regarding what exactly do earnings mean...Many tech firms are doing lots of acquisitions & when they are not poolings, a lot of goodwill is created that most firms try to write off as quickly as possible. In the case of JDSU, it is 3-5 years. I do not know Lernout's timetable. Nevertheless, the rapid evaporation of goodwill from reported eps allows firms to report positive GAAP earnings quickly, and also enables firms to claim that acquisitions are accretive to earnings much faster than they could if goodwill remained a drag on earnings for say, 10-15 years. Brokerage firms analysts who are recommending stocks on "cash" earnings - (prior to goodwill amortization) are ignoring completely the fact that an acquisition that may add to "cash" eps may in fact be a negative net present value proposition. In other words, by zeroing in on just "cash" eps, so-called analysts and investors ignore return on invested capital. aka ROIC. It is clear that in the case of Lernout, the blizzard of acquisitions have created several boatloads of goodwill on the balance sheet, and of course if we ignore the impact of goodwill amortization, we get "cash" eps, but it is a bit confusing to determine if Lernout is getting a positive return on the prices they are paying for the acquisitions. For instance, if you want to buy a candy store that has a book value of $500 thousand for $20 million, your true return on the buyout of the candy store should (unless you are a Democrat) be based on your $20 million investment. If you "write off" over 3 years say, the $19.5 million you paid over book value for the candy store, and then get excited in year 4 when you see that your candy store is made a 20% return off the original equity of $500 thousand, or $100 thousand operating profit, is that a reason to go out and celebrate? Some would say yes, if you bought that candy store with stock instead of cash, since it was only paper that you gave away. The problem with that arguement is that it infers that the true economic value of the candy store you bought was only $500k if you write off the excess over book quickly AND, (here's the funny part) that the stock that you used to pay for the acquisition was overvalued also. So, if Lernout wants to buy a Pizza Hut for $100 million in stock and if some sellside analyst ignores the goodwill created and focus on the cash earnings contribution from the acquisition in 3 years time, fine. Or, if JDSU pays $41 billion for SDLI in stock, does that say anything about ROIC on $41 billion invested today at t=0 on your HP 12-C calculators? Time for a pizza hut thin crust, extra sauce with "shrooms".
Oh, I apologize if this caused anyone to actually use their brains. |
