Big write-offs a cure for bleeding portfolios

Corporate investors are writing off millions--sometimes billions--of dollars this quarter as they throw in the towel on tech-heavy investment portfolios that have been bleeding red ink since the dot-com downturn.

In recent second-quarter reports, Microsoft announced a record $2.6 billion net investment loss from its portfolio, Comverse Technology warned it will take up to a $15 million charge and media company Belo said it would write off $33 million. E*Trade also said it expects to write off $6.8 million and Wells Fargo took a staggering $1.1 billion write-off.

Corporate venture investors who have taken investment portfolio write-offs are basically acknowledging that the declines in valuation for their public and private investments are essentially permanent.

Amazon.com, for example, had a $36 million write-off in the first quarter for its investments in Webvan, Sotheby's Holdings, WeddingChannel.com and Drugstore.com. And in the fourth quarter, Amazon had $155 million in losses for investments.

"If you have an unrealized loss in your investment portfolio, it won't show up on your bottom line unless you think it's a permanent decline in value," said Melinda Litherland, an audit partner in the technology practice at accounting giant Deloitte & Touche.

"And that's where the judgment comes in," she said. "Who wants to say it's permanent and take a loss? But in this environment, it's getting harder and harder to say it's not permanent."

A common occurrence
Write-offs to account for investment losses have been occurring more frequently this quarter and more are expected to follow. Typically, companies would use gains from their investments to "massage" or pad their earnings. In recent quarters, many of those gains turned into losses, but the kind that were not big enough to warrant the company taking a big charge.

	Red ink Realizing that their tech investments may never recover, many corporate investors are taking millions, sometimes billions, in write-offs. A sampling of affected companies:
	Company				Calendar Quarter				Write-offs
	Microsoft				Q2 2001				$2.6 billion
	Wells Fargo				Q2 2001				$1.1 billion
	Belo				Q2 2001				$33 million
	Comverse Technology				Q2 2001				up to $15 million
	E*Trade				Q2 2001				$6.8 million
	Amazon.com				Q1 2001				$36 million
	AOL Time Warner				Q1 2001				$620 million
	Source: CNET News.com research

"A lot of companies were playing VC and when the markets turned south, they were left with investments that were worth nothing," said Arthur Newman, an analyst with investment bank ABN Amro. "A bunch of companies started doing write-downs in the fourth quarter and there were more of them in the first quarter as it became clear these investments were not coming back."

"But the ones that were holding on the longest are now finally throwing in the towel," Newman said, as they realized the initial public offering market has dried up and companies are more likely to be bankrupt than booming.

"Of all our income sources, the gains or losses from our investments is the hardest line-item to predict," Intel spokesman Robert Manetta said. The big chipmaker runs a large venture investing operation, with a portfolio valued at $3.3 billion.

Intel, for example, writes off any losses on an investment if it has declined for six months, Manetta said.

During the first quarter, Intel wrote off a $428 million paper loss on some of its investments, but that was offset by $428 million in paper gains from other companies in its portfolio. As a result, the company had zero net gains and losses in the first quarter.

Write-offs from investment losses are expected to be one-time events. Most analysts avoid lumping projected investment losses or gains into their earnings estimates since they do not deal with a company's core business.

"Investors get suspicious if companies continually write off one-time charges for investments," said Thomas Berquist, a Goldman Sachs analyst. "If you do it quarter after quarter, then people start to get upset. If Microsoft, for example, came back next quarter with another $3 billion write-off, people would start to ask questions."

A little leeway
Corporate investors have wide leeway in determining when to call an investment a dog, but accounting guidelines require companies to write down investments when it is determined that the situation is permanent. While companies like Intel use the six-month period of declines as one barometer, other companies do not have such hard and fast rules.

"Microsoft looks at a company's short-term outlook, its operational performance and cash flow, its sector performance and other criteria," said Caroline Boren, a Microsoft spokeswoman. She declined to comment on whether Microsoft uses a time period in sizing up the valuations for its investments.

And while the investment performance of publicly traded companies in the portfolio are easily available by checking the stock price, it is more difficult to size up the valuations of the privately held ones. Corporate venture investors may be slower in lowering the valuations on these private investments than traditional venture capitalists, analysts say.

"I've heard situations where corporate VCs have a good relationship with the company and like their technology, but the traditional VCs decide to shut the company down," said David Barry, editor of Corporate Venturing Report, a Massachusetts-based publication.

But corporate venture investors contend that they are usually prompt in sizing up the valuations of private companies in their portfolio and that they are often in frequent contact with the traditional venture firms, which are also investors in the same companies.

With so many corporate investors posting staggering losses on their investment portfolios and because of the slowing economy, a number of companies are reducing the amount they invest in other companies. Corporate venture investing fell to $143.2 million in the first quarter, down from $2 billion for the same period a year ago, according to a PricewaterhouseCoopers MoneyTree Survey.

Some of the decline is driven by the poor results of the investments and the need to conserve cash by the corporate investors. And, in other cases, it stems from the dollar stretching further with falling valuations: $500,000 invested by a corporate investor today gets the same number of investments as $1 million did a couple of years ago, Barry said.

"People get caught up in these paper numbers, said Barry, an industry watcher. "These are losses they're writing down, while still continuing to hold the shares. What should matter is what is the actual investment return once they divest the investment--that's the true bottom line."