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Technology Stocks : Lucent Technologies (LU) -- Ignore unavailable to you. Want to Upgrade?

To: GVTucker who wrote (14159)	3/24/2000 8:52:00 AM
From: Clay Takaya	Respond to of 21876

Tucker, Great post. I appreciate the article and your analysis of it. Clay

To: GVTucker who wrote (14159)	3/24/2000 3:44:00 PM
From: Prabhu Kavi	Read Replies (4) \| Respond to of 21876

GVTucker, I disagree with your conclusions. The reason that companies like Cisco acquire so much has less to do with accounting rules than with market leadership. Most of the innovation today happens in smaller startups, not in big companies. This is due to the high level of talent that startups get, and the sheer number of them virtually guarantees that some of them will create more innovative products than the established big companies. So when a startup creates a working innovative product that a big company cannot, the big company has three choices: 1. Buy the startup, and use its extensive sales channels to gain market leadership. 2. Not buy the startup, and face the threat that your main competitors will buy it and beat you in the market. 3. Fight the innovative startup in the market, and hope that the big company's superior sales channels can win. But think of Cisco against Juniper and you see this doesn't always work. The best recent example of when an acquisition made sense was Cerent. Here was a company with an innovative product that the established companies did not or could not produce. They had numerous customers and were ready to go public. Cisco bought Cerent for what seemed to be an outrageous price, but is now selling boatloads of them through its sales channel. In retrospect, that $6.9 billion looks well spent. So it's simple. Big companies must acquire because they simply cannot innovate faster than all of the startups, or face loss of market share against some of these startups. Changes in accounting rules may change the price, but not the need to acquire. Prabhu

To: GVTucker who wrote (14159)	3/24/2000 4:00:00 PM
From: Thomas Scharf	Read Replies (1) \| Respond to of 21876

There is one more factor to consider when comparing internal and acquired R&D. Some R&D ends up fruitless with products that are don't work, are too expensive or just too late to market. When a company acquires R&D, they are buying it at a much later stage when it is easier to see if the product is going to be successful. In essence, failed R&D ends up as losses for the investors in the companies that were not acquired while the acquiring company gets 100% (ideally) successful R&D. Thus, acquired R&D is potentially a much more efficient use of capital.

To: GVTucker who wrote (14159)	3/24/2000 5:00:00 PM
From: Mr.Fun	Respond to of 21876

GV, I completely agree with you on the principle. I would also add that the present value of option grants should be considered compensation with a corresponding increase in expenses. Given the volume of above water options granted every year in silicon valley this would also seriously alter investors perceptions about the profitability of tech companies. The sad thing is, no matter how intellectually correct it may be to consider the impact of purchased R&D and options as operating expenses, I do not sense any movement in the investment community to address this issue. Fund managers no longer seem to consider protecting the assets of their clients as a primary directive. It's all whether you beat the relative benchmark - so lever up on momentum stocks no matter the price, cause if the bubble bursts every one will get hit and its better to try to eke out the incremental 10bp of outperformance today. Ah well, those are the current rules of the market. Can't last forever, but how long until it changes? 6 weeks? 6 months? 6 years?

To: GVTucker who wrote (14159)	3/24/2000 11:05:00 PM
From: brightness00	Respond to of 21876

I could be wrong on this, but isn't there some discussions by the GAO about disallowing good-will write-offs and omission of option grants? Or is it all fizzled out? As for CSCO, hmm, it might just be the first trillion dollar company, at this rate anyway. Too bad I was out for lunch when the bounce back took place the Thursday before last, and have been reluctant to re-establish my position in CSCO.

To: GVTucker who wrote (14159)	3/25/2000 10:13:00 PM
From: Joe S Pack	Read Replies (1) \| Respond to of 21876

GVTucker: Congrates. You post about disparity on R&D expense by CSCO and LU has made the list of Cool post of the day on SI. Talking of (pyramid) schemes, here is one on MSFT. billparish.com I find it fascinating. Draw your own conclusion. -Nat

To: GVTucker who wrote (14159)	3/27/2000 1:47:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 21876

GVT, An excellent point, that goes to the heart of some rather peculiar accounting rules surrounding acquisitions. Under current purchase accounting rules a substantial portion of the purchase cost is written off as in-process R&D provided that the R&D has no current market and is unlikely to result in a marketable product in the near future. But the only reason that companies like CSCO are acquisitive is to obtain the R&D of the acquired company. Why pay a premium if there is no value to the R&D? But pooling of interest accounting is equally (and perhaps more flawed). Pooling of interest accounting does not recognize the cost to shareholders of the acquisition since the companies are treated as if they were always merged. That's why the financial reports are restated following a pooling merger. There is a move afoot to eliminate pooling of interest accounting because of this distortion. IMO, this is not enough. We also need to have immediate write-offs for IPR&D discontinued. I propose that instead, such sums be included in goodwill and written off over a 3 - 5 year period. The issue also speaks volumes about analysts who blithely accept earnings before "one-time" write-offs. Thanks for a great post! TTFN, CTC