Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : WCOM -- Ignore unavailable to you. Want to Upgrade?

To: limtex who wrote (3153)	8/8/1998 2:56:00 PM
From: dougjn	Read Replies (1) \| Respond to of 11568

I agree completely with most of what you said. And with your conclusion that Wcom's write-off is appropriate and up front. My only quibble is that you leave out he other major method of merging. Pooling. What happens there is that the premium paid over book value is NEVER amortized or written off. Instead the book value of the target is "pooled" with the book value of the acquirer. (The accounting fiction is that since neither company is buying the other, but instead they are truly merging their stock, they can merge or pool their accounts.) This is how all mergers should be accounted for, regardless of whether the consideration is cash or stock. In fact, I would say that anytime what is being acquired is an Organization which includes significant non capitalized intangible values, that pooling should be used. I.e., not if you are buying inventory or pieces of equipment. Yes if you are buying a company, division, or dissident partnership group. Etc. Now, this is not some effort to conceal over high purchase prices or something. If too much is paid in stock, earnings will be diluted short term and long term as the incremental earnings gained by adding those of the target, and after synergies and savings, fails to overcome the larger divisor created by having lots more shares outstanding. Similarly, if too much is paid in a cash merger, the debt burden will be very high compared to the additional earnings stream. And again, will not overcome the dilution of the stream even longer term, if it truly is too high. But buying a company should not result in different accounting treatment than building that company up over time. Just because its quicker or something. Goodwill write-offs are just absurd noise thrown into the system by accountants living for the purity of their little models, regardless of how poorly they start to reflect the real world. Come on, aren't there some accountants out there who are MAN (or WOMAN) enough to defend this silly stupid purchase accounting thicket of rules????? Maybe not. <g> See the thing is, in the modern world, book value is increasing an absurd way of measuring earnings power. What does the book value of Microsoft, of for that matter, PeopleSoft, or Cisco, have to do with their ability to generate cash flow or earnings? On a sustained, replaceable basis? If someone acquired Microsoft for cash (God or someone <gg>), the goodwill write-off would choke heaven. If on the other hand that same someone acquired US Steel or perhaps even a commodity chip maker like a Samsung or a Micron for cash, the write-offs would be much more manageable. (Because they earn a whole lot less on their book value.) OK Msft has a much higher market cap. But on a percentage basis, I mean. Capital (book value) by itself never created earnings. But these days the non-book value organizational components are more and more important. And not just in tech. All sorts of franchises. Coke's earnings have little to do with its book value. They have a lot to do with its intellectual property (their formula, etc.), and even more to do with their image. OK, that image could decline over time if not maintained. But why would the goodwill from a purchase accounting takeover of Coke only get written off in a takeover? And not while Coke purrs along independently? The truth is that Coke maintains it's franchise and image (its goodwill, if you like) every day by spending on advertising, promotional tie-ins, and by the marketing placement of its products in casual eating locals, vending machines, supermarket shelves, etc., etc. Most of that, almost all in fact, is written off, expensed, in the quarter in which it is incurred. Similarly, most R&D in software or other tech companies is written off immediately. But it is earned upon, in many cases, for years and years. As the earnings power of companies is increasingly based on knowledge and organization, in one form or another (and it always has been more than accountants ever acknowledged), book value is increasingly non-predictive of earnings. It is such a partial factor as to be essentially irrelevant. Doug