The Day Ahead: Compaq's CMGI loss quite a distraction

Compaq had plenty of positives in its fourth quarter earnings report. The company stuck by its 2001 outlook, topped estimates and said it wouldn't be dragged into a PC price war. But a write-off related to its investment in CMGI was quite a distraction.

Compaq reported fourth quarter earnings of $515m, or 30 cents a share, on sales of $11.5bn. The earnings were two pennies above consensus estimates and excluded charges.

Here's how the "excluding charges" game works. Analysts and investors usually exclude one-time items such as gains and losses. The focus is on operating results. However, the real bottom line includes the extra curricular stuff. Including a $1.8bn charge for the write-off of investments, principally the massive decline of its investment in Internet incubator CMGI, Compaq reported a net loss of $672m, or 39 cents a share.

Ouch.

As Compaq chief Michael Cappellas rattled on about the company's enterprise business, I just kept thinking back to those ugly CMGI shares. Did Compaq get emotionally attached to CMGI like one of my broker pals? Why didn't Compaq just sell shares a little bit at a time? With a writeoff approaching $2bn, it's pretty clear that Compaq should have reduced its 13 percent stake in CMGI a little earlier.

Compaq, like many individual investors out there, has taken a bath on CMGI. In its supplemental financial data, Compaq said the charge was related to "certain equity investments judged to have experienced an other than temporary decline in value". That's putting it mildly.

Translation: Compaq has given up on a CMGI recovery. You can't blame Compaq for giving up. CMGI can't even come up with reliable financial targets. CMGI's AltaVista, a former Compaq division, will never go public.

What the Compaq big bath charge really shows is the folly of those stock deals in 1999 -- especially if you held on to the shares. In August 1999,Compaq sold an 81.5 percent equity interest in AltaVista for approximately 19 million CMGI common shares, CMGI preferred shares convertible into 1.8 million CMGI common shares and a $220m three-year note receivable. When the dealing was done Compaq owned a 16 percent stake in CMGI.

At the time of the Compaq-CMGI deal, CMGI was "a clear leader in the Internet economy". Benjamin M Rosen, who was Compaq's acting chief executive when the CMGI deal was announced, sounded proud to be a CMGI shareholder. "As CMGI's largest outside shareholder and its principal strategic partner, we look forward to mutually driving future Internet opportunities," he said.

If he only knew. Luckily, Compaq cashed in on the CMGI deal with a gain of $1.2bn way back in its third quarter of 1999. But Compaq kept taking CMGI shares. CMGI had a terrible habit of using stock to pay the bills. In August, CMGI paid its semi-annual interest payment to Compaq on those AltaVista notes with 312,547 CMGI shares, according to regulatory filings.

Speaking of reality checks, here are a few items to note:

• Lam Research topped estimates, but said its first quarter won't be as hot. Bookings will be down 35 percent sequentially. Chief executive James Bagley said the chip equipment maker's outlook was the worst-case scenario.

What's really going on? Bagley is being prudent. "Demand has clearly dropped," said Bagley, who usually has great perspective on the chip sector. Bagley admitted he was "clueless" about predicting what'll happen next. At least, he's honest about the folly of forecasting. When asked about Intel's recent capital spending projections, Bagley said the $7.5bn target didn't surprise him, but how wrong analysts were with their predictions.

What's really going on? E*Trade is tired of the Nasdaq volatility. The NYSE has been trying to poach Nasdaq-listed companies for months with a "we're not as volatile" pitch. Maybe it's working. The other item to note is E*Trade gets to hang out with its peers who may acquire it someday -- Charles Schwab, Merrill Lynch to name a few.

What's really going on? Part of Openwave's big jump was short covering. Shorts are traders that bet a stock is going down. When a stock goes up they often have to cover their tails. Matthew Hoffman, an analyst at Wit SoundView, acknowledged the short covering, but said "there are real buyers out there". Short sellers were picking over Openwave's deferred revenue and day sales outstanding. Hoffman dismissed the worries as "nits".

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