Forum Archive Index - November 2000

[Brian Gale <brigale@i4free.co.nz>]

I'm not sure what you mean by ' Economic Goodwill' , Warner. I presume
you are referring to the intrinsic value a company has in its
infrastructure - but this does not appear in its accounts. BCH is
a classic example where they have built up a sophisticated database, as
part and parcel of their operations, but the real value of this would
only come out if the company was sold. However the strength of the BCH
infrastructure is well recognized hence their high share price. 

This concept of  ' unmeasured value'  relates back to what
Peter Maiden and Ben were discussing a while ago, I've forgotten the
title.

In the case of R&D this would be written off as it was
incurred ( it is a Tax Deductible item so would appear as expenses) not
appear the accounts as an intangible asset. A company does not want
intangibles on its books because, as the name implies, the value cannot
easily be determined.
 
Which brings us to NTA which is the real value of a company in a wind-up
situation. The Tangible assets consisting of buildings, machinery, office
equipment (inc. computers and software), furniture and fittings, motor
vehicles, able to be sold on the open market.
Intangibles are unlikely to have any value whatsoever unless the company
is taken over as opposed to liquidated.
 NTA is the bottom line, theoretical, value of a company, but again
it depends on how the assets have been valued and in many cases this
value would not be fully realised, but it does give some measure of
apparent value, on the open market. FFS is a case in point where it's NTA
would be very difficult to turn into cash because of forest
valuations.

 RMG  are issuing shares to purchase the acquisitions, so as
the Goodwill increases on one side of the Balance Sheet the Shares on
Issue increase on the other side, so an individual shareholder's portion
is reduced, and the monetary target for ' Return on Shareholders Funds'
has increased. Of course the hope is that eventually RMG will become a
very strong Company able to justify the purchases with earnings that are
better than those previously achieved by the  taken over
Company.
I suppose it looks better if the shares are priced at higher than market
price but really it could be cosmetic because the seller will want his
value, which would mean the Goodwill will be higher.

It isn't easy to understand how Goodwill appears as an asset on the
balance sheet, it's one of those ironies of accounting, it really is a
liability until balanced off by future earnings, maybe if you think of it
that way it will make more sense.

Regards
Brian




At 16:03 20-11-00 +1300, you wrote:
> Thanks Brian, getting clearer! I
> think I have a problem understanding
> "goodwill" as oppossed to "economic goodwill"... I
> see economic goodwill as
> intangible assets that are producing positive earnings as opposed 
> to
> goodwill that may come in the future but is yet to be proved, say R&D
> and
> software with "potential". In my examples I am refering to
> economic goodwill
> that could be an intangible in the books but produces earnings.
>
> In RMG's case, I see that most companies rolled into RML have been done
> at
> 25-27c Aus. (currently 24c) and that the most recent aquisition of
> Task
> force in Auckland was set at 36c NZ (market price was around 25-6c.)
> does
> this mean that alot of "goodwill" disappears? Its good to see
> that these
> companies are still prepared to join RMG at premiums to market
> prices.
>
> Thanks
> warner.
>
> PS: you didnt mention significance of NTA.?
>
>
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