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Technology Stocks : Wind River going up, up, up! -- Ignore unavailable to you. Want to Upgrade?

To: Robert Calusdian who wrote (8939)	12/21/2000 11:57:01 PM
From: Allen Benn	Read Replies (4) \| Respond to of 10309

Could someone please explain to me what, exactly, the huge "goodwill" and "identifiable intangibles" liability is? It seems this company would be (and should be) posting large Quarter to Quarter EPS growth rates if not for these items. Goodwill is the amount above book value that WIND pays for a company. Since most technology companies have little in the way of hard book value, they throw off scads of goodwill when they are purchased. Typically, goodwill is amortized over a few years – unless a case can be made for why the goodwill, or excess value, does not diminish over time. This non-cash write-off torments acquisitive technology companies, mainly because they never know for sure if the Street actually ignores these charges. It was common practice for technology companies to finesse the requirement of booking goodwill by qualifying acquisitions as mergers under the “Pooling of Interests” method. This method, when applicable, enables companies simply to combine their balance sheets, without booking goodwill, since neither company was purchased per se. WIND used this method to acquire ISI, but unfortunately ISI already had lots of goodwill on their balance sheet from prior acquisitions. In addition, there are lots of downsides to the pooling method, including the requirement for a 100% stock deal, no unusual stock transactions of any type for 6 months before and after the merger, and the requirement that all company financials be restated for the prior two years. For example, WIND’s revenues nearly doubled after buying ISI, but you would never know it by looking reported year-on-year revenue gains. (This might surprise long-time followers of WIND, but WIND now reports revenue growth of 187% in FY 1999. Of course, at the time WIND reported just a 40% revenue growth. The point being that WIND never got any credit from the Street for growing revenue through its substantial acquisition.) Just yesterday, the FASB announced monumental changes in how goodwill is accounted for. As everyone knew, the Pooling of Interests method of merging companies is no longer allowed. (This bothered many companies in Silicon Valley, including acquisitive Cisco, because of the requirement to amortize goodwill.) The surprise, at least for me, is that the FASB has also indicated that companies no longer need to amortize goodwill. They suggest that a one-time write-off of excess goodwill be taken when a company is acquired, and then just leave the remainder un-amortized on the balance sheet. This is extremely important, since companies like WIND can now acquire other companies without the silly constraints associated with trying to qualify for pooling. They can use any combination of stock, cash or anything else of value. This frees WIND to buy back stock any time they choose outside of the quiet period, without issuing euphormisms about buying stock to compensate for options. For example, WIND could start buying stock tomorrow to squeeze the shorts who are aggressively tanking the stock. It also means any future acquisition adds to upcoming revenues. This is extremely important given the current economic environment. In an upcoming lackluster year for revenue growth, companies will savor the revenue gains now possible through acquisitions without suffering the earnings-deadening amortization of goodwill. In summary, 2001 is shaping up as the biggest M&A year of record because: 1. Tech stocks are at bargain levels, and can be bought with cash as well as stock. 2. The purchase method, the only way left to acquire, does not require restating past revenues, meaning that acquired revenues show up as growth. 3. Excess goodwill need not be amortized, lowering the apparent earnings, while having no effect on cash. 4. The Clinton antitrust police will be replaced by less onerous regulators. Microsoft was the first out of the shoot with the just-announced purchase of Great Plains Software. Expect a whole lot more. In particular, expect WIND to acquire along with everyone else, and possibly be acquired like a lot of others. Allen