Subject: RE: "I've got more programmers than you"
From: "Larry Augustin" <>
Date: Sat, 6 Oct 2001 17:21:42 -0700

Good will is not a premium to the market value of a company, but a
premium to the book value.  For example, a public company could have a
market capitalization of $50M, but the assets Ian describes below could
be worth only $10M.  The difference has to be accounted for somehow, and
that's what becomes good will.

My point is that the stock market sets the value above the book value.
It's not an acquisition premium.  If that company is acquired, the
acquisition price is going to be $50M + some premium (commonly referred
to as the control premium).  That means the acquirer is going to acquire
$40M + the premium in good will.

Good will is one example of a "non-cash charge".  Non-cash charges tend
to occur when a company uses stock as a currency.  Stock is a currency a
company can use to buy things: other companies, employees (stock
options), etc.  Since the company is not spending cash, the question is
how to reflect the use of stock as a currency on the company's P&L
statement.  The Federal Accounting Standards Board (FASB) sets rules for
how to do this with the aim of having the company's P&L reflect the
actual state of the business as closely as possible.


Larry M. Augustin, CEO, VA Linux
Tel: +1.510.687.7029      Fax: +1.510.683.8680


> -----Original Message-----
> From: Ian Lance Taylor []
> Sent: Saturday, October 06, 2001 12:54 PM
> To:
> Subject: Re: "I've got more programmers than you"
> Tom Lord <> 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