Zakrosian,
That was a fine article until you got to the bottom.
<And at the Securities and Exchange Commission, Chief Accountant Lynn Turner dismissed suggestions that these write-downs are merely accounting technicalities. He noted that by issuing large blocks of new shares to pay for acquisitions, companies have significantly diluted the value of the stock held by the original investors. And those investors, he said, should be demanding to know why the companies paid so much for the acquisitions and why they waited so long to acknowledge it.
"What's causing the write-downs now has nothing to do with accounting," he said. "The message investors should draw from all this is that companies went out and paid way too much for these businesses and now they have to settle up.">
Typical Accountant Nonsense. And I am one! He makes it sound as if the accounting for Acquisitions and resulting Goodwill is an agreed upon science. There are many disagreements within the profession as to whether the current accounting methods are proper in this area. Many strong disagreements. For just the type of situation we have here.
As for "issuing large blocks of share ....shareholders should be mad at huge dilution." and "What's causing the write-downs now has nothing to do with accounting .... companies went out and paid way too much for these businesses ". These comments ring a big huge alarm bell in my head. Here we have A Big Chief at the SEC who has no clue about business, valuations, and common sense. I am sure though he is very good at applying the accounting rules without ever thinking outside the box. His comments are based solely on the accounting rules. And those rules say NOTHING about what happens when One business buys Another business, in an exchange that includes 2 equally grossly overvalued stocks at the time.(and please no one say 'well who's to say they were overvalued'. Thats another discussion to itself) So because the accounting rules don't address this issue, the Chief concludes that the business paid too much. What he has done is take a set of facts and apply some arcane accounting rule without thinking. His answer is technically correct by the rule, but is grossly wrong by common sense.
Here is a good example. What if JDSU/SDLI merged today at a low point in the business cycle, rather than in the middle of the mania? Assumptions: Both businesses would be struggling with the economy, and their stock prices, and valuations would equally reflect those struggles. JDSU offers SDLI the exact same ratio premium in stock. (I forgot what it was) So lets say JDSU at $9, SDLI at $10, offer 2 JDSU for 1 SDLI. What would the balance sheet accounts and Goodwill number look like if the combination were made today? We all have the answer right in front of us. Its the balance sheet released 2 days ago.
And there you have it. The writedown had everything to do with the accounting rules, but it was the overvaluation of the stocks that 'confused' the accounting rules and caused these rules to fail and require an adjustment.
Feel free to nominate me as the next SEC Big Chief.......... |
