Portfolios of Some Tech Firms Are Bruised in Market Decline
By CASSELL BRYAN-LOW
Staff Reporter of THE WALL STREET JOURNAL
If you are watching the value of your portfolio evaporate, it may be of some consolation to know that there are a lot of smart people with the same problem.
Many technology companies have seen shrinkage in the value of the portfolio of investments they hold in other companies, and recently have been selling shares of those investments at prices of 90% or more off their peak. Among recent sellers are Cisco Systems Inc., Intel Corp. and 3Com Corp.
Until the stock market soured last year, many companies, both New Economy and Old, profited from their portfolios of investments in other concerns. As the market peaked early last year, gains from the sales of such stakes made up a larger and larger portion of profits. Of course, many of the companies are still selling these stakes at a profit, having invested at very low prices before the companies went public. But, as Nasdaq stocks have plummeted, companies are no longer able to rely as they once did on the handsome profits from those sales.
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"Now what you are seeing is companies selling off these investments at depressed prices to generate much needed cash," says Howard Schilit, head of the Center for Financial Research and Analysis, in Rockville, Md.
The sales also may be an indication of the longer-term view on some of those investments. "The gloomy talk now," says Mr. Schilit, "is that it may take a few years for [technology] companies to get out of this funk."
Intel has sold stakes in 10 of its investment-portfolio holdings this year, valued at a combined $99.1 million, according to financial-data provider Thomson Financial. Of those companies, seven are down about 90% or more from their peaks, and the other three are off 50%-plus. The total value of Intel's portfolio of 550 companies stood at $3.7 billion on Dec. 1, about a third of its value last April.
Intel's recent disposals include the sale of more than 1.8 million shares of GlobeSpan Inc., valued at more than $60.7 million, or at prices averaging about $33 a share. At their peak, those shares would have been valued at $270.3 million.
"In the normal course of managing that portfolio, we are going to be selling a portion of those holdings and investing in other companies," said an Intel spokesman in Santa Clara, Calif. "There are examples that haven't been the greatest financial investment," he said, but stressed that investment decisions are based on gaining access to technology they deem to be strategically important, as well as financial gain.
The "financial gain" side of the equation surely seemed to rule the day when stocks were going up. Intel managed to book gains of $3.7 billion from its investments during 2000. However, the company projects that for the latest quarter, to be reported later this month, no net gains will be realized. (For the year-earlier quarter, Intel posted investment gains of $449 million.)
"Not only won't [Intel] be showing gains, it's quite possible they will be showing losses" in the investment portfolio, says Drew Peck, a technology analyst at SG Cowen Securities in Boston. In light of that, he says it will be interesting to see how Intel will account for those losses. While many companies exclude such investment gains from their Wall Street earnings numbers, Intel maintained last year that such gains are a recurring part of its business and therefore should be included. "Now the shoe is on the other foot," Mr. Peck says. "Will they continue to say losses have to be incorporated or will they abandon the strategy?"
During March, Cisco, the San Jose, Calif., maker of Internet-switching equipment, reduced its stake in two of its holdings, Akamai Technologies Inc. and Corvis Corp., both down more than 95% from their peak.
Cisco said it planned to sell 2.2 million shares of Akamai, averaging about $13 a share, or $29.1 million total value, according to Thomson Financial. That is just a fraction of Akamai's peak price of $344.88 each, and well below the $60-a-share value that Akamai was at when Cisco last disposed of shares in September. Cisco also said it intended to sell 1.4 million shares of Corvis, averaging under $8 a share, or $10.7 million total value. Meanwhile, Corvis shares peaked at $114.75.
A Cisco spokeswoman said the company doesn't comment on individual transactions but said in general "it is common practice to actively manage the portfolio." Meanwhile, the value of Cisco's portfolio of publicly held investments has declined to $3.6 billion, as of the end of January, from $4.6 billion in October. And the company realized no net gains on investment in the latest quarter ended Jan. 27, compared with $31 million realized in the year-earlier period.
Also in March, 3Com, of Santa Clara, Calif., sold 1.5 million shares of Aether Systems Inc., one of its largest holdings. The transaction was valued at about $35.5 million, or $24 a share. However, had they been sold at Aether's peak price of $345 a share, the value of those shares would have been $507.6 million.
The maker of computer-networking equipment, 3Com acquired 2.5 million shares of Aether in 1998, for $6 million before Aether went public in October 1999. 3Com's investments are based on access to technology as well as financial return, said Anik Bose, vice president of 3Com Ventures, which has about 30 companies in its portfolio. He added, once a company has gone public, 3Com "will usually reduce their ownership to a minimum."
The company reported a loss on investments of $44.3 million for the latest quarter ended March 2. That compares with a gain of $654.9 million reported by 3Com for same quarter a year earlier. Mr. Bose said 3Com doesn't publicly disclose the value of its portfolio.
Write to Cassell Bryan-Low at cassell.bryan-low@wsj.com |
