Multi Part Reply Part 1
Mindmeld, great work. A good solid basis for an effective discussion. Point by point I've assembled a few observations. Split into several posts so we can track the different threads.
Goodwill
My numbers agree with yours. The 4'th quarter of FY 01, Cisco wrote down 298 M$ of goodwill (1,055 through 4Q - 757 through 3Q), plus a charge of 289 M$. Since then, zero. All recorded properly according to GAAP. In this I think the entire thread would agree.
However, some of what I was introducing earlier seems to have fallen into a gap, wedged open by a tangential focus on GAAP.
In evaluating economic impact, the issue isn't whether or not the numbers are recorded according to GAAP. No, it's all nice and clean and properly presented accounting treatment, so a complete waste of electrons to argue otherwise. Cisco has always conformed quite neatly to GAAP.
Instead, there are two subtle and elusive points here. Firstly, that from an economic standpoint a change in accounting principles does not make a company more or less profitable. Just changes the relationship between accounting profit and economic profit. Which are two different things.
After all, there are ways of accumulating wealth that present zero profit (e.g. spend every cent of revenue in excess of cost on R&D), and ways of presenting profit that don't reflect any actual accumulation of wealth (e.g. sale of previously written off inventory). Like juggling, it all depends on what balls are in the air when the snapshot is taken of what's in the hands.
Folks like me who assess an investment based on wealth creation try to peer through such tricks of the strobe light. And in so doing, occasionally run afoul of accountants, so it might seem :o) A thick skin and a sense of humor helps. Appears my skin could use some thickening and my humor some thinning. Sorry 'bout all that.
Anyway, just on the surface, the difference between the new GAAP and the old GAAP makes for $0.02 in reported earnings, to the company's credit.
Second, like the value of Inventory, the carrying value of Goodwill is an estimate, arrived at by management and dependant upon the assumptions they feed into generally accepted GIGO functions.
Rather than worry about whether the output of the GIGO function finds itself properly recorded on the books, it is more useful to test the implications of management's assumptions relative to what we observe elsewhere.
First we might note that the 4,666 B$ in Goodwill was almost entirely accumulated in the bubble years of FY '99, '00 and '01. And we might calculate the amount written down as recognition of "oops" set in at 587/4,666 = 12%. Meanwhile back at the ranch during this time, JDSU recognized an "oops" in the order of 90% of its bubble acquired goodwill. Check Nortel. And other rapaciously acquisitive competitors in the space.
We don't need to look only at the books, we only have to look around us. Most of the Cisco kibble startups that had the misfortune of not being eaten have vanished entirely into the big blue sky as a consequence of vanishing VC financing. Leaving behind only ex-employees with startup experience on their circulating resumes, nearly-new gear available on eBay, and investors who are now applying "Due Diligence" with something that is beginning to resemble diligence.
Ed Forrest recently did us all a favor and posted a very useful article about warning signs of increased investment risk. One of which was management's implied judgement being notably different with respect to industry.
All around Cisco, goodwill has been imploding. But internally it was written off at less than the rate it was being written down before management's oft cited and optimisticly expected V-shaped recovery of 2H 2001 failed to arrive.
So the numbers on their face suggest that with the exception of the normal rate of depreciation employed before pooling was eliminated, what Cisco purchased at the height of the bubble is still worth just about what it was at the height of the bubble. In the opinion of management.
I'm not suggesting there is any risk in the accounting. I'm suggesting there may be risk embedded in management's opinion. |
