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To: Bill Harmond who wrote (91148)	1/16/2000 1:21:00 PM
From: H James Morris	Read Replies (1) \| Respond to of 164684

William, what's your take on the Aol/TimeWarner merger? Btw There's a class coming up on cash flow analysis and Ebita reporting, do you want to go? If the market generally accepts EBITA so will I. This is the last post I will make relating to Ebita. Aren't you glad? >January 16, 2001 The AOL-Time Warner merger might do more than transform the media-industry landscape. It might also do more to divert attention from business' traditional bottom line than any transaction in history. For decades to come, investors can expect to hear AOL-Time Warner representatives explain that net income -- or losses -- are largely irrelevant. Instead, they' ll be touting earnings before interest, taxes, depreciations and amortization, or EBITDA. The reason for such emphasis will quickly become obvious. In doing this deal, AOL is paying vastly more for Time Warner than the value of the latter' s tangible assets. It is presumed that such overpayment buys intangible value, which is derived from the acquired company' s reputation or from the savings and synergies the buyer believes will result from combining the ventures. All of that is categorized as goodwill. E. John Larsen, a professor at the Leventhal School of Accounting at the University of Southern California, explains it in simpler terms: "Goodwill is whatever the buyer is willing to pay in excess of what it can lay its hand on." Never has a company been willing to pay so much for goodwill. The figures change as stock prices fluctuate, but it' s likely that if the deal is done, AOL-Time Warner will be saddled with more than $100 billion in goodwill charges. Regulations now require that this vast expense be amortized or accounted for as a charge against earnings. Conceptually, this is because expenditures are expected to be offset by returns. AOL-Time Warner is opting to spread its goodwill charge over 20 years. So for the next two decades, the company plans to take annual hits to its earnings of at least $5 billion, or about $1.50 per share. Seen in some perspective, AOL had net income last year of $762 million. For the first nine months last year -- the last quarter has not yet been reported -- Time Warner had net income of $1.1 billion. It is not inconceivable, therefore, that the annual charge for goodwill will exceed the combined net income of the merged company, pushing conventional net income into the red. That' s why AOL-Time Warner will join the growing chorus emphasizing EBITDA, which measures cash flow excluding charges for goodwill and other expenses. Accounting experts note that AOL-Time Warner could have avoided taking the goodwill charge entirely by doing the deal as a so-called pooling of interest. S.P Kothari, who teaches financial statement analysts at the Sloan School of Management at the Massachusetts Institute of Technology, says that course was likely ruled out because a pooling of interest bars companies from stock buybacks or spinoffs for years. Kothari further notes that the Securities and Exchange Commission has cracked down on companies that take huge write-offs for goodwill in a single quarter, thinking it' s best to report one bad quarter and be done with it, rather than extending the hit on earnings over years. SEC Chairman Arthur Levitt, Kothari says, "thinks that investors won' t fully appreciate what is going with a company that takes the charge in a single quarter." Instead, the SEC is pressing companies to take goodwill charges as they would for any other asset that depreciates over a period of years, but that is all bookkeeping, in Kothari' s view. "The charge has no effect in terms of cash flow," he says. Still, the bookkeeping can create problems. When AT&T bought NCR in 1991, they avoided goodwill charges, "and the market slammed the decision," Kothari says. Either way, goodwill charges have been rising sharply, and so have corporate interests in focusing investors on cash flows indicators such as EBITDA. Michael Wallace, a director of research at Warburg Dillon Read in New York believes that investors accept the validity of this focus. "People will look past the (goodwill) charges," Wallace says about the AOL-Time Warner deal. "People are going to look at the EBITDA, and they won' t pay attention to the goodwill charges." Douglas Christopher, an analyst at Crowell Weedon in Los Angeles, notes that Walt Disney has a similar though smaller problem with goodwill charges resulting from its acquisition of ABC. "It does complicate things," Christopher says, then adding that the market generally accepts the bookkeeping practice. Larsen of USC says some careful accounting will be in order: "It will be critical for a proper footnote on the transaction," he says.

To: Bill Harmond who wrote (91148)	1/16/2000 1:52:00 PM
From: H James Morris	Respond to of 164684

William, I couldn't resist to show you this one. These clowns that you regard so highly, state that "Fools are smart to invest in companies that pay fanatical attention to balance sheet management". Yet! they tout Amazon.com. Now there's a balance sheet that even Houdini the magician couldn't figure out. Btw This is the first and last time you'll ever see me bring those clowns to this thread. >The Fool Take Scour the Numbers SHARES OF TELECOMMUNICATIONS equipment maker Lucent Technologies plunged 30 percent in early January after management warned of flat revenues and lower profits. This serves as a reminder that a rising stock price and glowing analyst reports don' t necessarily mean that a company is in tip-top shape. Careful investors may not have been too surprised by this recent development, as it was apparent early last year that Lucent' s accounts receivable and inventory were growing too rapidly. Accounts receivable is a balance sheet item that measures how quickly a company collects money from customers. Inventory is products in development and/or waiting to be sold. These two items represent drags on cash, the lifeblood of any company. Managers have to maintain a tight grip on both to prosper. Fools like to see accounts receivable and inventories growing no faster than revenues. Yet Lucent' s sales for fiscal 1999 grew 20 percent, while accounts receivable and inventory grew 41 percent and 54 percent, respectively. In addition, days sales outstanding (DSO), a measure of how quickly a company converts receivables into cash, also rose -- to 88.8 days at the end of September, vs. 77.7 days a year ago. It' s important to note that these numbers shouldn' t be viewed in isolation. Companies may have good reasons for adding inventory or extending credit to customers. But the numbers always bear watching. Fools are smart to invest in companies that pay fanatical attention to balance sheet management