Goutama, I don't know if you're around much anymore, but you might be amused to know that the mainstream business press seems to be picking up on your analysis of Intel's financial engineering operation. I picked this up from Message 15520693 , it looks like it's on the Barron's site, but I don't subscribe. Maybe somebody else can check out the rest of the article.
Chipmaker Intel, one of the first corporate VCs, has a strategic equity portfolio with stakes in more than 550 public and private companies. Though only a handful are public, at yearend 2000 the two portfolios were valued almost evenly, at $1.9 billion in marketable securities and $1.8 billion in non-marketable securities. Intel carries marketable investments at the lower of cost or market value, but generally does not adjust private valuations. A spokesman argues that Intel Capital, the company's investment unit, creates value for shareholders beyond the immediate worth of a given private investment.
As of December 31, the Intel portfolio included approximately $290 million of net unrealized gains on marketable securities. Applying the Nasdaq's 15% year-to-date loss to Intel Capital's marketable securities would wipe out those gains, and then some. Given the rising importance of venture-capital gains to the company's earnings, their expected disappearance could have a pronounced effect on Intel's earnings. Last year, the company realized investment gains of $3.7 billion, equal to a third of reported net income of $10.5 billion. The prior year, portfolio gains accounted for only 12%, or $883 million of reported income.
Some people compare the probable losses hidden inside VC funds and corporate balance sheets to the credit bust of the late 1980s, when many commercial banks and savings and loans were forced to liquidate loans well below book value. If so, coming quarters won't be pretty either for the Wall Street banks that tried, with varying success, to integrate venture-capital investing into their investment banking operations. The goal, of course, was to build a veritable assembly line in which a company's financing needs were controlled from start-up through IPO, generating a succession of fees. Last year J.P. Morgan Chase CEO William Harrison went so far as to call VC investments his bank's main earnings driver, but only a few months later the bank was hit with a $92 million venture-capital loss.
Personally, I figure 2nd quarter will be the really ugly one for Intel, when the year-ago comparison shows the $2 billion Micron gain that the financial engineers insisted be treated as recurring and not one-time. |
