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Quote of the Day
“You’d never know this from the most common form of accounting for mergers. As all companies do, AOL would like to account for the takeover as a pooling of interests. There’s actually some question whether it’ll be able to do so, as a Wall Street Journal article last week pointed out. (AOL’s deal with Sun Microsystems to sell Netscape software may violate the rules for pooling.)
Assuming it does use pooling, AOL simply takes Netscape’s assets and liabilities and lumps them onto its own balance sheet. Whether it costs AOL shareholders $4 billion, $10 billion, or $100 billion doesn’t matter–at least not in the accounting. The purchase price never enters onto AOL’s books. Is it any wonder companies love pooling?”
- From an April 5th, 199 article on Morningstar.com covering the closing of the AOL/Netscape merger. We saw how financial shenanigans helped inflated the tech bubble – more on that below.
August 9th – This Day in Stock Market History
August 9th, 1945 – Atom bomb dropped on Nagasaki. Stock markets rally as Wall Street sees an end to World War 2. The Dow Jones Industrial Average rises 1.68%, closing at 164.55.
Over the next year, stocks would rise rapidly:
August 9th, 1974 – The day after Nixon announced his resignation, stock markets fall. The Dow would drop nearly 1% to finish at 777.30, stock would continue their sharp decline for the next month, falling to 648, nearly 19% decline over the next few weeks.
August 9th, 1995 – Netscape IPO Priced at $28 per share, would close at $71.25, a rise of 150%. The internet bubble is born.
Netscape would be bought out March 17th 1999 by AOL for a deal that would end up valuing Netscape at $10 billion.
Best August 9th in Dow Jones Industrial Average History
2011 – Up 3.98%, 429.92 points.
Worst August 9th in Dow Jones Industrial Average History
1929 – Down 4.01%, 14.11 points.
Read of the Day
Since our quote of the day touched on the topic of accounting – lets take another look at the games accounting can play – this time on a national level:
From a 2010 column on international trade by economist Donald Bourdreaux, posted on his blog, Café Hayek, April 6:
Suppose Toyota sells a $20,000 car to an American and then immediately uses that $20,000 to buy software from Microsoft. Because the value of additional US imports (a car) equals the value of additional US exports (software), there is no change in the US trade deficit.
Now tweak the example just a bit. Toyota sells a $20,000 car to an American, then uses that $20,000 to buy stock in AT&T from another American. The American who sold the AT&T stock, in turn, spends the $20,000 on software from Microsoft as part of his effort to launch a new business. Because Toyota spent that of that $20,000 on US exports, the US trade deficit rises by $20,000.
Is the second situation worse them first?
If the pronouncements of the mainstream media and of most politicians are to be believed, the answer is a resounding yes. A rising trade deficit is bad!
But look more closely. In both cases, Americans get an additional car worth $20,000, and Microsoft produces and sells additional software worth $20,000. In both cases, the amount of extra American-made output produced and sold as a consequence of Toyota selling that car to an American is the same: $20,000 worth of Microsoft products. If you are a Microsoft employee, shareholder or creditor, it matters not a whit to you whether that companies increased sales are made to foreigners or two Americans.
Clearly, a rising US trade deficit does not necessarily mean less demand for American-made goods and services.
