Forum Archive Index - November 2000

["P Maiden" <pmaiden@xtra.co.nz>]

Hi Warner - unfair of me to use RMG and BCH example but good response using Kmart buying WHS. Of course neither BCH or WHS have goodwill as such as yet - only an issue if somebody acquired them.

 

Don't discount something like small companies acquiring big companies happening though. Years ago I was working for an Alex Harvey Industries company  - the giant industrial company in NZ. Their acquisition plans included picking up a family business in the Hawkes Bay that owned some forests and had a chain of hardware stores called Carters. Alex Harvey ended up as the acquired company in a reverse takeover and CAH as we know it today was born.

 

I take it this discussion on goodwill came up with Brian wondering how RMG was going to account for the goodwill relating to their acquisitions - the presumption being there was a lot of it. From their accounts in the Sep announcement there was some goodwill written off anyway. Whether this was some old Frontier goodwill or not I don't know.

 

There doesn't seem to be any reason why this should be an issue for RMG. RMG say that all acquisitions are earnings positive and if they have purchased wisely goodwill shouldn't be a problem. The main value benefit of so many acquisitions was to obtain the synergies out of consolidating a lot of activities - and they seem to be doing this by reporting a reduced headcount etc.

 

Is what you are seeking in your recent posts an explanation as to what is the real difference between RMG generating their earnings from an intangible asset such as goodwill (amortised over time) and a capital intensive business generating their earnings from tangible assets (depreciated over time)?

 

IMO from an investors point of view nothing. It all depends how you see the levels of earnings that will over time accrue.

 

Warner - obviously you think that these will eventuate and will in due course be reflected in the value of the company. There is no reason to doubt this.

 

This is a case where driving earnings from an intangible asset is good news. Once the goodwill has been expensed the ongoing earnings will be higher (no more goodwill to expense). In a capital intensive business the machinery has to be replaced (usually at higher cost) and the depreciation expense continues.

 

Much the same debate can be had between whether companies should only use shareholder capital to generate earnings or use borrowings as well.

 

At the end of the day it is what you are comfortable with after doing your own research, irrespective of what some standard ratios or definitions say. No doubt RMG will over time do well

 

Some ramblings but hopefully of interest.

 

Peter