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To: Perspective who wrote (30390)	10/23/2000 9:58:47 AM
From: LLCF	Read Replies (1) \| Respond to of 436258

<Case 1 - is there any doubt that they've blown a huge wad of cash on ArrowPoint? They take the appropriate charge for it.> Agreed, good example... but I thought they weren't allowed to just charge it off... they had to do it over many years, is that fair either? DAK

To: Perspective who wrote (30390)	10/23/2000 12:17:11 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 436258

BC - Consider these two cases: 1. CSCO issues 100M new shares in a public offering, raising $5B in cash and adding $5B market cap. They take the $5B cash and go buy ArrowPoint. 2. CSCO issues 100M new shares for a merger, adding $5B in market cap. The shares are issued as part of a pooling of interests transaction with ArrowPoint. Case 1 - is there any doubt that they've blown a huge wad of cash on ArrowPoint? They take the appropriate charge for it. Case 2 - no charge taken. These two cases are IDENTICAL from a shareholder perspective with the minor difference that the shares trickle onto the market in case two as opposed to the sudden appearance in case one. The dilution is immediate and identical in either case. No, dilution in itself doesn't adequately reflect the cost of something. Dilution happens because shareholder equity was acquired and disposed of. That expenditure must be reflected in an accurate accounting of the transaction. In case 1., the $5B increase in market cap lasts only as long as the cash does. In case 2., there is no $5B increase in market cap from the 100M shares because this is effectively just a stock split. In both cases, the only lasting increase in market cap is due to whatever value the acquired company brings to the table. If you were to assume that CSCO itself was initially worth $50 per each of 100M existing shares and Arrowpoint was an identical company, only initially private, then combining the two results in a company twice as large with a market cap of $10B now spread over 200M shares with no net impact on shareholders no matter how you accomplish the result. (unless the accounting is screwed up to misrepresent economic reality) Regards, Don