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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: rjm2 who wrote (17475)	7/30/2003 8:52:52 PM
From: quasimodo	Read Replies (1) \| Respond to of 79042

"With BONT paying $80 million, is it possible that you would have to write the PP&E and other assets down to ZERO at EBSC" Under the purchase method, the excess of buying price over fair value of equity is recorded as goodwill. In this case there will be no goodwill. Under the pooling method, the companies will just combine their assets and liablities at historical cost without recording any goodwill. "If so, would that mean that the $20 million in annual depreciation and amortization at EBSC would be eliminated?" No. The depreciation and amortization accounts refer to the pp&e and the capitalized leases of EBSC and these will be consolidated into BONT's figures. Hope that answers your questions.

To: rjm2 who wrote (17475)	8/1/2003 8:33:16 AM
From: Grantcw	Respond to of 79042

Hello Rjm2 and all, I've really been pondering these new acquisition rules recently and wanted to share my views as I think these new rules may impact value investing. In regards to your friends thoughts: <With BONT paying $80 million, is it possible that you would have to write the PP&E and other assets down to ZERO at EBSC? If so, would that mean that the $20 million in annual depreciation and amortization at EBSC would be eliminated? I'm not sure what the answer is, but I am becoming increasingly convinced that the "bargain purchase" is going to, in and of itself, do wonders for the income statement of BONT, or whoever the acquiring company is." > As I stated in my previous message, I believe that any company purchasing EBSC at $80 million or below would probably end up recording their fixed assets at 0 (see note at the bottom of this post as an addendum to my previous post). Now, the question is, what composed the depreciation and amortization amount on EBSC's income statement? I imagine it includes other things than just PP&E depreciation, so I don't think all of the depreciation and amortization expense of the EBSC would go away after the acquisition, but I do think it would be substantially reduced if the fixed assets are recorded at 0 based on the purchase price. That being said, I really think this example of the possible way that the company acquiring EBSC would be accounting for the acquisition shows how the new rules of acquisition accounting (established a year or two ago?) really enhance the attractiveness of purchasing companies below book value, in my opinion. Before these new rules came into effect, there were two main ways of accounting for acquisitions (purchase and pooling methods), and it was hard to even guess how companies were going to do their accounting because there were more options. Furthermore, under the old purchase method, in this situation a company would purchase EBSC, leave the fixed assets on the books and just record a negative goodwill entry for the difference between the purchase price of the acquisition and the company's book value. This negative goodwill balance would then be amortized into income every year. It was a nice pickup into income, but I think most financial analysts would have backed that out of 'real income' in their analysis. But now, things are different. A company that purchases another company under its book value will need to record the fair value of the assets and liabilities of the company being purchased and then lower the company's long-term assets (generally fixed assets) to balance the company's balance sheet based on the fact that the purchase price was lower than the book value. To me, this enhances the attractiveness of purchasing a company at below its book value. Now, not only can a company reduce costs by eliminating redundant processes, but now the company will also save on Depreciation and amortization as the acquired company's fixed assets will have a lower value. Anyways, I may be too detailed into the accounting for people, but I thought it was interesting and impacts value investing, specifically purchasing stock in companies that might be acquisition targets. Thanks for letting me ramble. :) CW ps. In regards to my previous post on the acquisition accounting for EBSC, my calculations assume that the fair market values of the current assets of EBSC and the total liabilities of the company are relatively equal to their current book values (the material question to me would regard the fair market value of their merchandise inventory). If they changed materially and were revalued at market value during the acquisition accounting, my calculations would need to be revised.