There is one trading day left in the year and thus one last day for last-minute tax planning. More than any year in living memory, this one is unsettled simply because no one knows what the tax code will look like for either corporations or individuals next year. As a consequence, I have found that taxes have dominated my thoughts about investing for the last couple of weeks and that makes me uncomfortable, since some of the least sensible investment choices I have made in my lifetime have come about when tax considerations have been preeminent. To ground my thinking and actions for these last...
The year in review: Apple's universe?
As the year winds to a close, I don't think that there can be much debate that this was Apple's year, for better or for worse. In my view, no company has dominated the financial news and the cultural landscape in any year as much as Apple did during 2012. Not only were Apple's earnings announcements greeted with mass hysteria, but Apple's products were bigger news than any celebrity on Hollywood. At the risk of adding to the heated discussion that accompanies almost any mention of the company, here is my attempt to pull together what happened to the company this year.January 2012: How much cash...
Acquisition Alchemy: Creating value from deals
By now, it should be no secret that I am not a fan of acquisition-driven growth. I have argued in my previous posts that acquirers often pay too much, that many acquisitions are driven by CEO egos and overconfidence, that M&A bankers are too conflicted to give unbiased advise, that accretive deals can be value-destructive and that the presence or impairment of goodwill provides no useful information to investors. Am I being too negative in my portrayal? Possibly. After all, there are companies have grown successfully with acquisitions, at least over some periods. In constructing a value-creating...
Acquisition Accounting II: Goodwill, more plug than asset
There is no asset on a company’s balance sheet that wreaks more havoc on valuation and good sense than goodwill. The first problem with goodwill is that it sounds good, and when something sounds good, people feel the urge to pay for it. The second problem is that, notwithstanding claims to the contrary, it is not an asset but a plug variable that measures everything and nothing at the same time.A short history of acquisition accounting To understand the treatment of goodwill in GAAP, it is worth taking a quick look at how acquisitions have been accounted for over time, at least in the United States....
Acquisition Accounting I: Accretive (Dilutive) Deals can be bad (good) deals
Analysts, investors and journalists who follow stocks have an obsessive focus on earnings per share, what it is now and what it will be in the future, as can be seen in the earnings announcement game every that takes up so much of Wall Street’s time and resources. Not surprisingly, acquiring firms, considering new deals, put their accountants to work on what they believe is a central question, “Will the earnings per share for the company (acquirer) go up or down after the acquisition?” A deal that will result in higher earnings per share, post-deal, is classified as accretive, whereas one that...
Acquisition Advice: Big deal or good deal?
HP is one of a multitude of companies that has overpaid on acquisitions, and like those other companies, it cannot claim that it lacked outside advice and guidance. In fact, HP paid $30.1 million in advisory fees to Perella Weinberg and Barclay’s Capital for guidance on how much to pay for Autonomy and whether the deal made sense. So why did they not spot the accounting manipulation or recognize that synergy would be elusive? In general, why, if acquiring firms pay so much for "expert" advice, do so many deals go bad? Conflicting roles: The answer can be seen in an imperfect analogy. Asking an...
Acquisition Hubris: Over confident CEOs and Compliant Boards
In my last post, I noted that acquisitions are more likely to destroy value for acquiring firm stockholders than to add value, and that there is little evidence that companies learn from history. That is puzzling, given the manpower, data power and model power that is brought into the acquisition process. How can all these smart people working with sophisticated models and updated data be so wrong so often?The answer I think lies in a simple fact: in most acquisitions, the decision to acquire is made first and the analysis follows, and all too often, the decision is not only made at the top of...
