Forum Archive Index - August 2001

["Peter" <pmaiden@xtra.co.nz>]

Gerry - that's an interesting point about the amount of goodwill ($400M-$500M) that will be carried on the DAD balance sheet post 'merger'

 

Those who haven't read the article from the New York Observer that Ben brought to our attention the other night should do so. The BCH and DAD 'merger' is much the same sort of situation that was talked about in that article - share issues and share swaps funding acquisitions and creating mountains of goodwill. I hope that the outcome is different in this case.

 

The goodwill, $400M-$500M,  that has been created in this deal is essentially the difference between Baycorp's book value and its market capitalisation  - the result of their exceptional performance over many years.

 

It is somewhat ironic that Data Advantage (as the acquirer of Baycorp) has to pick up the result of this success and write it off against future profits. That unfortunately is the way the world works, you don't get something for nothing etc.

 

In that interview Data Advantage did say  'it will have a substantial impact on reported profits. We're confident the investment community will look past what is basically an accounting treatment to the true operating strength of the combined business".

 

The amortisation of goodwill is a real expense and (as Gerry pointed out) will have a $20M-$25M  impact on the bottom line over many years.

 

It is this bottom line (NPAT) that is the basis of the Price/Earnings ratio. In future, as Gerry pointed out, it appears as if the new merged entity will either trade at a far greater PE multiple than it does at the moment or the price will drift down to a level that will reflect real levels of profitability.

 

It will be interesting to see how the company and the investment community handle this in the future. The feeling I get from that interview is that DAD already see it as a potential problem.

 

Cheers

 

Peter