DJ Wells Fargo Writes Down Investments, But Why Did It Wait?
06 Jun 19:40
By Bob Sechler
Of DOW JONES NEWSWIRES
AUSTIN, Texas (Dow Jones)--It's no surprise that many of Wells Fargo & Co.'s
(WFC) equity investments have suffered precipitous declines amid the market
turmoil of the past year.
But several banking industry analysts were taken aback late Wednesday by the
bank's decision to take a huge second-quarter charge - totaling $1.13 billion -
primarily to write down the value of some of those investments. Wells Fargo,
based in San Francisco, had recorded a small gain from venture capital
investments as recently as its first quarter.
"The question is, couldn't they have recognized some of that (investment)
impairment then" or in previous quarters to spread out the hit, said Edward
Jones analyst Chris Blum.
The non-cash and other special charges announced by Wells Fargo late
Wednesday will equal 65 cents a share. Prior to news of the charges, the bank
had been expected to earn 69 cents a share for the second quarter, according to
Thomson Financial/First Call.
Wells Fargo Chief Financial Officer Ross Kari said in a prepared statement
that the bulk of the charges - $1.05 billion - will result from impairment
write-downs of publicly traded and private equity securities, mostly in his
firm's venture capital portfolio.
The charges mainly are reductions of non-cash venture capital gains that
Wells Fargo recognized in 1999 and 2000, he said.
He cited two Wells Fargo venture capital investments as examples: Cerent
Corp., which was acquired by Cisco Systems Inc. (CSCO) in late 1999, and Siara
Systems, acquired by Redback Networks Inc. (RBAK) in early 2000.
Wells Fargo recorded non-cash gains at the time of both acquisitions. But
Cisco and Redback shares are off sharply since then: Redback, closing Wednesday
at $16 a share, is down 91% from its 52-week high, while Cisco is down 70% from
its 52-week high, closing Wednesday at $20.76 a share.
"The company expects to write these positions down due to the sharp,
sustained declines in the market values, and the uncertainty of price
recoveries," Kari said in his statement Wednesday.
He pointed out that Wells Fargo has been documenting the declining valuations
of its investments as unrealized losses in its quarterly statement of
comprehensive income.
Still, several analysts questioned why the firm hadn't moved to lock in some
of the losses earlier to spread out the hit, particularly since the declines in
market valuations of firms such as Cisco and Redback aren't a new phenomenon.
"On the surface, it's a little troubling," CIBC World Markets analyst Thomas
McCandless said. "I would have expected that they would have managed it
better."
A Wells Fargo spokesman said late Wednesday that the firm opted for the
write-downs now because it believes the time is right under generally accepted
accounting principles and based on the sustained reduction in market valuations
of the securities.
Regardless, McCandless and other analysts said they don't think the
announcement by Wells Fargo signals that investors should brace for news of
similar large second-quarter charges from other banking firms.
Some firms, particularly J.P. Morgan Chase & Co. (JPM), have been writing
down the valuations on an ongoing basis, they said.
"Some companies have been more aggressive in their accounting," Edward Jones'
Blum said.
McCandless agreed. "I think it's very company-specific," he said. "I don't
think it's something that the whole industry is going to be saddled with."
Wells Fargo officials, meanwhile, expressed confidence in their business and
in their venture-capital investing despite the announced charges.
"Venture capital investing is a volatile business, but over the long term it
has earned very attractive returns," CFO Kari said in his statement.
"Even after these write-downs, recent returns on our venture capital and
equityinvestments were significantly above our historical averages," he said.
"We expect returns to be above our minimum hurdle rate of 20% in the years
ahead."
-Bob Sechler; Dow Jones Newswires; 512-236-9637
(END) DOW JONES NEWS 06-06-01
07:40 PM |
