<<Lucent announced loosing a record $230 million and everyone is buying.>>
The above is part of the following post, (to which I was responding):
see:#reply-5280784.
Lucent announced loosing a record $230 million and everyone is buying. I think this stock is ready for a major correction. Lucent's market cap is around $130 billion, comparable to GNP for several countries, and they lost a record amount! I'm afraid the bubble is just about to burst on this one and then I might buy some more shares. For now I just hold a few shares in case "market mania" continues a little longer.
As to:
I thought acquisition expenses were only "losses" if the acquiree ultimately didn't produce. If I netted $60,000 last year and bought a house out of savings for $200,000, I'd show a loss of $140,000 for the year. But I have a house! Is this an erroneous analogy for LU acquiring Yurie et al? If I could swap some equity in my house for a vacation home (i.e. stock swap), my earnings would still be $60,000. Is this how using stock to acquire companies works?
My understanding of an acquisition cost is what you can offset against current revenue (hence earnings) and not necessarily amortize over a specific period of time, as some items must be amortized over a specified period of time. (in which case the amortized items impact earnings over the amortization period rather than as a ONE TIME CHARGE).
Attorney's fees, M & A fees etc, may qualify as such, (and others), all these combined as the report was presented, yielded a loss of $230 million.
If you do not consider such acquisition costs, LU had positive earnings of .32 cents/share
Now, My response to the above post stated that:
Lucent announced loosing a record $230 million and everyone is buying.
Response:
What is the reason for the loss ? I understand is due the cost of considerable acquisitions..... if such is the case, then what will be the marginal benefit of the acquired units/businesses, etc.?
The key words are: EXPECTATIONS of FUTURE events
What I mean by that is what are the expected ADDITIONAL benefits by making such acquisition ?, are we better off or not?, is the asset that was acquired a productive asset that will enhance our future revenues (and earnings), are the related costs in line with a typical valuation of a similar business in the same industry, or did the company paid "too much" for such business ?
Most importantly, in which way can this acquisition enhance our current operations, are there any "economies of scale", i.e. savings in combining parts of the new entity that makes our business (LUCENT'S), more productive and efficient.
If all of the above questions in this case yield positive answers, then the acquisition is/will be viewed as a positive event, and the actual (quarterly) loss, becomes more of an accounting treatment of the necessary expenses one had to incur in such purchase.
In your example the fact that you are using your equity in your home to purchase another "non-productive" asset, i.e. a vacation home, is making it worse for your "stock", because neither home is yielding you any economic benefit. (other than your own shelter), and now a vacation shelter (recreation).
Therefore, your current revenue, (wages, salaries, investment proceeds), will not be enhanced, because now you will face new costs, (i.e. not only the closing costs but in addition, your taxes, insurance etc.
Yes your earnings are still 60,0000 but those earnings will be negatively impacted because you have increased your expenses, and there is no new earnings coming out of the new vacation home. (and that is assuming there is no new debt).
Now, picture this:
Say you own an industrial warehouse that you originally paid 800,000 and your mortgage is 500,000 your equity is 300,000
Now, over a period of three years, the revenue from this building nets you 100,000/p.a., and we capitalize such net income at say 10%.
Your valuation for your asset is $1'000,000 so there has been an increment of $200,000 of equity in your original investment.
You then go out and find a second warehouse, that it is valued at the same $1'000,000 (with the same income of 100,000 p.a.
Then you go out and re-finance your 1st warehouse, and pull the additional 200,000 equity and with it, you give a down payment for the 2nd. warehouse.
Now you own two warehouses valued at $2'000,000, with total debt of $1'500,000, so far so good, your total equity equals the same $500,000 before you decided to buy the second warehouse.
The key here is WHAT IS THE OUTLOOK for leasing rates and vacancy factors.
If the expectation is that leasing rates will trend higher, and vacancy factors lower, your expectations of increased valuation on both warehouses is positive, because, as your net income goes up, your valuation will also go up.
A third consideration is the interest rate environment, if rates trend lower, capitalization rates will move in parallel, meaning for example that with your income remaining CONSTANT at $200,000 p/a, but say that cap rates are now at 9.5% (in stead of 10%), the value of both buildings have now increased to $2'105,000.
If your revenue increases to $250,000, and a cap rate of 9.5% is applicable, your valuation goes to $2'631,500.00
The above is a real estate example following your example.
In the case of LU, there are many other considerations to take into account, but the bottom line is the same:
How can you increase the net operating revenue of your company, and what p/e are you going to apply to such earnings to arrive at "X" figure.
Here the valuation becomes quite complicated, due to specific demand for LU stock, and "what are acceptable p/e ratios on companies that have strong growth in earnings (and sensible acquisitions).
In addition, what are interest rates, and influx of funds into the overall market.....
Capice ?
I'm long on LU mostly because I have a blazing computer, but I still have a painfully slow pipeline to what I use my computer for most. The companies who fix the telecom bottleneck at my home phone jack will prosper well into the next century.
If such expectation is met by LU, then we will be in fine form !
Z. |
