Scenes From A Failed Marriage:
Elizabeth MacDonald, Forbes Magazine, 08.20.01
forbes.com
"If Lucent didn't run from Alcatel because of its poor
numbers, it should have.
Alcatel's very public booting in May by Lucent had to make the Paris
telecommunications equipment company feel humiliated.
Lucent walked away from a reported $34 billion all-stock deal because
it says the pact wasn't a merger of equals-meaning, Alcatel wouldn't
give it an equal amount of clout in the boardroom. The move stunned
market watchers.
That's because Lucent supposedly needed this lifeline. After all, the
Murray Hill, N.J. telecom equipment company (and owner of the
famed Bell Laboratories) was the one that disclosed embarrassing
accounting irregularities in late December. Those mistakes led it to
erase $679 million from its revenue in its fiscal 2000 fourth quarter,
which ended last September.
And it is Lucent, not Alcatel, that has been reporting losses ever since,
most recently a $3.3 billion third- quarter loss accompanied by a
projected $7 billion to $9 billion restructuring charge for the fourth
quarter. Lucent's stock is down 85% in the last 52 weeks.
But a closer look at Alcatel reveals that it was in no position to buy
Lucent last spring. Its numbers are bad, too.
Sure, Alcatel reported earnings of $1.2 billion in 2000 and eked out
$185 million in the first quarter of this year. And its American
Depositary Shares, at a recent $16, near their 52-week low, make it
seem like a cheap value play.
But its earnings lately are weak. For one, Alcatel took a $2.3 billion
charge in the second quarter for restructuring, goodwill and inventory
writedowns, among other things. This resulted in a net loss of $2.7
billion in the quarter, with possibly more writedowns coming.
Underpinning this shakiness is the fact that cash generated by
operations plunged $1.2 billion into the red during the first half, versus
a negative $411 million a year earlier. That's largely because Alcatel
is having trouble making sales; its inventory ballooned to $6.5 billion
as of June 2001 compared with $5.5 billion as of June 2000.
So what does a company do to make its results look better? Take lots
of one-time restructuring charges and create a piggy bank of reserves
to bolster earnings. The one-time charges, meanwhile, are offset by
one-time gains that make earnings look better.
Specifically, Alcatel reported $715 million in gains in the first quarter
from selling off its stakes in various companies, nearly matching the
$860 million in such gains it got for all of 2000. If not for the
one-timers Alcatel would have been bathing in red ink in the first
quarter, with a loss of $503 million, says the Center for Financial
Research & Analysis, a Rock-ville, Md. research boutique run by
accounting expert Howard Schilit. More one-time gains will pump up
earnings, as Alcatel is reportedly getting set to unload $2 billion worth
of assets in a broad restructuring.
Meanwhile, Alcatel's "one-time" charges came to $122 million in the
first quarter, near the $134 million it took for all of 2000. More
important, Alcatel booked such charges in each of the past four years,
totaling about $1 billion, says Schilit's group. The group believes that
sizable, recurring one-time charges raise a red flag that a company
may be boosting operating income by loading ongoing costs into these
writeoffs. It can't be determined that that's happening here, as Alcatel
repeatedly declined comment on the analysis from Schilit's group. A
spokesman says Wall Street takes these items into account when
valuing the company.
Now look at how some of these restructuring reserves reappear on
the other side of the profit-and-loss ledger. During the 12 months
ended March 2001, says Schilit's group, Alcatel booked about $254
million in restructuring charges but sluiced $408 million from reserves
through earnings. Since the end of 1996 Alcatel has included about $2
billion of restructuring reserves in earnings, Schilit's group figures.
That's a nice kick to pretax earnings over that period. This is a
company under tremendous strain, and the cracks are beginning to
show." |
