Aether undergoes the corporate equivalent of a sex-change operation

August 18, 2004|By JAY HANCOCK

THIS IS how the tech boom ends. First with a bang, then with a whimper and now with the weirdest strategic business turn since the DeLorean Motor Co. thought about becoming a cocaine dealer.

Aether Systems Inc., which used to call itself "a one-stop provider of wireless software and services connecting people to the information they need, wherever and whenever they need it," wants to be a mortgage banker when it grows up.

Pay no attention to prospectus language about "wireless handheld devices." Aether's new stock in trade is the center-hall colonial and the vinyl-siding Cape.

On Monday, the Owings Mills company announced the sale of its mobile government division to Bio-key International for $10 million.

The unit, which sells wireless services to police and fire departments, was the last Aether division peddling any technology recognizably newer than, say, the cotton gin.

What's left is a pocketful of cash from Aether's days as a technology hottie, a few employment contracts for senior executives and maybe 10 employees. Rather than flush the rest of the money down the tech toilet, Aether decided to undergo the corporate equivalent of a sex-change operation.

File it under, "Late is Better than Never but Sometimes Almost as Bad."

Aether has blown 90 percent of its shareholders' money. In mid-2000, thanks to a couple of bubble-bloated stock offerings, it had $1.4 billion in cash, a book value of $2.3 billion and a stock market value of $7 billion. Its stock once hit $300 a share.

But that was long ago in a distant galaxy. The wireless business never turned a profit. Aether incinerated money with stupid acquisitions and outsized expenses. Its cash pool was down to $250 million June 30. It had liabilities of $200 million and a book value of $138 million. The stock hasn't been over $100 since 2000, over $50 since 2001 or over $10 since 2002.

Yesterday's closing price: $2.75.

Down but not bankrupt, Aether is trying to recover from one burst bubble by clambering onto what many believe is another: the mortgage bond market.

This year the company hired investment banker Friedman Billings Ramsey & Co. to chart a strategic course. In its considered, unbiased opinion, Friedman Billings Ramsey decided that Aether's best move was to hire Friedman Billings Ramsey to plunge Aether's boodle into the mortgage market.

The idea is that Aether will employ its remaining cash and much more borrowed money to invest in the secondary market for mortgage-backed securities guaranteed by Fannie Mae or other federal proxies.

Unfortunately for Aether shareholders, it's becoming a well-trod path. Having delivered great returns, mortgage bonds are becoming Plan B or Plan A for billions of dollars in idle capital. Real estate investment trusts such as Annaly Mortgage Management have been paying 10 percent or 14 percent dividends for years by borrowing at low, short-term rates and buying higher-yielding mortgage bonds.

But now everyone wants in on the act, which raises bond prices, and rates are rising. Aether says it will reduce interest-rate risk by buying adjustable-rate bonds, but almost anybody in the business is trying to do the same thing, and Aether is the newbie.

Unlike competitors, Aether will not register as a real estate investment trust. That's good because, for tax purposes, it allows the company to exploit $700 million in previous operating losses as a credit against future earnings.

But it also means Aether will keep all profits inside the company, paying no dividend, returning no cash to shareholders. This is an outfit that does not have a track record of carefully shepherding stockholders' money.

The $10 million Aether got for the mobile government division is what it burned in two weeks of operating expenses during its heyday. If Aether had chucked the towel two years ago it might have gotten far more money for sold-off operations and saved a lot of cash expense and heartache in the bargain.

As it is, Aether holds cash, net of liabilities, of a little more than $1 a share. At $2.75, the stock reflects some confidence by Wall Street that the company is worth more than its liquidation value, but not much. The shares have plunged by a fourth since Aether's new strategy became apparent in June.

The dream is dead, and Aether bosses get credit for seeing that. Many tech companies still haven't. But it took them too long, and maybe they've just traded one core incompetency for another.

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