How To Make $45 Billion Disappear

Late last week, JDS Uniphase announced the financial results for its fiscal year ending June 30, and those numbers were horrifying. Fourth-quarter sales were 35 percent below the level of the prior quarter. Losses for the three-month period were $477 million (that’s pro-forma, meaning that it excludes a long list of “special” losses). And then there was the figure that got the headlines: a whopping $44.8 billion balance-sheet reduction in the value of companies JDS Uniphase has acquired in the recent past, a write-down that was promptly labeled the biggest loss in the history of business. The company’s shares, which traded around $150 a year and half ago, now hover around $8; its market capitalization was once around $200 billion, and is now around $12.5 billion.

While that number is spectacular, it of course does not mean that JDS Uniphase literally burned away $44.8 billion in cash over the prior 12 months. But what it does mean is still worth a look.

JDS Uniphase makes and sells components for fiber optic networks. A year or so ago, this seemed like a great business to be in, and the firm was growing at breathtaking speed, in no small part by snapping up competitors. JDSU shares reached sky-high levels, and the company invariably paid for its acquisitions with stock. Its targets were also richly valued—demand for optical network products was growing torridly at the time and it seemed as though the growth-rate of that demand would never slacken, making these companies (and especially JDS Uniphase) favorites of widely followed guru types like George Gilder. The popularity of this point of view snowballed, and at some point the value of these companies lost all contact with reality—an enormous amount of hope was priced into JDSU and similar shares. 

What happened then is that the music stopped. In addition to newfound skepticism about share prices, a general slowdown began having a pronounced impact on big telecommunications companies, which trickled down to their suppliers, and to their suppliers’ suppliers. Suddenly everyone had less money to spend, in large part because everybody else in the telecom ecosystem had less money to spend.

Eventually, one assumes, the process will reverse itself again, and it’s still perfectly plausible that some version of the long-term vision of the future implied by all that enthusiasm will still come true. Some day. But the momentum has been delayed a few quarters, and will likely tread water for at least a few quarters more. Which brings us back to that massive accounting loss: Because short-term demand for JDS Uniphase’s products has fallen off a cliff, it suddenly seems to have rather drastically overpaid in making those acquisitions. The difference, then, between what those acquisitions used to be worth and what they are worth now is $44.8 billion.

How important is this? Well, it isn’t trivial, but mostly it’s a vivid example of the consequences of the overheated optimism of the recent past. The loss number is so dizzyingly large not because JDS Uniphase is engaged in a business that has no value, but rather because the value that used to be attached to that business was a fantasy.

The actual fortunes of JDS Uniphase will likely turn on other factors—also related to its aggressive growth. In a nutshell the firm has too many employees, too much equipment, too much everything, when measured against current demand for its products. Layoffs are slated that will bring total work force reduction to 16,000, more than half the number of employees at the beginning of 2001. The company will reportedly close up 25 buildings and 2 million square feet of space in its offices and factories. The goal is to bring quarterly expenses down to the $350 million range, a level at which it hopes it can break even.

This, of course, assumes that demand will not fall even further—that the music will start up again and demand will return. That’s reasonable enough, but these days, waiting a few quarters for that to happen seems likely to be fairly nerve-wracking.