Dan3, while your concern over the depreciation issue has some merit, your approach and conclusions are way off base.
Inflation of the valuation of the PP&E occurs if the value of these assets is charged more slowly than the actual rate at which they decrease. The nature of high tech is that plant becomes obsolete very quickly, and the cyclical nature of the business means that otherwise valuable plant can become surplus overnight - and be obsolete and worthless before business pick up again. Ideally, a company in such a business will be conservative in the valuation of its PP&E, taking sufficient charges to keep the book value of its PP&E in line with its real value. If it doesn't, it runs the risk of finding itself in the position of NT - and having to take a huge writedown in a single quarter.
First of all, most PP&E is subject to pretty specific rules regarding depreciation. And while there certainly is room to move some dollars around here and there to massage the balance sheet and income statement from quarter to quarter, for the most part beyond a penny per share here and there the flexibility is not there, particularly with PP&E which is one of the more cut and dried things on the balance sheet.
PP&E has NOTHING to do with the huge writedowns that NT has been taking. NT purchased other firms at a cost far above book value, and booked that excess cost in goodwill. The huge, multi-billion writeoff that NT has taken are a result of a writedown of INTANGIBLE assets like goodwill, not PP&E.
Another great example of conservative accounting was AMD's acquisition of Nexgen. Even though it paid for the acquisition with stock, so there were no "out of pocket" costs for AMD, then or ever, for "buying" Nexgen, AMD felt that the listed book value of Nexgen's assets was too high, so it took a writedown ensure that its undepreciated PP&E did not become inflated above its actual value (the value of Nexgen's assets were added to AMD's as a result of the merger).
That's not accurate at all. In fact, it is almost the opposite of an accurate portrayal.
First of all, AMD accounted for the NexGen purchase as a pooling-of-interests. AMD took NO writedowns at all. Go back to your financials, and note that AMD states that "no significant adjustments were required to conform the accounting policies of the company [AMD] and NexGen." That's pretty clear, I think.
Not only did AMD NOT feel that NexGen's book value was "too high" as you note, but in reality AMD obviously felt that Nexgen's book value was way, way too low. At the time of the purchase, Nexgen's book value was about $25mm. AMD purchased NexGen for about $600mm, or 24x stated book value. NONE of that book value was written off. Of course, as an AMD shareholder you got diluted, but that's something different, having nothing to do with conservative accounting.
Oh, and that PP&E account of NexGen that you talk about? It TOTALLED about $5mm when AMD purchased NexGen. When you look at the 33.6mm shares that AMD issued, that amounts to a grand total of about 15 cents per share. And none of it was written down.
Contrast that conservative accounting style with Intel's very liberal accounting. Despite forecasts of flat demand for the visible future, Intel has allowed the book value of its PP&E to increase by about $5 Billion this year. Had this been the result of a significant, permanent, expansion of capacity to meet significant expanded demand that increase would have been warranted.
First of all, purchase accounting and accounting for PP&E are apples and oranges, so your comparison is silly to start with. Second, as I stated before, you way, way overstate the flexibility that Intel has in accounting for PP&E. Intel can move a hundred million here and there to make a quarter's earnings line up, but it is impossible for Intel to legally manipulate its PP&E to the sum of $5 billion. The only way to do it is through blatant fraud. And, quite frankly, if Intel is able to deceive its accountants to the tune of $5 billion, it would be the largest accounting fraud ever. Are you accusing Intel of fraud on this grand a scale?
The other issue is the $6 Billion in goodwill they added to their balance sheet as a result of their acquisitions during the past 2 years. They certainly don't appear to be getting above market returns from the "other" category, so it doesn't seem to me to be reasonable to be listing goodwill worth $6 Billion on their balance sheet. Compare AMD's conservative immediate writeoff of the doubtful aspects of the Nexgen merger with Intel's very liberal taking of $6 Billion as goodwil instead of listing as costs the money they spent on various acquisitions during the period.
First of all, as I noted before, note that AMD did NOT write anything off in the NexGen merger, they accounted for it as a pooling of interests.
Intel, OTOH, accounts for most all (if not all) of their purchases as purchases, which is a cleaner way to acquire and much easier to analyze. The goodwill on the balance sheet is just a plug of the excess of the purchase price over book value. That's easy to see given that Intel accounted for their deals as purchases. If AMD had accounted for the NexGen deal as a purchase (which it essentially was, not a merger as AMD technically called it) then about $400mm of goodwill would have been recorded on AMD's balance sheet, and it would have been easy to calculate the true cost of the NexGen purchase. It isn't a coincidence that Intel's preferred method of acquisition is still possible. The method that AMD chose in the NexGen purchase, OTOH, is getting phased out because it is deceptive. This is the complete opposite of what you say.
By the way, thinking about this brings to mind the opposite issue: companies in industries like agriculture that pay to acquire farmland, depreciate it down to $0 over 40 years, but are then holding an asset with a real value 10 or more times its original cost.
Land isn't depreciable. It remains on the balance sheet at cost in most circumstances.
Dan3, balance sheet issues and the manipulation of them are very real problems. But this particular dog you've got here won't hunt. |
