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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.
Position in LLY

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