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-- Anonymous, June 23, 1999


RESEARCH ALERT - Qualcomm target raised

NEW YORK, June 23 (Reuters) - Lehman Brothers said Wednesday it raised its price target on shares of Qualcomm Inc. to $165 a share from $150.

-- Maintained buy rating.

-- Raised 1999 earnings estimate to $2.18 a share from $2.11. Raised 2000 earnings estimate to $3.02 from $2.78.

-- Said believes the Qualcomm is continuing to experience strong trends across its core businesses.

-- Shares rose 3-1/8 to 133-3/4.


-- Anonymous, June 23, 1999

EMC to Acquire Data General for US$1.22 Billion in Stock, Pay 48% Premium By John Stebbins

EMC to Buy Data General for $1.22 Bln to Boost Line Hopkinton, Massachusetts, Aug. 9 (Bloomberg) -- EMC Corp., the world's No. 1 maker of corporate computer-storage systems, agreed to buy rival Data General Corp. for about $1.22 billion in stock and assumed debt to add products for midsize businesses.

The company will exchange 0.3262 share for each Data General share, or $19.58, 48 percent more than Friday's close. EMC also will assume $212 million in debt of Westboro, Massachusetts-based Data General, which has had trouble making money.

The acquisition will help EMC boost sales to companies that want to do more business online but can't afford its top-of-the-line storage equipment. EMC has about 35 percent of storage sales to big companies, though rivals including Dell Computer Corp. and Compaq Computer Corp. are selling cheaper machines to target the $10 billion-a-year market for small and midsize companies. ``The midrange market . . . has been an attractive place to be, especially to pick up the newer Internet companies,'' said Mark Kelleher, a Suntrust Equitable Securities analyst, who rates EMC ``strong buy.''

EMC fell 3 to 57. Data General rose 4 1/4 to 17 7/16. EMC said it expects to take an unspecified charge when the acquisition closes before year's end.

Lehman Brothers Inc. advised EMC, while Morgan Stanley DeanWitter provided financial advice to Data General.

-- Anonymous, August 09, 1999

The Double Standard on Earnings

By Ed Leefeldt

New York, Aug. 11 (Bloomberg) -- These are earnings reports? A Yahoo! Inc. press release last month led off saying the Internet search engine had ``pro forma'' earnings of 11 cents a share in the second quarter. Pro forma, Yahoo said, meant before acquisition-related charges, such as amortization of ``goodwill.''

Reading on, investors discovered that after taking these charges -- which the accounting profession has always insisted are real costs -- Yahoo actually lost 7 cents a share.

For the same quarter, Nortel Networks Corp., North America's second-largest maker of telecommunications equipment, highlighted in its release what it called ``net earnings from operations'': $368 million, equal to 55 cents a share. Nortel also said that, after acquisition-related losses, including goodwill, and one- time gains and charges, it really lost $138 million, or 21 cents a share.

Amazon.com Inc. in virtually the same breath reported for the second quarter a ``pro forma operating loss,'' a ``pro forma net loss'' and a ``net loss.'' The numbers ranged from $67 million to $138 million. The Internet bookseller explained that pro forma meant earnings before goodwill and other costs, so the last number was the real thing.

In a footnote, Amazon.com said the first two numbers were ``for informational purposes only and are not prepared in accordance with generally accepted accounting principles.''


Companies and securities analysts are making a big push these days to bury earnings as we have known them. These folks want to divert investors' attention from the historic bottom line -- net income and earnings per share -- to something they call ``cash earnings,'' which excludes what can be substantial charges for goodwill that comes about because of acquisitions.

Later this month, the revisionists will get a big boost. It will come from the private organization the Securities and Exchange Commission relies on to set U.S. accounting standards.

The Financial Accounting Standards Board is working on a proposal, scheduled to be published the first week in September, that will allow companies to highlight cash earnings on their income statements to the SEC and shareholders as well as in their press releases. FASB wants to let companies state cash earnings before they state the traditional net income, excluding one-time gains and losses, and earnings per share figures. In other words, instead of just one bottom line, there may now be two.

``This could be one of our most important decisions,'' says FASB Chairman Edmund Jenkins. ``It affects any company and all investors.''

Change the Rules

The proposal is certain to be controversial. ``Cash earnings are mostly garbage promoted by companies that can't look good'' under the current standard of reporting, said Jack Ciesielski, publisher of The Analyst's Accounting Observer, a research service for institutional investors.

The gobbledygook cited in the three earnings releases above certainly focuses investor attention on cash earnings, which can be significantly higher than traditional net income. Money-losing and acquisition-bent Internet companies like Yahoo and Amazon.com have promoted the cash earnings idea to make their results look better.

And bigger companies like stockbroker Merrill Lynch & Co. and No. 1 retailer Wal-Mart Stores Inc. are beginning to flirt with the concept. Merrill cited cash earnings along with traditional earnings high in the text of its second-quarter earnings release. When Wal-Mart agreed to buy British supermarket chain Asda Group Plc in June, it said the acquisition would add to earnings before goodwill amortization though it would be ``mildly dilutive'' afterward.

The very idea that FASB might allow companies to inflate their earnings with an accounting maneuver might seem shocking. The accounting group has long stood for purity in bookkeeping, and for years investors and analysts have valued stocks in relation to a single standard: a company's net income per share.

Strong Support

Still, many in the investment business say the proposal ultimately will be accepted. ``I don't know of anyone who doesn't support a concept of cash earnings,'' said Janet Pegg, a managing director of Bear, Stearns & Co.

Cash earnings are profits before goodwill. Goodwill is accountant-speak for the excess an acquiring company pays for a takeover in relation to the value of the target company's net tangible assets such as machinery and inventory. Goodwill covers such amorphous things as executive competence and a company's good name.

Merger madness and bull markets have inflated the prices of companies acquired in recent times to many times their net worth, creating huge amounts of goodwill that normally have to be written off against future earnings. But companies on a buying binge have escaped from these goodwill charges by ``pooling,'' an anachronistic way of merging that keeps the goodwill charges off the combined company's books.

Pooling Is History

That's about to change. After 30 years, FASB is now taking a close look at its rules on mergers and acquisitions. Effective at the start of 2001, the rule-makers not only want to kill pooling but also make writing off goodwill more onerous, forcing companies to amortize the total over a maximum of 20 years rather than the current 40 years.

This will create a mountain of goodwill, but FASB is willing to let companies downplay that cost by reporting cash earnings along with net income. Jenkins says that sanctioning cash earnings is something of a concession to companies bent on takeovers. ``Certainly when we eliminate pooling there will be more situations when goodwill will have to be recognized.''

Says Robert Willens, an investment banker at Lehman Brothers Holdings Inc., ``They threw the market a bone.''

Critics of cash earnings say companies are desperate to de- emphasize the high prices they are paying for acquisitions in relation to the actual earnings or potential profits of the companies they buy. Nortel Networks, for instance, paid $7.2 billion in stock last year for Bay Networks Inc. While Bay was a prominent maker of computer network equipment, it had lost money in each of the two fiscal years before the acquisition.

Cover the Cost

``People are scrambling to show their companies in the best light,'' says Greg Bohlen, an investment broker with J.C. Bradford, a Nashville, Tennessee, investment bank that brings young, technology-oriented companies to market. ``They have to find some way to justify these huge prices.''

Securities analysts adopted the idea of cash earnings as eagerly as did companies. Their million-dollar-plus pay increasingly is tied to the mergers and acquisitions that their firms advise on -- and they want to keep the M&A game going. In 1998 alone, for example, Goldman Sachs Group Inc., the lead player in mergers for the year, took in $4 billion in revenue from handling takeovers.

First Call Corp., which tabulates securities firms' earnings estimates, is now publishing cash earnings predictions for a group of 20 Internet-related stocks. ``This will be huge,'' predicts Chuck Hill, director of First Call research. ``Analysts are pushing it, so it's going to mushroom.'' Hill says analysts on some of these 20 companies now refuse to give his company estimates the traditional way, after goodwill, forcing First Call to put out only cash earnings forecasts for these companies.


FASB's proposal on cash earnings is far from becoming a rule. The group will hold hearings on the idea in the first two weeks of February, and heavy hitters from the securities industry will weigh in. If FASB's seven-member board eventually does approve the measure, it could be effective in 2001, at the same time pooling dies.

FASB dislikes pooling because it artificially treats corporate marriages using an exchange of stock as mergers of equals with no goodwill involved. FASB, however, contends that every buyout has a buyer and a seller. The rule-makers want to eliminate this double standard of merger accounting by requiring companies to use the purchase method used more commonly in the U.S. and exclusively by the rest of the world. So, if the buyer pays more than net worth, it will have goodwill to write off.

The prospect of such charges could put a crimp in the takeover trend. Companies have completed more than $1.6 trillion of deals using pooling in the last 10 years, according to Securities Data Co., including the transatlantic marriage last year that formed car giant DaimlerChrysler AG.

Pooling Pleasure

What acquiring companies would lose if pooling goes was evident early this year when Internet navigator Yahoo acquired GeoCities, which helps people create their own Web sites, in a pooling transaction. Yahoo paid about $3.6 billion in stock for GeoCities, which had total assets of just $130 million. Under the purchase method of accounting, Yahoo probably would have had to write off about $3.4 billion against its future earnings. The new FASB rule will make that charge mandatory.

What's more, FASB's proposal to reduce the amortization period to 20 years will make earnings look even smaller -- or losses larger -- in the first crucial years after an acquisition.

Trying to ease that pain, FASB might actually be giving back more than it takes. By downplaying the cost of takeovers it may encourage more of them. ``The elimination of pooling will actually have a beneficial impact on mergers and acquisitions -- assuming the market converts to cash earnings,'' predicts Rick Escherich, an M&A analyst with J.P. Morgan & Co.

Times Change

Proponents of cash earnings argue that new times demand new methods, just as the spreadsheet has replaced the ink-stained ledger book. ``Accounting rules were written to evaluate hard assets,'' says Steve Cakebread, chief financial officer of Autodesk Inc., which provides software for personal computers. No one denies that assets such as oil being pumped from the ground, machinery running three shifts a day and computers humming in offices around the country should be depreciated over time, reducing a company's net worth.

But Cakebread says that computer software isn't a hard asset. Rather it's a set of electronic impulses representing the brainpower of programmers and is a new kind of goodwill. ``People now pay a premium for this kind of intellectual property,'' Cakebread says.

Even Warren Buffett, who runs Berkshire Hathaway Inc. and may be the epitome of the common-sense investor, has made the case against amortizing goodwill. Buffett used See's Candies, one of the small companies Berkshire owns, as an example. He claimed that See's brand name was ``economic goodwill'' that enabled it to consistently raise prices, even in hard times, and was therefore an expanding rather than declining asset.

These arguments fall short, says Larry Cohn, a banking analyst at Ryan Beck & Co. Assets have to be paid for, he argues. If a bank builds a mortgage business itself, it stands the cost of hiring and training employees, in effect, creating the brainpower that goes into goodwill. If instead the bank buys an existing mortgage business, should it escape having to account for those costs?

New Tune

At bottom, says Ciesielski of Analyst's Accounting Observer, much of the goodwill in acquisitions is simply ``no will'' -- the result of chief executives buying companies at any price and then trying to hide the overpayments from shareholders. ``So now they say, `Ignore the goodwill, we're building a business,''' he complains.

Proclaiming that traditional profits are outmoded isn't anything new. In recent years, companies like Time Warner Inc. and AT&T Corp. have pushed cash flow -- usually defined as earnings before interest, taxes, depreciation and amortization -- as an alternate, if not better, measure than net income.

Entertainment companies have said that assets they bought such as broadcast licenses and television stations have grown in value over time. Writing down the value of those assets and then penalizing an acquiring company for goodwill doesn't make sense, they say. Analysts already judge two-thirds of all industries, at least in part, on some kind of a cash basis, according to J.P. Morgan's Escherich.

Bereft at Bottom

The problem with focusing on cash flow is that this measure can hide a lack of true earnings. Cash flow has become popular with companies that borrow heavily to build empires. But often most or all of the cash goes for interest payments, leaving the traditional bottom line bereft. Debt-laden cable-television companies like Comcast Corp., for example, have long histories of red ink.

Investors may not notice this lack of true earnings until the growth by acquisition inevitably slows. ``The market gets so fascinated by cash flow and these stocks get so leveraged that when the music stops, they go bankrupt,'' warns Dennis Leibowitz, a telecommunications industry analyst at Donaldson, Lufkin & Jenrette Inc.

Abandoning the profit norm also leads to language trouble. Cash earnings quickly became a widely used shorthand for what Jenkins insists should be called earnings before amortization of goodwill. And companies in their public statements have come up with all manner of substitutes for traditional earnings.

Advertising Its Advertising

Not all the funny numbers even relate to profits. In July, for example, Ameritrade Holding Corp., after reporting earnings in a forthright manner, talked about its ``pre-advertising net income before taxes.'' Ameritrade's advertising expenses had more than doubled those of the year-earlier period.

``It's becoming a Tower of Babel,'' says Ciesielski.

A growing number of investors don't even worry about earnings in any form, says Shannon Puls, who runs an Internet site for so-called whisper earnings estimates, which are word-of- mouth estimates from analysts. ``With Amazon, it's the `revenue whisper' that counts,'' Puls said. Internet companies with little or no earnings highlight their number of subscribers and even hits on their Web sites to make their results look better.

What's good about FASB's imprimatur on cash earnings, says Pegg of Bear Stearns, is that it will tend to make companies' reports more comparable. ``Otherwise, people will be pushing their own numbers,'' she says.

Making Ready

Part of Wall Street senses that cash earnings will eventually push net income and bottom-line earnings per share out of the way. Hedge funds, big pools of capital from the rich that take big risks, already are screening for companies that may not show much in the way of traditional earnings but would have big numbers on the new basis. ``They think these companies will do well as investor perceptions change, and they want to be in on the ground floor,'' says Lehman Brothers' Willens.

Some accountants say FASB's earnings proposals don't go far enough. The group needs to get a fix on what he calls ``operating earnings,'' that is, profits a company can be expected to make year after year, said Jim Harrington, leader of technical services at PricewaterhouseCoopers, a New York-based accounting firm. ``That's what investors really want to know.''

If companies are allowed to downplay goodwill, they will start dumping other costs into that category, increasing their cash earnings numbers to the fullest, Harrington said. Jenkins says FASB has no plans at the moment to broaden its look at the income statement.

Rule-makers have every reason to be cautious about changing the sacred yardstick for earnings. In 1930, the New York Stock Exchange organized an accounting standards group out of concern that too many different methods of reporting earnings had contributed to the stock market crash of 1929. When the nation's top accountants formed FASB in 1973, their first job was to solve what one accounting expert had called ``The Definitions Mess.''

FASB is still struggling with the meaning of numbers -- and the meaning of words. Cash earnings are promoted as an aid to investors' understanding of how companies are really performing. But they might just lead to greater confusion.

-- Anonymous, August 11, 1999

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