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JDS is at it again
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December 20, 2001: 5:03 p.m. ET
But shouldn't the latest news from AT&T and Juniper be sending up the warning flags?
By Adam Lashinsky
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SAN FRANCISCO (CNN/Money) - AT&T gives up the dream of being a soup-to-nuts telecommunications company. Once-bulletproof Juniper Networks drastically lowers its fourth-quarter revenue projections. And JDS Uniphase, whose fans once swore its ticker stood for "Just Don't Sell US," is ... making another acquisition?
Strange but true. JDS (JDSU: down $0.20 to $8.20, Research, Estimates), which maintains dual headquarters in San Jose, Calif., (the capital of Silicon Valley) and Ottawa (the capital of Canada), is at it again. Its last several acquisitions, all using stock as currency, produced accounting losses that totaled $50.6 billion in the fiscal year that ended June 30, one of the largest losses in corporate history. JDS's announced $340-million acquisition of a microelectronics unit belonging to IBM is a little different in that at least part of the deal -- $100 million -- is in real money. IBM (IBM: down $1.19 to $122.70, Research, Estimates) accepted wampum (JDS stock) for the balance, as well as a promise that JDS will pay up to $85 million more in 2003 if the microelectronics unit hits certain performance targets.
Why look at this smallish deal now when there are seemingly bigger fish to fry like AT&T and Juniper? It's all of a piece, really. When you break down the valuations of the companies involved, you see that far from being over, the telecommunications meltdown has quite a ways to go. (See this column's thoughts on the telecom bust a week ago and note that nearly all the stocks mentioned have gone far lower still.)
Start with IBM. At a market capitalization of $210 billion, its entire, well run, profitable, steady-as-she-goes enterprise is worth about two times estimated revenue for 2002.
Enter JDS Uniphase, which has repeatedly slashed its forecasts and will probably have about $1 billion in revenue in calendar 2002. (It recently reduced its forecast for the December quarter to as low as $280 million and warned that March-quarter sales will be lower -- the trend line isn't good.) JDS, despite the plunge in its stock price from $65 in January to Thursday's close of $8.26, is still worth about $11 billion, or 11 times sales.
Finally, there's the money-losing IBM unit, which JDS says will add about $92 million in annual sales. That puts the pricetag on the IBM unit at about 3.7 times sales.
So let's go through the math again. IBM, valued at two times sales, is offered nearly four times sales for a money-losing operation. JDS is paying a lower valuation than the rest of its company. Quite a deal -- unless...
Unless Wall Street wakes up and sees how woefully overvalued JDS Uniphase remains. And wouldn't you think that AT&T's admission that the cable TV business is just the cable TV business, and Juniper's acknowledgement that it's being affected by declining expenditures at the telecommunications carriers just might affect JDS Uniphase, a supplier to the equipment makers?
"I think it's shortable by 50 percent of where it's trading," says Paul O'Neil, a fund manager with Knight Bain Seath & Holbrook in Toronto, whose fund's charter, alas, doesn't allow him to short stocks, or place bets that a stock price will fall.
So much for the hoped-for telecommunications rebound in 2002.
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