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Strategies & Market Trends : Steve's Channelling Thread

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To: mishedlo who wrote (12646)	3/13/2001 11:11:44 PM
From: Logain Ablar	Read Replies (1) of 30051

M: It is a good question and how would you know the answer if you did not ask or take an accounting course. Goodwill is the difference between the price an acquiring company is paying (fair market value) and the book value of a company acquired. Book value is assets less liabilities and equity. So as an example if a company pays $1B (with stock of course) for a company with only net worth of $100M the acquiring company would establish goodwill of $900M. This is the general rule there are allowances for the write of of in process R&D and a few other items if the SEC rules are met so the # could be a little less than the 900M. If companies could they would write off the full $900 as a special charge to not have it bleed into earnings over time. Goodwill is written off (amortized is the formal term) against earnings over a period of time (usually 40 years but it is my understanding it can have different amortization period). Of course this rule is also changing this year. Normally the "pro forma" earnings being reported by tech companies excludes the goodwill amortization (as well as stock based compensation costs, this is only the taxes since the options already miss the income statement and what ever else the street will let a company get away with <gg>. So one can not just look @ a company trading @ 1.5 times book and say its a buy. As an example lets look at CSCO (not too closely since I don't have their balance sheet handy). It has used its paper money to acquire companies for some out rageous prices. This has created a lot of goodwill book value (while diluting ownership with increasing the out standing shares). In the old days when it was growing earnings @ 35% and traded @ a book multiple of 5 when it had less goodwill and less dilution may mean it should only trade at a book of 1. For some good reading I'd suggest visiting the berkshire hathaway web site. Buffet is a good read on value investing. If you can access some of his writings and read ben grahm you can see how the term "growth" is a misnomer and value investing encompases growth. Growth without value is just momentum. Just look @ amzn or even cmrc which I own. Until they start generating real income (and a steady stream of it) they have the growth but no real value (show me the money). Good luck. Tim

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