An accounting proposal with good implications for the IDT merger:
"First Call Uses New Method For
20 Internet Companies
By REUTERS
"The First Call Corporation, which tracks Wall
Street analysts' earnings estimates, said
Wednesday that it had decided to change the
calculations used for 20 Internet companies.
"The introduction of the new method, referred to as cash
earnings per share, or cash E.P.S., comes after a series
of inquiries by the Securities and Exchange
Commission into how technology companies account
for corporate acquisitions.
"The new model may also help settle questions about
how to value Internet companies.
"'The majority of analysts said this is the way we want
to value these companies,' said Chuck Hill, research
director at First Call, which is majority owned by the
Thomson Corporation. 'Clearly there is a groundswell
to do this among the analysts in Internet-related
industries.'
"The cash E.P.S. calculation for the Internet companies
is different from traditional 'cash flow,' which is
earnings before interest, taxes, depreciation and
amortization. Cash E.P.S. adds back to operating
earnings the amount written off for amortization of good
will, typically over three or four years.
"In most cases, a company's cash E.P.S. will be higher
than regular per-share earnings.
"Good will, the premium paid for assets in an
acquisition, is an important topic now because of
S.E.C. scrutiny into accounting for 'in-process research
and development,' an area that technology companies
have used to write off acquisition costs.
"In some cases, companies have reversed portions of
their research and development charges after the S.E.C.
opened inquiries. When allocated to good will, the
costs have to be recognized over longer periods,
depressing future earnings.
"Hill noted that with the United States accounting
rule-making organization, the Financial Standards
Accounting Board, and the S.E.C. looking at this and
related issues, the methodology could shift again.
"Some of the Internet companies affected include Yahoo
Inc., Avid Technology Inc. and Mindspring Enterprises
Inc. First Call is also continuing to provide its
traditional calculations of operating earnings estimates
for these companies. First Call may eventually expand
the list for cash E.P.S. beyond the initial 20 companies,
Hill said."
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You may remember that in the IDT acquisition, all but about $6 million are to be amortized -- including $10.04M for in-process R&D and the rest of the amount for goodwill. We won't know the goodwill total until the day the acquisition goes final.
If this "cash EPS" proposal would apply to IDX -- and there is no guarantee at all that it would -- IDX would be valued higher, without the amortization writeoffs arising from the acquisition. |
