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Technology Stocks : Advanced Micro Devices - Moderated (AMD) -- Ignore unavailable to you. Want to Upgrade?

To: Goutam who wrote (21168)	11/30/2000 9:04:25 PM
From: jeff_boyd___	Read Replies (1) \| Respond to of 275872

Goutoma, I'll try to respond; feel free to ask any questions if my answers don't make sense. Pooling v. Purchase Transactions - In a purchase transaction, the assets of the acquired company are recorded at the purchase price (fair market value). This can either be the amount of cash adjusted by assumed liabilities or the value of company stock that is transferred. If certain requirements are met the acquisition can be accounted for under the pooling method. Under the pooling method, it is considered to be the combination of two companies rather than an acquisition so the value that the acquired company had on their books carries over. No goodwill or other write-ups of assets takes place. Pooling is almost always much more favorable due to the heavy premiums that are paid. Cisco makes heavy use of pooling and in my opinion pooling should not be allowed. There has been a fair amount of controversy and the pooling method was going to be phased out, but companies like Cisco and others raised a big stink and heavy political pressure has at least delayed implementation of new rules. John P. made a comment a month or two ago about how Cisco could acquire AMD and show a huge increase in their EPS; he was absolutely right and it's distortive. In the same fashion Cisco can acquire a company with solid technology for a billion dollars worth of stock without stock without recording expense. There are theoretical arguments in favor of pooling and in some cases, I agree with them, but in many instances companies just try to "talk" the value of the stock up with the goal of being able to acquire real assets at an acceptable price. It works as long as the company maintains the growth and the stock market buys into the story. I mentioned Cisco, but they are one of the few companies that seems to add real value in acquisitions so I shouldn't dump on them; still as a shareholder, I think pooling should be stopped. Professionally, however, I like it as tax attorneys and accountants love transactions that create big fees. Deducting Goodwill - Intel hasn't been deducting goodwill based on the following footnote in the last 10K: The provision for taxes reconciles to the amount computed by applying the statutory federal rate of 35% to income before taxes as follows: (In millions) 1999 Computed expected tax $3,930 State taxes, net of federal benefits 255 Foreign income taxed at different rates (239) Non-deductible acquisition-related costs 274 Other (306) Provision for taxes 3,914 Apoligize about my lack of formatting ability, but there is no way that they deducted goodwill. The $3,930 shown above is pre-tax book income multiplied by 35% and the reconciling items explain why the tax rate is different in the financials. One of the largest items is adding back the impact of non deductible goodwill. The IRS has a team of auditors at Intel and although I'm sure the IRS has trouble recruiting qualified candidates in Silicon Valley, I doubt they would miss something like this. Note how big the "other" amount is. That includes things like the R&D credit, Foreign Sales Corporation benefit and "Cushion." Cushion is basically a reserve for potential problems and they likely do use it from time to time to make earnings. The first quarter of 2000 issue that you mentioned was the result of the settlement of the IRS audit. The note was: The Q1 2000 tax provision reflects a one-time benefit for the reversal of previously accrued taxes of $600 million. In March 2000, the Internal Revenue Service closed its examination of the company's tax returns for years up to and including 1998 and resolution was reached on a number of issues including adjustments related to intercompany allocation of profits. The company's effective income tax rate was approximately 15.6% in Q1 2000. Excluding the one-time tax benefit and the impact of non-deductible charges for IPR&D and amortization of goodwill, the company's effective income tax rate was approximately 31.7% for Q1 2000 compared to 33% in Q1 1999. This decrease takes into consideration the impact of the resolution of issues noted above. The note indicates that they had large reserves to cover potential liability if the IRS challenged their intercompany pricing (shifting profits to those low tax jurisdictions). Since the IRS didn't challenge them, they collapsed them to income. The key point that I think you are pointing out is that their tax rate declined and you think they did that to make earnings. You may very well be right! Without being an insider, however, there is no way to be sure as we don't know what went into that "other" column. My guess is that the decline in the effective tax rate is a combination of fudging and the fact that they probably are not reserving as much to cover for potential transfer pricing issues. I spoke to some other tax people about their 10% effective international rate and we were pretty flabbergasted about it. They have to be running their Foreign Sales Corporation benefit through the international provision or they are receiving some absolutely monumental tax concessions in foreign jurisdictions. I've never worked in Silicon Valley so I don't know how hard companies work to manage earnings. Based on some of Charles' posts I think they work hard at making things as confusing as possible. AMD is pure as the driven snow, but I sure wish they had the problem of managing the high expectations of Wall Street. Well, on such a depressing day I hope this helps. Jeff

To: Goutam who wrote (21168)	11/30/2000 9:23:39 PM
From: brushwud	Read Replies (3) \| Respond to of 275872

Goodwill exists in an accounting sense in the absence of any tax consequences. When one company buys another for cash and pays more than book value, it transfers all of the other company's assets & liabilities to its own balance sheet and books the excess as an intangible asset known as goodwill. If an acquisition is done on a pooling-of-interests basis, the assets & liabilities of both companies are pooled, but since there is no cash paid, there is no excess over book value, and hence no goodwill created. I would expect that most high-tech mergers are done as poolings-of-interests and also that Intel has done such transactions. The concept of FMV (fair market value) has nothing to do with any of this, although the price paid for an acquisition, whether in cash or stock, may be considered by definition to be the "fair market value" at that moment. Goodwill is a valid cost of business and is tax-deductible, but must be amortized and written off over many years. Under some circumstances, and according to tax rules I don't understand, some portion of goodwill may be construed as in-process R & D and expensed immediately, kind of like accelerated depreciation.