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Technology Stocks : Network Associates (NET) -- Ignore unavailable to you. Want to Upgrade?

To: $$$ who wrote (3685)	12/3/1998 9:29:00 AM
From: Martin A. Haas, Jr.	Read Replies (2) \| Respond to of 6021

$$$, posted on the CSCO thread, go towards the bottom of the article: Dec. 2, 1998 BY ADAM LASHINSKY Mercury News Staff Writer THE Securities and Exchange Commission has upped the ante in its burgeoning crackdown on the way technology companies account for acquisitions by signaling it will scrutinize much older transactions than the accounting and technology industries previously had expected. The SEC's policy shift comes in the form of comments to a relatively obscure technology concern, Lernout & Hauspie Speech Products N.V. (Nasdaq, LHSPF), a Belgian speech-recognition software company with dual headquarters in Burlington, Mass. Lernout disclosed late Tuesday that it may be required to re-state so-called in-process research-and-development charges it took for acquisitions as far back as November 1996. Although Lernout isn't well-known, the impact on Silicon Valley of the SEC's move is potentially devastating. Federal agencies often dictate policy by making examples of individuals or sole companies and then expecting others to follow suit. Any company that has taken an upfront charge to earnings for research-related expenses in the past several years could see those charges challenged and its earnings decrease -- along with its stock price. ''It's an issue that's taken on a life of its own at the SEC,'' says Mike Volpi, vice president for business development at Cisco Systems Inc. (Nasdaq, CSCO) which Volpi estimates has taken acquisition-related charges of at least $1 billion over the last three years. ''We're getting ready and looking back two to three years.'' At issue are the charges to earnings companies take for the R&D expenses of an acquired company. The write-off is intended to give acquisitive companies the same benefit they would have received from conducting the research themselves. By taking a large upfront write-off, a purchaser avoids adding more of the value of the acquisition to its balance sheet as goodwill, an asset that must be amortized over time. Higher charges upfront translate into lower recurring expenses. Lower ongoing expenses mean greater future earnings. The allure of better profits has led some companies to abuse the rule by taking a bigger one-time charge than intended under the accounting rules. But if a company is forced to incur higher expenses going forward, its earnings will be smaller. Lower earnings almost always mean lower stock prices over the long term. ''It certainly negatively impacts stock prices,'' says Volpi. ''The question is how much.'' Not all past in-process R&D charges are at risk. But in recent instances where the SEC has forced a re-statement -- such as at America Online Inc. (NYSE, AOL), Cabletron Systems Inc. (NYSE, CS) and Motorola Inc. (NYSE, MOT) -- it has considered only relatively fresh activity. ''My understanding is that the SEC has not asked anyone to go back more than the calendar year,'' says venture capitalist James W. Breyer of Accel Partners in Palo Alto. ''It's always the uncertainty that concerns companies the most. One of the concerns has been how retroactive the SEC's scrutiny would be relative to in-process R&D.'' Breyer, who is attempting to mobilize Silicon Valley opposition to the SEC's actions, notes that ''there are open questions regarding most companies that have not gone back'' to re-state acquisition-related charges. What's more, even those that have re-stated -- like AOL -- aren't safe, Breyer suggests, if the SEC is changing its standards midstream. The SEC isn't being shy about its intentions. SEC Chairman Arthur Levitt and Chief Accountant Lynn E. Turner have given speeches to business groups and written letters to the accounting profession decrying abusive accounting practices. The crackdown also affects more than public companies that have completed buyouts. It inhibits them from conducting fresh deals, and that has cast a pall over the prospects for start-ups and other private companies to sell out to public concerns. The result is that Silicon Valley is steamed. ''It's fine to go back and have people correct things that weren't according to the rules,'' says Cisco's Volpi. ''But if people have to re-state even if they abided by the rules, that's really bad.'' But judging from the SEC's words and actions, Washington doesn't think tech companies were abiding by the rules. It's just that nobody was calling them on their transgressions. Now someone is. LARSON'S HAPPY. FOR NOW: It's good to see William L. Larson in a better mood. Larson is the brilliant and mercurial CEO of Santa Clara-based Network Associates Inc. (Nasdaq, NETA), and when we last heard from him he was fuming in a conference call with investors that meanies (read: short sellers who profit from a stock's fall rather than its rise) were irresponsibly talking down his company's stock. Larson's singing a happier tune, of course, because shares of Network Associates are up sharply since his grousing. They closed Tuesday up a sliver at $51, having dipped below $30 in early October. Investors have complained that Network Associates' torrid pace of acquisitions has made it impossible to distinguish between the company's ''organic'' growth -- revenue increases from improved product sales -- and the effects of acquired companies. The company, which makes a variety of software that businesses use to manage their networks, also has been the subject of persistent rumors that the SEC is investigating its acquisition accounting (see above). Larson has denied that such a probe exists. However, when Network Associates purchased CyberMedia Inc. in early September it took an in-process R&D charge equal to 93 percent of the $131 million it paid for the company. One thing Larson has suggested is that he'll knock off the buying spree long enough to convince Wall Street he's really building a business. One who's convinced is Michael Kwatinetz, the wide-ranging analyst and research director for Credit Suisse First Boston Corp.'s technology group, which is hosting its annual technology conference in Scottsdale, Ariz., this week. Kwatinetz began recommending Network Associates' stock last week with a report that purports to peg the company's current organic growth at 30 percent. He did this by calculating the effects of sales at acquired companies back to 1995. The 30 percent growth, while slower than the 50 percent rate between 1995 and 1997, is ''still pretty significant,'' says Kwatinetz. Larson, who needs little encouragement, agrees and congratulates his company on its one-year anniversary (it changed its name from McAfee Associates after purchasing Network General Corp.) as a ''billion-dollar, 1-year-old start-up.'' Larson also trumpeted the company's ''20 consecutive quarters of overachievement,'' that is, exceeding Wall Street's expectations. He even played a videotaped testimonial (''But don't take my word for it,'' he begins) from Microsoft Corp. (Nasdaq, MSFT) President Steve Ballmer, who urged investors ''if you have not looked at (Network Associates) lately, I certainly encourage you to do so.'' Investors indeed have looked. And they barely blinked Tuesday when Lehman Brothers Inc. analyst Michael Stanek removed his ''buy'' recommendation on the stock, reasoning that it had appreciated too much. San Francisco-based Stanek, who's bullish on Network Associates and Larson, teases the bevy of his competitors who've jumped into the stock after its rise. ''Aren't we supposed to buy low and sell high?'' he muses. The stock ''has had a pretty heady move'' and now is worth about 24 times his forecast for its 1999 earnings, a ''multiple'' more or less in line with the broader market's. I sold half my position at 46, I should have held on as outlook on NETA looks good. Regards, Marty