When Good Assets Go Bad

When Williams Communications released its 10-K report on April 1, stockholders found a nasty surprise: The flailing service provider wrote down $2.9 billion in assets during the fourth quarter of 2001. Of that amount, $1.9 billion was related to fiber and conduit, while the remainder came out of to equipment, international assets, wireless capacity, abandoned projects and goodwill.

The reduction leaves Williams with an estimated $4.5 billion in assets. It also leaves stockholders feeling irate.

"If the process of those assets losing value has been taking place, it's been taking place over a long period of time," says Neal Nelson, an individual stockholder in Williams Communications. Nelson is particularly angry at the timing of the announcement, which happened after the company was de-listed in early March and when it was undergoing heavy-duty conversations about restructuring.

Nelson has organized more than 2,800 stockholders in the hopes that Williams will include shareholders in the restructuring process, which currently only involves creditors.

Williams isn't the first carrier to take a huge write-down for physical assets. Level 3 Communications took a $3.2 billion charge in the fourth quarter. Changes in Financial Accounting Standards Board rules that dictate when asset-impairment charges are taken have prompted some service providers to take stock of the declining economy and devalue their networks accordingly. Most of these networks are valued on their ability to generate future revenue.

Still, not every service provider plans to take a write-down on physical assets. Mike Meldahl, the president of Touch America, was asked at a Merrill Lynch conference last month whether he planned to write down any of Touch America's physical plant. He said no, because the cost to build that network would be just as high today.

Determining how much a network is worth is difficult at best, and many service providers won't write down assets until circumstances dictate they must — as it appears was the case with Williams Communications when it was negotiating with creditors and considering declaring Chapter 11 at the beginning of this month.

And some providers may still change their minds and write down physical assets. When they do, it's likely to be a nasty surprise for investors.

Copyright © 2002 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in The Net Economy.