The collapse in the telecommunications industry is cutting a swathe through the earnings of leading US companies that invested in the sector, according to quarterly figures released in recent days.
Along with the bursting of the technology bubble in the financial markets, the debacle also looks set to rob many companies of a source of profits that has in the past few years had a powerful impact on their performance.
Microsoft, which had mounted an ambitious series of investments in telecoms and cable companies, confessed last week to having to take write downs of $3.9 billion (#4.5 billion) on its holdings. Many of its investments - such as $5 billion in AT&T to support an acquisition of cable company MediaOne - were made near the peak of the communications investment boom. The charge virtually wiped out earnings for the quarter at one of the most profitable US companies.
Soured telecoms investments have also driven down second quarter earnings by billions of dollars at leading US banks. Wells Fargo, JP Morgan Chase and FleetBoston Financial have reported charges or writedowns of $1.1 billion, $1 billion and $290 million respectively, that were related to private equity investments. The bulk of that was tied to investments in the battered telecoms industry.
The corporate writedowns are the latest sign of one of the biggest collapses to hit the stock and bond markets in recent years. While the soaring share prices of dotcom companies hogged the headlines in the late-1990s, the massive capital investments required for communications networks meant that telecoms companies raised far more cash through the stock and bond markets.
For now, the telecoms debacle has left the banking industry with relatively few loan losses. However, Mr Charles Peabody, banking analyst at Mitchell Securities, said managements were also beginning to blame telecoms credits for rises in non-performing assets, making it likely that more problem telecoms loans would surface later in the year. Equity investors usually take their losses before debt-holders, he added.
For many of the tech companies that had come to look on investment gains as a reliable source of profits, meanwhile, the picture has changed completely. Intel said last week that writedowns of $220 million had wiped out virtually all of its investment gains for the latest quarter, while it would suffer a net $100 million investment loss for the coming quarter. Last year, its investment profits averaged $940 million a quarter.
This quarter's private equity reversals at the banks were also troubling because they largely reflected their inability to make cash out of private investments - rather than fluctuations in listed holdings.
Earnings at JP Morgan Chase, for example, have been buffeted for several quarters by the changing value of its listed holdings. But these were largely paper losses. Last quarter, the banks said they were losing money on their private holdings as well. Realising value from such investments requires new rounds of financing, and the banks were admitting that they see no exit.
Mr Jeffrey Walker, who heads JP Morgan Partners, said the bank reckoned that "over the next 12 to 18 months . . . the financing environment for telecoms and tech deals will be pretty hard". Mr Walker said he saw increasing opportunities for private equity investments in the coming months. But he made clear that his focus would be outside telecoms - in sectors such as life sciences and industrial companies.
"Our goal was to have a diversified portfolio," he said. "A return to a globally diversified model is where we want to be."
