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Technology Stocks : LSI Corporation -- Ignore unavailable to you. Want to Upgrade?

To: E_K_S who wrote (15990)	11/14/1998 8:45:00 PM
From: Ian@SI	Read Replies (1) \| Respond to of 25814

Eric, I haven't looked up the 10Q but it should be readily available at any of the Edgar sites. The Barron's article described what seems, to me at least, to be SOP for most US firms that do acquisitions. I would be surprised if any knowledgeable investor reacts negatively or positively to the article. But I have no idea how the typical Barron's reader will behave. Extract related to LSI follows. Ian. ++++++++++++++++++++ Subscribers may view the complete article at: interactive.wsj.com On September 9, the SEC's new chief accountant wrote a letter that shook the tech industry. The Commission's new Count, Lynn E. Turner, chided an accounting group over an income-juicing trick played by corporate acquirers. Claiming they'd just paid millions of bucks for research with no future use, high-tech acquirers have been instantly writing off most of the buyout price, and thereby dodging a drag on future earnings. It's like moving into a house and ignoring the mortgage bills. On the SEC's forceful advice, eminent firms have changed their reports, including Cabletron, MCI WorldCom and America Online. A subsequent memo dated October 9 from Count Turner detailed the R&D writeoff heresy, along with others, and bears reading by every tech watcher, at www.aicpa.org. The R&D writeoff and an alternative accounting approach called pooling of interests are the industry's two ways of avoiding the earnings burden of gradually writing down purchase prices against earnings. James W. Breyer, managing partner at the Palo Alto, California, venture-capital firm Accel Partners, worries that the SEC is discouraging both accounting choices. Foreign firms who don't play by our accounting rules would be able to buy up young tech firms more cheaply than a U.S. acquirer. "This is one of the central policy issues facing the high-technology community," Breyer says. With industry and government scratching their heads, auditors can't guide their clients. So tech companies haven't changed behavior much, since Count Turner's September 9 alert. Using some high-tech magic of my own, I examined every earnings announcement since that date. I found that about 100 firms have announced R&D purchase writeoffs, worth over $8 billion. Half of that amount was from two firms, DuPont and MCI WorldCom. That's $8 billion of future earnings hits avoided. At a 30-times earnings multiple, those two months' worth of writeoffs are equal to about a quarter-trillion dollars in stock value. Some of the most eager users of this tool are such hot-money honeys as Elan and telecom supplier Uniphase. Elan just took an $816 million writeoff in a quarter when its revenues were all of $171 million. Uniphase has written off nearly $140 million of acquired R&D since its June 1995 fiscal year. That's a material amount, given that Uniphase's operating profits over that stretch were but $66 million. Such writeoffs are nice for insiders like Accel's Breyer, but from the outside it makes earnings numbers the sheerest of speculations. That's because the amount of R&D written off is computed from estimates compounded on estimates compounded on estimates. A fine example is LSI Logic, the Milpitas, California, chipmaker. For the September quarter, LSI reported $33 million in operating profits, and $225 million R&D writeoffs from the purchase of a firm called Symbios. That's over 18 months' operating profits. LSI told me that it needed more than a day to respond to questions on the writeoff, but the firm's 10Q discloses that the $225 million number resulted from management estimates of revenues, cost of sales, R&D costs, selling, general and administrative costs, and income taxes from the Symbios R&D projects. Each of these factors, moreover, was itself based on sub-estimates that took LSI two pages just to summarize. As the SEC accounting chief Turner warns in his September 9 memo, estimates of future revenues and costs should be evaluated with skepticism when they come from management. When the financial department can produce a year and a half's profits with greater certainty than LSI's product engineers, even the best of estimates invites scrutiny. Here's the punchline: When Lynn Turner arrived at the SEC this summer, he had just previously been the chief financial officer of a recently acquired chipmaker called Symbios.