Is it too much to ask that financial writers understand basic financial concepts before they launch into a rant or two about the ills of leveraged buyouts?
Apparently, if the passage below is to be believed to come from a "financial writer."
It didn't help that another recent change in accounting rules required Freescale to reflect on its books the difference between the value of the company's physical assets and the buyout firms' purchase price. That took a big bite out of profits: In April, 2007, it posted a $539 million first-quarter loss, after booking a $212 million gain a year earlier. In town hall meetings with employees and conference calls with investors, Mayer explained away the paper losses, assuring everyone that operating earnings were in the black and cash was plentiful enough to cover Freescale's interest payments.
We believe our readers demand better. We're betting it is less than 15 minutes before you collectively spot the conceptual error that should send the writer packing and post it in comments.
Ready, and.... BEGIN!
When a Buyout Goes Bad [BusinessWeek]
Posted by guest , Apr 04, 2008 2:46PM
Umm...goodwill isn't amortized
Posted by guest , Apr 04, 2008 2:49PM
Haha, BusinessWeek. Business news for and by those who hate business!
Posted by guest , Apr 04, 2008 2:50PM
No 'Goodwill' towards that shitshow writer...
Posted by guest , Apr 04, 2008 2:53PM
you don't amortize, but can't you still write it down?
Posted by Master of None , Apr 04, 2008 2:59PM
@2:53PM
If the acquired entity has been impaired, yes.
@EP
Are you asking us to come to our own conclusions? That may be too much for those of us who are used to Carney pounding us over the head with his.
Posted by guest , Apr 04, 2008 2:59PM
Forget the accounting stuff. They overpaid, and there were no countervailing synergies. Kiss the 539 mm bye-bye.
Posted by guest , Apr 04, 2008 3:05PM
Master of None- is "impaired" an accounting def? i'm just curious what triggers it. 20% drop in value or something?
Posted by guest , Apr 04, 2008 3:06PM
goodwill is the premium to book value, not assets.
(from a lurker)
Posted by guest , Apr 04, 2008 3:07PM
Goodwill does show up on the balance sheet as an asset
Posted by guest , Apr 04, 2008 3:09PM
this is lurker again - the change in accounting rules did not force companies to show goodwill - they always did! the change was to do away with amortizing it....but it always was on there as an asset
Posted by guest , Apr 04, 2008 3:14PM
Who cares about earnings in an LBO? In fact, gimme those "paper" losses - at least I won't have to pay any taxes and I can pay down debt; maybe make a return.
Posted by guest , Apr 04, 2008 3:18PM
It's not the goodwill that's depressing earnings...they stepped up their inventory, PP&E, and new intangibles that all cause a non-cash drag on earnings (on top of the fact that their business is in the toilet, that doesn't help either). And there was a change several years ago that caused them to show goodwill and step up assets, before they could do pooling and not show goodwill.
Posted by AJ , Apr 04, 2008 3:21PM
I keep re-reading it and it just makes no sense. The "new accounting rule" required the buyout firm to book the excess it paid over assets? That's not goodwill... That would be purchase price over book value or equity as someone already pointed out. Also, I'm not sure how that leads to losses unless they do mean goodwill and they wrote off the goodwill.
Does the BW author mean the mark to market rules? And that they have to mark the value of the assets to market which is likely lower than the buyout price? That again doesn't really make sense... Dammit EP, I'm going to have to pull a filing...
Posted by ep , Apr 04, 2008 3:23PM
@3:14- That's it! Yes, there is the goodwill issue (and you'd expect the author to get that together) but the entire hand waving over the "quarterly loss" and the nonchalant dismissal of the "paper losses, positive operating earnings" explanation (as if management was pulling a fast one) rings "CLUELESS" clear as a bell.
Posted by AJ , Apr 04, 2008 3:26PM
Amort of intangibles... wow those are large numbers
Posted by Flashdancers , Apr 04, 2008 3:30PM
One could argue that it's just not financial journalists that are obsessed with the bottom half of the P&L.
Posted by guest , Apr 04, 2008 3:33PM
Not to mention that operating earnings are a line item on the income statement, and are most certainly not in the black 3/07. Likely the author meant to refer to Adj. EBITDA.
Posted by guest , Apr 04, 2008 3:44PM
I cant believe hot chicks get hot listening to you wanna-be douch bags and gay cum receptacles.
Posted by Master of None , Apr 04, 2008 3:46PM
@3:14PM
Most of those 'paper losses' are for accounting purposes, not tax, so you don't actually save anything there.
@EP
Are you saying paper losses don't matter? I'm not familiar with this company, and I didn't read the article, but when I see it happen more than once (without a damn good explanation) I generally consider it a sign that management is habitually over-paying for assets in an effort to report 'growth at any price.'
Posted by guest , Apr 04, 2008 3:46PM
this whole thing is garbage. goodwill is tested for impairment at least annually. i didn't bother to read how much they wrote down, but apparently it's a shitload. the whole implication of the article is that if there had not been a change in accounting rules, the company's profits would not have been impacted, so the change in accounting rules really fucked investors. more so than the company overpaying for an acquisition by at least $500 mln.
Posted by guest , Apr 04, 2008 3:46PM
sorry I am late to the game but, the possible recent accounting change he references,FAS 141R, which will require more amortizable intangibles to be booked is not effective until YE after 12/15/08... a previous poster mentioned the old 141 which did away with pooling and forced purchase price allocation, and this rule hasn't been recent since we invaded Iraq...
Posted by guest , Apr 04, 2008 3:47PM
I don't think they do.
Posted by GinNTonic , Apr 04, 2008 4:01PM
@3:46
The only thing you need to know is that it's a private company owned by sponsors.
If EBITDA is equal in scenario with and w/o the writedown, the scenario with writedown is making more cash (hopefully paying down more debt) even though their earnings are lower.
Posted by GinNTonic , Apr 04, 2008 4:09PM
Simple Calc:
Scenario A (w/o writedown)
EBITDA: $200
Interest: -$100
Earnings before Taxes: $100
Taxes (40%): -$40
Earnings: $60
Cash Flow to Retire Debt (simplicity sakes): $60
Scenario B (with writedown)
EBITDA: $200
Interest: -$100
Writedown: -$50
Earnings before Taxes: $50
Taxes (40%): -$20
Earnings: $30
Cash Flow
EBITDA: $200
Interest: -$100
Taxes: -$20
Cash Flow to Retire Debt (simplicity sakes): $80
Posted by guest , Apr 04, 2008 4:17PM
Gin: Not a total expert, but I think that the rules regarding deductibility of goodwill (for tax purposes)mean that its not necessarily the slam dunk that you imply here.
Posted by guest , Apr 04, 2008 4:30PM
@3:46
The investment thesis for many-a-LBO is that you may never have to be a cash tax payer during your investment period...the "at least I won't have to pay taxes" was meant to reflect that leverage, certain non-operating losses, etc. are used as an advantage - that ultimately, earnings, in the traditonal sense, really don't matter.
I think the point of her beef with this article is that this particular paper loss didn't matter - any LBO's reported earnings are negative - usually to the nth degree - following the acquisition. But as long as they are generating cash and paying down debt, it shouldn't matter if your net income is negative googleplex. And if you continue to generate negative earnings through your investment period, so long as you continue to generate cash and pay down debt - even better.
My guess is that FAS 141, goodwill impairment tests, etc. didn't cross her mind when making this posting.
Posted by GinNTonic , Apr 04, 2008 4:37PM
@4:17
I'm not pointing out specifically goodwill. It can be any non-cash charge such as an asset writedown. The point is that for a prviate company, low to negative earnings is actually a good thing, as long as what causes those low to negative earnings are not cashflow-related items.
Posted by Debter , Apr 04, 2008 4:50PM
Wow, civilized debate (if there really is a debate) amongst the flock.
Posted by guest , Apr 04, 2008 5:20PM
@4.50--yeah, its like rooting for the special olympics team - in the end, they're all retarded anyway, so, who cares?
Posted by guest , Apr 04, 2008 6:02PM
Pretty sure you only have to write off all of the goodwill down to book value of assets only if operating income is negative. If operating income were positive they wouldn't have had to write it all off. Which means there's nothing there to cover the interest payments. Oops.
Posted by guest , Apr 04, 2008 10:52PM
EP - that's a bit of a cheap shot. You took one paragraph that looked at profits from a lengthy article that shit all over Freescale from many angles. Sure it's a stupid paragraph, but to imply that the author doesn't understand "basic financial concepts?"
So do you work for Blackstone, Carlyle or TPG?
Posted by guest , Apr 05, 2008 12:47PM
I don't know Freescale's business or what this writer is referring to. One possibility, however, is this: In any business where you are selling assets on a regular basis (think equipment rental companies) when a buyer (PE firm) acquires the company, all of the assets must be written up to FMV (or OLV). If before the transaction the company was recognizing a "book profit" on those asset sales, after the transaction and for some time thereafter, that book profit disappears or is significantly reduced. This applies to Inventory held for sale as well. Cash flow has not changed, but EBITDA and Earnings will be significantly depressed. Very challenging to explain to lenders......
Posted by guest , Apr 05, 2008 3:27PM
We recorded approximately $5.8 billion in intangible assets for developed technology, tradenames, trademarks and customer relationships in connection with the Merger. In 2007, $1.3 billion in amortization expense related to these intangible assets was recorded and is the driver of the increase in amortization expense for acquired intangible assets over 2006.
During the fourth quarter of 2007, we began discussions regarding an existing supply agreement with Motorola. We concluded in connection with these discussions that indicators of impairment existed related to the developed technology, customer relationship and trademark / tradename intangible assets associated with our wireless business. Upon concluding the net book value related to the assets referenced above exceeded the future undiscounted cash flows attributable to such intangible assets, we performed an analysis utilizing discounted future cash flows related to the specific intangible assets to determine the fair value of each of the respective assets. As a result of this analysis we recorded a $449 million impairment charge related to our wireless intangible assets in 2007.
So, in layman's terms, it's all non-cash, however, the buyers probably overpaid, and the Motorola relationship has turned for the worse. Separately, a number of comments have confused the fact that profits for tax purposes are computed differently from book profits, so this charge is unlikely to change taxable profits.