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Actonz brings in the corporate big guns

By Deborah Hill Cone

Friday 25th July 2003

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PricewaterhouseCoopers has stoutly defended its controversial $400 million valuation of Actonz's billing software Baccis in the High Court at Wellington.

PWC partner Craig Rice, now in charge of the accounting giant's corporate finance energy and utilities practice for Asia-Pacific, explained in his brief of evidence how in 1998 the firm (then Price Waterhouse) had prepared the valuation report of Baccis using the accepted methodology of discounted cashflow (DCF).

This is the way it had valued assets of other similar technology companies, such as Peace Software, Deep Video Imaging and Aoraki-Jade, and the valuations had proved robust in those examples.

With energy billing company Peace, it had also had to make assumptions of potential future market penetration because Peace had no earnings history ­ but its estimations had been borne out, with Peace now a highly successful global player.

Harvard-educated Mr Rice told the court PWC stood by its valuation, which was consistent for 1998, although it could not have foreseen the tech wreck in April 2000.

The valuation of Actonz's product Baccis is very important because there are literally hundreds of millions of dollars in investors' tax bills riding on it.

Inland Revenue and Actonz are in court in a test case dispute over whether investors can make deductions against their own income tax bills for depreciation of the Baccis software.

Investors were partners in a joint venture that owned Actonz's software including Baccis.

The IRD's position is that the Actonz's valuations of the software, prepared by PWC and New Jersey-based firm Aus Consultants, were inflated.

When Actonz opened its case last week witnesses were grilled by Jim Farmer QC, acting for the IRD, about why Actonz paid $5000 for the Baccis software, obtained from vendor Cybertech Trust in 1996, when two years later it was valued for the purpose of attracting investors at $450 million.

That point came up again this week, with Mr Rice saying the $5000 price was not relevant because it was a related party transaction and had not been assessed by way of an independent valuation.

The IRD has not presented its case yet but Mr Rice foreshadowed some of its arguments by disputing the taxman's three opposing valuations of Baccis from McCallum Petterson Forensic (MPF), Peter Macauley and Amos Aked Swift.

These retrospectively valued Baccis in 1996 as being worth between $5000 and $500,000, compared to PWC's and Aus Consultants' valuations of up to $403 million.

In Mr Rice's view the IRD-commissioned valuations have taken an inappropriate approach because they are based on the replacement cost of creating the software, rather than on the more usual DCF (discounted cashflow) methodology, most commonly used for valuing companies or assets.

Investors and Actonz director Scott Anderson say the case turns on the valuation of the Baccis software, but some technical issues on the tax treatment of software could also be crucial.

One of the questions is whether software itself is depreciable, or whether as the IRD claims, only the right to use computer software and copyright in computer software is depreciable.

Actonz director Brent Gilchrist, who spent 10 years as a senior inspector with the IRD and worked for international accounting firm Spicer & Oppenheim, gave evidence this week that in his view "software" incorporated the right to use.

Mr Gilchrist's brief of evidence drew attention to IRD having greenlighted GST and income tax deductions relating to a similar software company, linked to Actonz, called Exicom.

"Pleasingly, the Exicom business went on to make money and to become a tax paying entity," Mr Gilchrist said.

"This history is important in terms of the Actonz dispute, as the background transaction is similar in nature to the transactions that have given rise to the Actonz dispute."

The Actonz case is expected to last five weeks, with Actonz's Mr Anderson yet to give evidence. The IRD is not expected to open its case until next week or the week after.



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