Forum Archive Index - August 2001

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Peter,
 
>
>You are right Snoopy. The $400M-$500M goodwill that has been created
>with the merger of Data Advantage and Baycorp is the intrinsic value
> of the Baycorp 'brand'
> 
>

...and the value of all that consumer credit information stored on 
their in-house computers.  The computers themselves aren't worth 
much, but oh, the information inside them!    

I guess the other non tangible asset is the computer software that 
Baycorp have developed, to match turn the raw credit data into 
something useful, and saleable.

>
>
>
> However we do need to realise that this in the past has existed as
> the difference between Baycorp's book value and it's market
> capitalisation. In other words in the pockets of Baycorp's
> shareholders.
> 
>

Isn't it the Baycorp intrinsic value now similarly in the pockets of 
Baycorp Advantage shareholders?   No actual money will be handed 
over in the takeover.  And the realisation in goodwill hasn't 
affected the new company's cash flow.

>
>
> With Data Advantage being the acquirer of Baycorp that value is now
> a real measurable thing - Data Advantage have in essence paid for
> it.
>
>

I would argue it was a 'real measurable thing' before.   After all 
those who paid $11-$13 for Baycorp shares in recent weeks, did so not 
because they were prepared to pay over the odds for tangible assets 
worth just a few cents.  They bought because the intangible value was 
very real to them.
>
> 
> No doubt the potential of the Baycorp brand will drive the success
> of the new merged organisation. 
>
>

I wonder about that.   There is no doubt that 'Baycorp' and 'Debt 
Collection' are synonymous in New Zealand.  But can you say the same 
in Australia?

>
> 
> However the future returns of Baycorp Advantage will have to show
> the cost of acquiring the Baycorp brand. The shareholders (as would
> Buffett ) of the merged company will want to see a return from
> acquiring that brand.
>
>

Yes, absolutely they will!  The purchase of Baycorp by Data Advantage 
means that today's valuation of Baycorp is now locked in as a 
measurable sunk cost on paper.  If the 'Data Advantage' data and 
'Baycorp' computer systems don't 'gel', or the customers don't see 
the value in using 'Baycorp Advantage' that BA management saw, that 
goodwill might yet prove embarrassing.

In this worst case scenario, are 'Baycorp Advantage' allowed to do a 
block write down of goodwill?  Or do they have to stick to the 
accounting amortisation schedule no matter what.  Anyone know?

>
> 
> What the investing community has to decide is how to value the new
> merged company. I feel that Data Advantage are concerned about that.
> 
> For instance will the investing community say that it is worth 
> about (say) 50 times earnings before the new goodwill expense (as at
> present)? Or is a fair value 50 times earnings after allowing for
> the new goodwill expense. 
> 
> There is a big difference between the two when this expense is going
> to be $20M odd a year.
>
>

The answer to that, I think , depends on how 'Baycorp Advantage' 
performs.  If profits look like growing at a compound rate of 20% 
plus for another 5 years, then investors will see that as fast as the 
'accounting goodwill' is written off, the real goodwill (what a third 
company would pay for 'Baycorp Advantage' over and above the 
tangible asset price) has actually increased.  If this is the case, I 
would expect Investors to discount the $20m per year profit 
adjustment when looking at the real value of 'Baycorp Advantage'.

OTOH, if the Baycorp Advantage profit trend falters that $20m 
goodwill adjustment can be expected to come back sharply into focus!

There is a huge dichotomy between those two scenarios, which spells 
either more days in the sun, or disaster for shareholders.  
>
> 
> It will be interesting to see how all this all pans out over the
> next year or so.
> 
> 
With a P/E of around 50 today, and a growth rate of 20% per annum, 
that implies a 2006 P/E of around 20, still high (by NZ standards), 
but not completely over the top.  I would say 'Baycorp Advantage' 
have put themselves on a tight rope for five years.   Can they do it?
If anyone can, they can.   How much of this is built into the share 
price?  A lot of that growth is already in there IMHO.  SNOOPY


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