Wells Fargo takes $1 billion hit on tech investments

Thursday, June 7, 2001 | 11:49 a.m.

SUN STAFF AND WIRE REPORTS

SAN FRANCISCO -- Wells Fargo & Co., the largest bank in Nevada, disclosed Wednesday a hefty $1 billion loss on its venture capital portfolio, making the giant bank the latest casualty of the nation's technology woes.

The San Francisco-based company said it will record a second-quarter charge of $1.05 billion, or 61 cents per share, to account for the plunging value of its venture capital investments.

Wells also revealed it will write off $70 million in auto loans picked up in its recent takeover of Utah-based First Security Corp. because of a decline in their value caused by deteriorating conditions in the used car market.

Before Wednesday's announcement Wells had warned it would absorb a charge of $90 million, or 5 cents a share, to pay for costs associated with the First Security acquisition.

The latest charges are expected to wipe out most of Wells' earnings for the three months ended June 30. Before Wednesday's disclosure, analysts surveyed by Thomson Financial/First Call had forecast second-quarter earnings of 69 cents per share.

In trading on the New York Stock Exchange, Wells' stock fell 93 cents to close at $47.84 and then slipped 56 cents more in after-hours trading. The stock traded at $46.50 this morning.

Wells said its venture capital losses reflect the meltdown in technology stocks over the past year.

Like many more traditional venture capital firms, Wells invested in promising start-ups purchased by thriving Silicon Valley tech firms that paid for the acquisitions in stock.

As an example, Wells venture investments yielded the bank substantial stakes in two high-flying computer networking companies, Cisco Systems and Redback Networks, whose stocks have plummeted during the year.

Separately, Dow Jones News Service reported that several banking industry analysts were taken aback by the bank's decision to take the huge second-quarter charge.

Wells had recorded a small gain from venture capital investments as recently as its first quarter.

"The question is, 'couldn't they have recognized some of that (investment) impairment then' " or in previous quarters to spread out the hit, said Edward Jones analyst Chris Blum.

Wells Fargo Chief Financial Officer Ross Kari said the charges mainly are reductions of non-cash venture capital gains that Wells Fargo recognized in 1999 and 2000.

He cited two Wells Fargo venture capital investments as examples: Cerent Corp., which was acquired by Cisco in late 1999, and Siara Systems, acquired by Redback in early 2000.

Wells Fargo recorded non-cash gains at the time of both acquisitions. But Cisco and Redback shares are off sharply since then: Redback, closing Wednesday at $16 a share, is down 91 percent from its 52-week high, while Cisco is down 70 percent from its 52-week high, closing Wednesday at $20.76 a share.

"The company expects to write these positions down due to the sharp, sustained declines in the market values, and the uncertainty of price recoveries," Kari said in his statement Wednesday.

He pointed out that Wells Fargo has been documenting the declining valuations of its investments as unrealized losses in its quarterly statement of comprehensive income.

Still, several analysts questioned why the firm hadn't moved to lock in some of the losses earlier to spread out the hit, particularly since the declines in market valuations of firms such as Cisco and Redback aren't a new phenomenon.

"On the surface, it's a little troubling," CIBC World Markets analyst Thomas McCandless said. "I would have expected that they would have managed it better."

A Wells Fargo spokesman said late Wednesday that the firm opted for the write-downs now because it believes the time is right under generally accepted accounting principles and based on the sustained reduction in market valuations of the securities.

Regardless, McCandless and other analysts said they don't think the announcement by Wells Fargo signals that investors should brace for news of similar large second-quarter charges from other banking firms.

Some firms, particularly J.P. Morgan Chase & Co., have been writing down the valuations on an ongoing basis, they said.

"Some companies have been more aggressive in their accounting, Edward Jones' Blum said.

Wells Fargo officials, meanwhile, expressed confidence in their business and in their venture-capital investing despite the announced charges.

"Venture capital investing is a volatile business, but over the long term it has earned very attractive returns," CFO Kari said in his statement.

"Even after these write-downs, recent returns on our venture capital and equity investments were significantly above our historical averages," he said. "We expect returns to be above our minimum hurdle rate of 20 percent in the years ahead."