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Two companies taking similar actions that are obtaining very different resultsWhat is happening to the debt positionNortel Networks engaged in several acquisitions in 1998 The effect on their income statement was staggering Despite 17575 billion in revenues a 213 million increase from 1997 Nortels net income before taxes was negative 537 million ROE was negative 464 compared to the industry average of 138 Acquisitions mergers and partnerships have become a major strategy of many companies in the telecommunications industry Nortel frequently participates in acquiring other companies in order to expand their business units products and lines In 1998 Nortels largest acquisition occurred when they acquired Bay Networks for an estimated US91 billion In looking at the 1998 financials I mention these because of the large dollar amount spent on acquisitions that year Nortels DebtEquity ratio was interesting Looking at the balance sheet total liabilities increased by 11 billion 15 The Statement of Cash Flows shows that Nortel repurchased approximately 1 billion of outstanding stock Looking at these two numbers one would expect the debtequity ratio to increase but it actually decreased by 58 And from 1997 to 1999 it has decreased from 41 to 16 The 1998 Income Statement also showed a large increase 144000 in the number of outstanding shares The large increase was due to the conversion of outstanding Bay Networks shares and to exercise stock options by Bay Networks executives The operating earnings number on Nortels 1999 annual report shows two figures on page 1 GAAP earnings -015share and operating earnings 128share Whats behind the difference The cost of all the Nortel acquisitions purchased IPRD intellectual property research development for 722MM acquired technology 686MM and goodwill worth 639MM Thats about 2 billion in acquisition costs zapped right out of operating earnings The difference between Nortels operating earnings and standard earnings for 1999 was almost entirely attributable to Nortels acquisitions of Bay Networks Shasta Cambrian Periphonics et al Raytheon also has been
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