Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Creative Accounting


Eli Lilly (LLY) announced this morning the acquisition of Applied Molecular (AME) for $400 million in stock (80% and cash 20%). The company is accounting for this acquisition by taking a one time charge against equity, which will write down book value by about $ .40 a share and consequently cause earnings going forward to be unaffected.

Essentially the company is talking out of two sides of its mouth. They are on one hand buying the company for its research and development (that is all they have), but by writing the cost off up front, they are on the other implying that it is not worth anything.

Why account for it this way? Because the company knows investors don't even look at book value anymore. The transaction if accounted for properly would be dilutive, affecting earnings by about $ .10 per share over the next several years (the original cost plus expenses going forward). That is something investors will remember. By writing down book value now, most investors will quickly forget the cost.

The stock is only down 1.8% on this news. If properly accounted for, the stock would probably be down more.

The size of the transaction makes this no big deal. But the philosophy behind it is another disturbing example of creative corporate accounting.
< Previous
  • 1
Next >
Position in LLY

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos