BC -
This still bothers me greatly, because it means that the purchase price of the company is completely ignored in income statements. If I need $1M in new equipment, I can issue $1M in stock to buy it, or acquire a $1B company that has only that equipment. For that matter, it could be a $5B company. All that ever will show on the income statement is the depreciation expense of the $1M equipment, when the other $999M should clearly be charged against earnings in this case. The dilution alone is not an adequate accounting of management's bad decision.
Man, do I hate grey areas. Really makes one think...
The problem is that a company's market value may have little to do with reality, and if you have a stock for stock transaction, the problem is squared. If you remember, I sent you a post about a company that consisted of a single 10 year money tree in a zero interest environment. That was dealing with option accounting, but it is useful for other purposes where cash and ownership are involved because the value of the company, the sum of all future dividend payouts, is exactly known. What I noticed is that not only are stock ownership transfers exactly and completely accounted for by the dilution of the existing shareholders, but that even salary cash expenses are seen to directly and exactly be deductions from shareholder value, their future dividends. A shareholder can suffer from either cash disbursements or from ownership share dilution, but the normal uncertainty of share value makes it easy to want to incorrectly charge a given transaction twice, once to each side. When the share value is exactly known by all, any stock and cash transactions are made at true value and there is no net effect on the shareholders. In the case where the stock value is a matter of opinion, one side will prevail after the true value is exposed in the fullness of time.
Regards, Don |
