate entities as they devoured dozens of optical start-ups with innovative technologies and sharp employee talent. Integration headaches that commonly plague acquisitions were set aside to avoid slowing production, disappointing customers and jeopardizing a golden opportunity to storm the optical market.

With one out of every four stock mutual funds owning JDS in March 2000 - and share prices flirting with $150 that same month - the company had more buying power than it knew what to do with. Under the guidance of CEO Josef Straus, JDS paid more because it had more, and when the market turned south, share values of JDS and the companies it acquired all experienced dramatic backslides.

The enormous, non-cash $ billion goodwill write-down resulted primarily from three acquisitions between November 1999 and July 2000 totaling $ billion, which JDS made using high-flying shares as currency in stock transactions. The company paid $ billion for optical thin film coating and components maker Optical Coating Laboratory and $18 billion in its capacity-driven merger with wavelength division multiplexer E-Tek Dynamics. The bulk of the write-down resulted from its $41 billion purchase of SDL - a company with hard assets of "only" $2 billion. But with its SDL buy, JDS in one fail swoop added voice, data and Internet transmission technologies to its portfolio, strengthening its market position and eliminating one of its largest competitors.

"If we had gone back to any customer and said, 'We're going to shut this factory down because we're going to consolidate manufacturing in some other location, which will, long term, give us lower cost, better engineering efficiency and faster time to market,' they would have been quite unhappy," Muller said.

Muller understood a loss of this magnitude would draw considerable attention. Reporters would pore over almanacs in crafting their articles to find measurable comparison figures, usually in line with the gross national product of mid-sized Eastern European or African nations. Investors who knew the score on goodwill would shrug it off, wishing instead they'd received sales guidance for the next fiscal quarter.

"We knew there would be two headlines," Muller said. "We lost $51 billion, and we laid off [7000] people."

He was right. His next task was to convince shareholders, the media and other non-investor types that the losses were "paper losses" - that writing off 86% of your company's total assets is not the surgical equivalent to amputating everything from the neck down.

"It's meaningless," said Kevin Slocum, managing director at SoundView Technology Group. "There certainly is a psychological impact, so there's undeniably an impression that is left from such a thing. But it has nothing to do with business operations. It's not real money."

But as is often the case, psychological impacts spawn tangible outcomes. While journalists collectively reached for thesauri to find synonyms for "staggering" to accentuate the loss, the market reacted quickly. Shares of JDS sank 14% from $ to $ in after-hours trading following the announcement and closed the next day at $.

Muller argued that the loss announcement by itself did not cause share prices to drop. He blamed the company's decision to cut its sales guidance estimate from $450 million to a question mark for its next fiscal quarter.

Either way, Muller is unapologetic for the loss. Had JDS used the same share exchange ratios and same number of shares when market values were less inflated, he said, goodwill would have been less, but an opportunity to gain market share would have been lost. And despite the wide loss, he noted that cash increased in the fourth quarter by $650 million. At the end of June, JDS had $ billion in cash and $ billion of goodwill on its books. Last month the company wrote down an additional $ billion from that remaining goodwill total.

"The reality is the financial strength of the company has increased considerably," Muller said. "We have a lot more cash with essentially no debt."

Equity and industry analysts generally agree that write-down moves are cosmetic and have little material effect on operations. The goodwill totals, they said, are a monument to past optimism and an indication of how far the market has plunged: "It doesn't relate to the question of whether the fiber market is going to grow or isn't," said Tom Nolle, president of CIMI Corp.

The Yankee Group predicts the fiber optic components industry will grow from $ billion in 2000 to $ billion by 2005 at a compounded annual growth rate of 25%. Pushing the growth is a migration toward next-generation networks that provide high bandwidth services. In terms of growth, it won't match the explosive good old days, but management will be focused more on solid business planning and less on market hype.

"For the long term, I'm quite optimistic for the whole industry," said Jay Patel, senior analyst for The Yankee Group. "It's just that they lost focus for the last two years."

Others are not so fast to absolve financial sin, countering that although Financial Accounting Standards Board directives are being met to the letter, companies are using misdirection and accounting chicanery to cover up judgment errors made during sunnier financial weather.

Using JDS's purchase of SDL as an example, Peter Knutson, associate professor emeritus of accounting at The Wharton School at the University of Pennsylvania, said the argument that no value was lost because cash was not used in the transactions fails to recognize opportunity cost and the cash potential of the company's stock: Had JDS issued shares to the market, received cash at an inflated price and used the cash to buy SDL, it's no different than financing the acquisition with shares.

"It's rubbish - absolute nonsense," Knutson said. "If you used cash, you could say you've used highly overvalued cash. The analysts are saying it doesn't matter, but it does matter, because in the long run you have to recover what you spent."

Corning exemplifies Knutson's cash purchase scenario, and cannot invoke JDS's stock transaction defense to downplay acquisitions that contributed $ billion to its $ billion second quarter write-off. Although the company used stock in its $ million purchase of NetOptix last year, resulting in $ billion of its total write-down, Corning paid $ billion in cash for Pirelli's optical components business in December 2000. Of that cash total, $ billion was written off. Executives at Corning declined requests for comment.

Although Knutson agreed the acquisition write-down would not impact operations going forward, he said what is most important is whether the acquisitions can generate enough cash to make a return on the investment and turn a profit.

"The future cash inflows had damned well better justify what [JDS] spent, and right now it doesn't sound like it does," he said. "It may be worth what they originally paid in the long run, but certainly their timing has something to be desired. They could've waited a year and picked it up for a song."

Cash wasn't used directly, but the additional shares issued in order to make the purchase - which received approval from the company's board of directors and shareholders - diluted existing shareholders' stake in JDS, at least in the near term.

"To say it's just paper and means nothing is not the case," said Michael Perica, vice president of equity research at Gruntal & Co. "What gets destroyed here is shareholder wealth."

JDS relinquished 25% percent ownership to purchase SDL and recorded goodwill at a share price of $111 when the deal was announced in July 2000. When regulatory and shareholder approval hurdles were finally cleared in February 2001, the market had deteriorated so significantly that in that time, JDS's stock price sank to around $.

"What SDL represents in terms of our portfolio of businesses was worth the percentage of the company that they received," Muller said. "I don't think that changed in any meaningful way between July of last year and February of this year."

But Harvard Business School Assistant Professor Mark Bradshaw said there's truth to both sides of the issue: "The fact remains it was a business decision, and things turned out differently than I'm sure they expected back then."

Companies have used many cost-cutting measures to bring spending levels back to earth, including employee reductions that have claimed thousands of jobs. While workers across all industries are looking over their shoulders, the telecommunications sector has been particularly brutalized: According to outplacement agency Challenger Gray & Christmas, through the first nine months of 2001, the telecom industry has laid off 225,231 employees. The computer industry is a distant second with 131,658, and the transportation industry third with 128,131.

Among large fiber optic players alone, the year's damage report is grim: JDS has reduced its headcount 55% from its peak of 29,000 to 13,000. The once-unwavering Cisco has eliminated 8500 positions. Corning has cut 12,000, or 28%, of its 43,000 employees. And by the end of 2001, Lucent will have cut between 35,000 and 40,000. Worse still, earlier this month Nortel announced an additional 20,000 job cuts, elevating its not-so-grand total to 50,000.

While industry experts and academics agree it would be difficult to pin acquisition mistakes on senior management given the chaotic environment these companies operated in, some former employees point to frivolous spending during halcyon days as the root problem that led to thousands of layoffs. Will Massaad, co-founder of Ottawa-based high-tech placement and recruiting agency Intelligent Technology Solutions, said that while many displaced employees are either resigned to the bad economy or silent in their disapproval, former staffers of nearby Nortel are more outspoken. Based on feedback from thousands of laid-off employees, most say Nortel acted irresponsibly by throwing too much cash at upstart technologies.

"The comment of every single person that came out of Nortel is that [President and CEO] John Roth was spending like a drunken sailor," Massaad said. "There are a lot of pissed-off people coming out of that company." (Nortel declined to respond to Massaad's charges. On , Roth - who said in

May that he would step down as chairman and CEO in April 2002 - announced that current Nortel CFO Frank Dunn would assume the top spot Nov. 1, with Roth staying on as vice chairman until April of next year.)

Although Massaad said JDS - which, in addition to San Jose, also calls Ottawa home - is not taking the same drubbing from former employees as Nortel, at least one analyst said not all shareholders agree with the company's aggressive spending. The risks that came back to bite them this year could bite again.

"It's hard to believe that their executive team is going to remain intact after all of this," said Rob Enderle, research fellow for Giga Information Group. "When you take as big a hit as they've taken, you have to expect the stock holders and the board are going to be looking for some heads to chop off, and the senior executives seem to be on the short list of who they target."

Until struggling companies beat quarterly estimates, increase guidance or say carrier spending has returned, confidence in the sector will remain weak. In the meantime, companies must continue to cut cost and hope they don't cut so deep that when the market rebounds they're unable to meet demand.

Muller said if JDS discovers it's gone too far in its cost-cutting measures, the rapid growth experience of the past would provide a road map for doing it again, which he said the company is prepared to do.

"We have had considerable experience in expanding our staff during times of growth, and we're confident we can do it again. When people say, 'Would you still have made these acquisitions and recorded all this goodwill and had these big losses?' my answer is, without question, I would do exactly the same things because I feel they were necessary to building a great company."

Growth Pattern

Key JDS Uniphase mergers and acquisitions

June 1999

Uniphase/JDS Fitel (merged company becomes JDS Uniphase): $ billion

August 1999

AFC (double band fiber amplifiers and SmartAmp intelligent networking amplifiers for DWDM): $22 million

October 1999

Ramar (lithium niobate-based integrated optical components): $ million

November 1999

Epitaxx (long wavelength detectors and receivers): $500 million

November 1999

SIFAM (optical amplifier components): $98 million

December 1999

Oprel (erbium doped fiber amplifiers/DFB laser diodes, high-temperature and high-power laser diodes and semiconductor optical amplifiers): $27 million

February 2000

OCLI (optical thin film coatings and components): $ billion

April 2000

Cronos (MEMS components): $565 million

May 2000

Casix (crystals and fiber optic components): $60 million

June 2000

E-Tek (WDMs to increase bandwidth capacity in fiber optic networks): $ billion

September 2000

Epion (gas cluster atomic scale surface smoothing and cleaning): $95 million

January 2001

OPA (automated and semi-automated systems for fiber optic components and modules): $169 million

February 2001

SDL (products for transmission of data, voice and Internet information over fiber optic networks): $41 billion