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To: Don Lloyd who wrote (30458)	10/24/2000 12:02:49 AM
From: Perspective	Read Replies (2) \| Respond to of 436258

In case 1., the $5B increase in market cap lasts only as long as the cash does. No, the additional 100M shares remain outstanding. Assuming the stock price is not impacted (and CSCO's definitely has not) the market cap increase remains even after the money is spent. The market is supposedly saying that the purchase was worth what CSCO paid. 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 Your argument is only true if the companies are equals. If I assume as you did that the companies are equally sized, but company A goes for a PE of 25 and company B has no earnings, the shareholders in company A would argue that they've just been diluted. The amount of the dilution is equivalent to that which would result if company A raised $10B in an offering and lit it on fire (which would clearly result in a charge against earnings). But your point is well taken. You've definitely made me reconsider my opinion on this subject. The real cost to the acquiring company is the ratio between the valuation of the acquired and the acquirer, multiplied by the market cap of the acquired. It would be impossible to compute a charge for that, which is probably why the accounting rules permit the present treatment, and why it's the topic of so much discussion. This still bothers me greatly, because it means that the purchase price of the company is completely ignored in income statements. If I need $1M in new equipment, I can issue $1M in stock to buy it, or acquire a $1B company that has only that equipment. For that matter, it could be a $5B company. All that ever will show on the income statement is the depreciation expense of the $1M equipment, when the other $999M should clearly be charged against earnings in this case. The dilution alone is not an adequate accounting of management's bad decision. Man, do I hate grey areas. Really makes one think... BC