Subject: Re: "I've got more programmers than you"
From: Tom Lord <lord@regexps.com>
Date: Sun, 7 Oct 2001 20:44:08 -0700 (PDT)



       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.

Thanks.

[Not a financial wizard, nor a tax expert --- grains of salt apply:]

So writing off that amount over subsequent earnings is not unlike
depreciating purchases of capital equipment.

I purchase a piece of equipment for a price of $X.  Immediately its
resale value is lower -- and continues to get lower over time.  The
difference between $X and its presumed resale value (as asserted by a
standard formula) is a deductible expense of operating my business.

That makes more sense than saying "I spent $X for something that must,
therefore, be worth $X -- so its a wash, tax-wise."

An acquired business doesn't exactly "depreciate" -- but its
liquidation value (roughly the $10M in your example), which is
comperable to the depreciated equipment value, is lower than my
purchase price -- hence a deductible expense.  The liquidation value,
rather than the market value is relevant here because, once acquired,
the purchased business no longer has an independent existence to which
market value can be assigned.  (I could spin off more or less the same
business, but it wouldn't have any direct legal connection to the
original.)

-t