Subject: Re: "I've got more programmers than you"
From: Ian Lance Taylor <ian@airs.com>
Date: 06 Oct 2001 12:53:37 -0700

Tom Lord <lord@regexps.com> writes:

> There are somewhat mysterious (to me) accounting tricks for
> amortizing one-time expenses (such as the cost of buying another
> business) over a long period of time.  If someone can give a simple
> and clear definition of "good will", for example, I'd appreciate it.
> If you are concentrating on the sustainable business that underlies
> those kinds of transactions, look at the "adjusted" results.

When you buy a company, you pay for a bunch of different sorts of
things, including:

* physical assets (computers, chairs)
* intellectual property (proprietary software, patents)
* employee contracts (of course they can quit at any time)
* liabilities (generally part of the package and not actually desired,
  but if the purchaser is a profitable company purchased liabilities
  can be used to offset profits to reduce taxes).

Each of those things has a value.  Obviously the value of some of
them, particularly intellectual property, is hard to determine, but
there is ordinarly at least a range of reasonable values.

So you can add up the value of all those things, and that is the more
or less objective value of the company which was purchased.  Call that
X.  Except in the case of a distress sale, the purchaser normally pays
more than X--he or she pays T.  The difference, T - X, is ``good
will.''  Good will is thus basically the extra money the purchaser
pays to convince the acquired company that the acquisition is a good
idea.  Good will can then be amortized as an expense over some number
of years, and thus used to offset future profits.  Or, if the
acquisition is not going well, it is normally simply written off as a
loss (as Nortel recently did).

As you can see, there are a lot of nebulous values there with no
clearly right or wrong answer.  A really good CFO is a person who can
grok the issues sufficiently well to manipulate the numbers to produce
a desirable result for the company while staying within the boundaries
of plausible choices.  A desirable result for a public company is
normally a smooth increase in adjusted revenues.  Microsoft is an
example of a company with a really good CFO.

A less good CFO just wings it and makes his or her best guess about
the numbers.

Ian