Opportunities in M&A: forget the strategy, learn accounting
19th May 2011
Market volatility creates opportunities, sometimes very large ones.
We all remember the huge losses of AIG and its bail out by the US government in 2008. The company is now 92% owned by the US government, and in recent very honest article on Bloomberg author suggests that the government is worried about the recent AIG 36% fall in share price, and hence that the government might want to sell some more stock:
Now the company is now worth USD51bn http://uk.finance.yahoo.com/q?s=AIG
Furthermore the article correctly states that:
as of Dec. 31, AIG said it had $11.3 billion of net operating loss carry-forwards that expire from 2028 to 2030. It would need about $32.3 billion of taxable income from its operations over 20 years to fully reap those benefits, assuming a 35 percent tax rate. AIG concluded it likely won’t realize any of them.
This is indeed very interesting, it represents a significant opportunity for someone profitable, someone like Berkshire Hathaway, who made some USD20billion of profits last year, and would be in position to use the USD11.3bn of loss carry-forwards of AIG should it wish and be able to acquire it, effectively further decreasing the purchase price to some USD43bn (need to take the NPV of cash). Add to it an opportunity to possibly get AIG to purchase some of Berhshire liabilities, and the acquisition of AIG might seem like a good idea. The only problem is...assuming of course that all the skeletons are out of AIGs cupboards.
Another problem is how can once persuade the government to sell it to Berkshire directly, as the government, the owner, will then realise the losses from the claimed loss carry-forwards.
This quick analysis also somewhat questions one of my favourite quotes of Warren Buffett:
Managers thinking about accounting issues should never forget one of Abraham Lincoln's favorite riddles: `How many legs does a dog have if you call his tail a leg?' The answer: `Four, because calling a tail a leg does not make it a leg'
Perhaps with the use of modern accounting standards, sometimes dog can have five legs.
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This however is a good indication of how money can still be made on the recession and all the bail outs that took place. One has to look carefully to spot such opportunities, and not all will be able to benefit, though it seems that as the saying goes the rich will get richer.
So little plug in here for Vision Finance: If you have a profitable company, regardless of country and regardless of the industry, contact us and see what we can do for you to make this profits work for you. Various countries have various rules, including elements like above shown loss-carry forwards or use of amortization of real estate assets.
See what Vision Finance can do for you.
