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Technology Stocks : JDS Uniphase (JDSU)
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To: Jacob Snyder who wrote (20658)6/29/2001 3:26:37 PM
From: KMcKlendin  Read Replies (1) of 24042
 
Hi Jacob--

Sorry it took me a while to respond; I've just moved to Salt Lake City and I'm intermittently without internet access.

I understand your concerns about overpaying for aquisitions. In fact, the huge writeoffs of goodwill almost stopped me from buying JDSU. Here is my simplistic rationale:

1. JDSU overpayed for aquistions in the sense that any earnings derived from them did not justify the dilution. Subsequently, the stock price has plunged. Shareholders have therefore already payed a significant price for the aquisitions as the market has valued them significantly lower. A new investor in JDSU is buying stock aquisitions at the current level of the companies stock, and much lower than previous investors have paid.

2. The write off of goodwill is not a true loss in the sense that the company actually has a negative cash flow. For example, assume I have a company that generates a dollar per share of earnings. I then aquire another company that earns nothing, and is worth nothing. I use my stock to pay a value equal to that of my original company. My stock price should be now half as much--twice as much stock and the same amount of earnings. It may now be that my reported earnings are losses from the writeoff of good will. However, my company should be valued by its real (proforma) earnings which are now fifty cents a share. Who has paid the price for the aquisition? The original shareholders at the higher value. I would argue that this situation is analogous to JDSU's.

3. The writeoff of goodwill decreases the taxes on the true cash flow actually generating money for JDSU.

So I'm still hoping that my original analysis has some value. I admit that I know less than I would like about finance and balance sheet analysis, and would appreciate any education.

--Keith
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