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Home -> Community -> Mailing Lists -> Oracle-L -> RE: l'market / RE: Metalink Response ....FYI
example:
http://news.morningstar.com/doc/article/0,1,4382,00.html?hSection=fromAnalysts
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One Hand Washes the Other
I was talking to a reporter a couple of days ago about some upcoming accounting changes that could potentially boost some companies' reported earnings by changing the way they account for merger costs. She mentioned that she'd seen a study that predicted a wave of increased merger and acquisition activity as a result of this change, since companies' earnings wouldn't be as affected by merger-related accounting charges.
It turns out that this study had been done by a major investment bank--which makes more than a small amount of money from advising companies on mergers and acquisitions. By itself this wouldn't be too remarkable, since investment banks' proclivity for producing self-serving research is well known. However, there's a little bit more to the story that makes this pretty funny.
First, the proposed accounting changes have to do with the way companies account for what's called "goodwill," which is the amount of the purchase price paid by an acquiring firm above and beyond the target firm's book value. This amount is generally charged off against earnings over a period of time, but the charge is purely an accounting one--it doesn't mean that the company has seen cash flow out the door. Moreover, study after study has shown that investors tend to "look through" accounting changes like this, and base their investment decision on the true economic--rather than accounting--effects of mergers.
So, it seems to me that asserting that M&A activity will increase just because of an accounting change isn't a tenable argument. In any case, you don't have to take my word for it--take Wall Street's.
This is where things get fun. During the dot-com boom, most Wall Street analysts were adding back goodwill and other merger-related charges when making their earnings estimates, effectively saying that those noncash charges weren't very important in assessing companies' performance. (Enough analysts were doing this, in fact, that First Call starting collecting "cash earnings" estimates for a number of Internet companies.)
So last year, Wall Street was saying that noncash merger charges don't really matter, and basing its estimates around this idea. Now, a respected Wall Street firm is saying that these merger charges are so darned important that companies will be more inclined to do acquisitions once the charges aren't so onerous. Can’t have it both ways, folks. Either investors should pay attention to goodwill charges, or they shouldn't. Which is it?
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Pat Dorsey is director of stock analysis for Morningstar.com. He can be reached at patrick_dorsey_at_morningstar.com.
Pat Dorsey does not own shares in any of the stocks mentioned above.
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Author: Eric D. Pierce
INET: PierceED_at_csus.edu
Fat City Network Services -- (858) 538-5051 FAX: (858) 538-5051 San Diego, California -- Public Internet access / Mailing Liststo: ListGuru_at_fatcity.com (note EXACT spelling of 'ListGuru') and in the message BODY, include a line containing: UNSUB ORACLE-L (or the name of mailing list you want to be removed from). You may also send the HELP command for other information (like subscribing). Received on Wed Apr 04 2001 - 13:22:13 CDT
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