Paul: It is so quiet here possibly because INTC is not "moving".
One sure way to make it move is to get rid of "earnings", a la AOL!!
interactive.wsj.com
March 31, 1999
Heard on the Street
Netscape Deal Could Mean
Years of Charges for AOL
By THOMAS E. WEBER and ELIZABETH MACDONALD
Staff Reporters of THE WALL STREET JOURNAL
Who really bought Netscape Communications?
The simple answer is America Online, which closed its
acquisition of Netscape two weeks ago. Yet while AOL
paid the bill -- some $10 billion of AOL stock -- it has been
clear that Sun Microsystems will hold some sway over a
large chunk of Netscape, thanks to a new Sun-AOL alliance.
Just how much is only now
becoming apparent. Last week, AOL
and Sun unveiled their alliance, which
tellingly will be headed by a Sun
executive. Tuesday, at a joint company briefing, executives
spoke at a lectern backed by a large Sun logo, flanked by
smaller AOL and Netscape logos. The companies also
referred to their venture as the "Sun-Netscape" alliance,
rather than the "Sun-AOL alliance," as they had described it
last week.
But make no mistake: The depth of Sun's involvement is
more than symbolic for AOL shareholders. That's because
it could affect the way AOL is allowed to account for the
transaction. If regulators conclude that Sun effectively
purchased Netscape's corporate-software business, AOL
could be forced to account for the deal differently. AOL
could then incur as much as $9.7 billion -- yes, that's billion
-- in "goodwill" charges against earnings over a number of
years. Goodwill represents the amount AOL paid for
Netscape above the net fair value of the company's assets.
Business: Online service provider
Six months ended Dec. 31*
1998
1997
Revenue (millions)
$1,819
$1,114
Earnings (millions)
$228
$64
Diluted per-share earnings
$0.41
$0.13
Latest quarter (Dec. 31, 1998):*
Diluted per-share earnings: $0.22 vs.
$0.06
Average daily volume: 27,467,458 shares
Shares outstanding: 1.03 billion
Trailing P/E: 498
Dividend yield: none
*Figures not on fully taxed basis because company's tax provision continues to be substantially
offset by utilization of net operating loss carryforward
The upshot: AOL would incur between $96 million and
$243 million in annual earnings charges, using a conservative
40-year write-off period. AOL had net income of $91.8
million for its most recent fiscal year ended June 30.
"I'm a little uneasy," says Abhishek Gami, Internet analyst at
William Blair & Co. and one of those raising concerns
about the issue. A restatement, he adds, "would just kill
AOL's earnings."
Not a problem, AOL says. Officials at the online-service
giant say they are confident the company has met the
accounting requirements. "We feel very comfortable that we
have the structure and management team in place to make
the strategic alliance a real success and at the same time
meet the letter and spirit of the accounting rules," says Mike
Kelly, AOL's chief financial officer.
At issue is an accounting method called "pooling of
interests," which enables companies to avoid massive
goodwill charges to future earnings. These days, however,
pooling is under fire from securities regulators and
accounting specialists. It also carries strict requirements --
including one that bars a company from selling a significant
portion of the acquired firm's assets within two years of the
deal.
Industry executives speculate that Sun will eventually buy
these Netscape assets two years after the deal closes, in
keeping with the pooling rules. But accounting experts say
AOL could risk such a sale within those two years, by
arguing it didn't have a plan to dispose of these assets when
it entered into the pooling.
Netscapade? An Issue of Control
America Online
America Online bought Netscape, but some think Sun
will call the shots.
Paid stock valued at $10.2 billion to acquire Netscape.
Placed James Barksdale, Netscape's chief executive,
as a director and put top Netscape executives in key
AOL positions.
Sun Microsystems
Pledged to buy $500 million of Sun hardware and
services.
Agreed to pay AOL at least $975 million over three
years, representing guaranteed revenue for Netscape
products that Sun sells through the alliance.
Also agreed to pay AOL a $275 million one-time
licensing fee.
Placed Mark Tolliver, a Sun executive, in charge of the
Sun-AOL alliance.
Sun makes a variety of computer hardware and software
products, primarily for corporate use. AOL, in contrast, is
primarily a consumer company that provides a gateway to
the Internet. Netscape produces a Web site that appeals to
consumers, as well as software sold to corporations. It is
Netscape's corporate products, such as software for
processing electronic-commerce transactions, that Sun will
market through its AOL alliance.
When AOL signed its Netscape deal in November, the
stock swap initially valued Netscape at about $4.3 billion.
The value soared to $10.2 billion at the closing as AOL's
stock price jumped. Estimates aren't available for
Netscape's net fair value, but Netscape's book value was
about $475 million at Oct. 31. Thus, the goodwill involved
could range from a total of $3.8 billion to $9.7 billion.
Privately, AOL officials were concerned throughout the
transaction talks that the U.S. Securities and Exchange
Commission might reject the pooling treatment, people
close to the company say. Adding to the anxiety: In recent
months, the SEC has gone so far as to force companies to
account for all stock acquisitions as if they had been cash
purchases instead, thus incurring goodwill charges. Those
moves have been part of a general crackdown on pooling.
An SEC spokesman declined to comment on the AOL
matter.
In June, the Financial Accounting Standards Board plans to
issue a proposal to kill pooling, which corporate executives
expect will take effect Jan. 1, 2001. If the rules are adopted,
companies will have to account for their deals as purchases,
and thus incur goodwill profit charges. But some accounting
analysts, speaking generally, say that certain companies may
be stretching the pooling rules to the point of breaking in
their zeal to beat the FASB deadline.
Sun says it is treating Netscape as a third party, not as a
captive. "It is absolutely not the case that Sun is taking
control over the Netscape enterprise-software business," a
Sun spokeswoman says. "It is a critical and important
partnership that is very evenhanded." Sun's new joint
venture with AOL plans to use "as much or more" software
from the former Netscape as from Sun in its new generation
of electronic-commerce software, she adds.
Yet it is clear that Sun's involvement was crucial to the
AOL-Netscape agreement. AOL was anxious to get its
hands on Netscape's Netcenter portal. AOL was similarly
enticed by Netscape's Communicator browser, which
millions of consumer and business users rely on to surf the
Web.
AOL knew it needed help with Netscape's enterprise
software, the corporate packages that help companies run
their Web sites. Sun, as a giant corporate supplier -- and an
avowed enemy of Microsoft -- was a logical partner.
In concert with its deal to acquire Netscape, AOL entered
an alliance with Sun. When the details of the AOL-Sun
agreement were disclosed in SEC filings in February, they
showed a huge financial commitment by Sun.
As part of Sun's agreement to sell Netscape's business
software, Sun guaranteed AOL would receive at least $975
million in revenue over three years. Sun also pays AOL a
one-time $275 million licensing fee and $10 million a year in
cooperative marketing. AOL, meanwhile, agreed to buy
$500 million of Sun hardware and services, as well as pay
Sun $1 million a month for technical support and $5 million
a quarter to license Sun technology.
AOL is no stranger to accounting controversy. For years, it
amortized its marketing expenditures out as much as two
years into the future -- a practice that drew criticism from
some who said AOL was trying to inflate present earnings.
AOL scrapped the approach in October 1996 and took a
charge of $385 million to write off its deferred costs.
Analysts say it's difficult to handicap how the Netscape
transaction will play out. "From what I heard about it [the
AOL-Netscape deal], they've walked a very thin line here,"
says Janet Pegg, an accounting expert at Bear Stearns. In
particular, Sun can't be seen to have direct management
control over the Netscape assets in the alliance, a critical
part of the pooling rules.
But Ms. Pegg adds: "Stock analysts have not seen it [the
deal] as a slam dunk that Sun would end up with the assets
in the alliance."
--David P. Hamilton contributed to this article.
Srini.
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