Last Monday's Wall Street Journal featured an article that illustrated a trend in investment firms obtaining information through the Freedom of Information Act to make strategic decisions. In particular, the article highlighted SAC Capital Advisors contacting the Food and Drug Administration for information regarding a drug from Vertex Pharmaceuticals. SAC was able to use this information and purchase 13,500 shares of Vertex, whose stock rose by over 60% in a single day when further benign results were announced.
According to the United States Department of Justice, Freedom of Information Act "is a law that gives you the right to access information from the federal government." Signed into law in 1966, the Act "provides individuals with a statutory right of access to certain federal agency records." There are exemptions, and one of which is concerned with "business trade secrets or other confidential commercial or financial information."
While investors typically don't solely rely on the information from the Act, the valuable piece of information "helps them to piece together investment strategies or evaluate a company's prospects." Over 650,000 requests were received in fiscal year 2012, out of which over 93% were released in full or part. Within the different agencies, Department of Homeland Securities overwhelmingly received the most requests.
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Sunday, September 29, 2013
Sunday, September 22, 2013
Effects of Depreciation on Financial Statements
The effects of financial transactions on the three major forms of financial statements: balance sheet, income statement, cash flow statement, are important to understand the financial performance of any corporations. While most effects are intuitively understood, a few deserve special attention.
Depreciation: if depreciation amount and tax rate were 100 and 20%, respectively, then the net income would fall by 80. However, on the cash flow statement, there will be an increase of 20 in cash flow from operations. This is because the cash flow statement starts from the net income and adds back the full amount of depreciation. The depreciation itself caused no change in cash amount. The tax deduction from the depreciation allowed for more cash to be retained. Combining this all on the balance sheet, there would be 20 increase in cash and 100 decrease in net PPE. This 80 decrease is matched by the 80 decrease in equity, given the depreciation expense of 80.
Loss / gain on sale: if there was 100 loss on sale and given 20% tax rate, earning before tax would decrease by 100, and similarly net income would fall by 80. Assets would fall initially by 100 but with only 80 decrease in equity, the 20 is matched by increase in cash from not having to pay the additional tax, in similar fashion to depreciation. On the reverse, 100 gain on sale would only increase assets and equity by 80, given the additional tax expense.
Depreciation: if depreciation amount and tax rate were 100 and 20%, respectively, then the net income would fall by 80. However, on the cash flow statement, there will be an increase of 20 in cash flow from operations. This is because the cash flow statement starts from the net income and adds back the full amount of depreciation. The depreciation itself caused no change in cash amount. The tax deduction from the depreciation allowed for more cash to be retained. Combining this all on the balance sheet, there would be 20 increase in cash and 100 decrease in net PPE. This 80 decrease is matched by the 80 decrease in equity, given the depreciation expense of 80.
Loss / gain on sale: if there was 100 loss on sale and given 20% tax rate, earning before tax would decrease by 100, and similarly net income would fall by 80. Assets would fall initially by 100 but with only 80 decrease in equity, the 20 is matched by increase in cash from not having to pay the additional tax, in similar fashion to depreciation. On the reverse, 100 gain on sale would only increase assets and equity by 80, given the additional tax expense.
Microsoft Nokia Deal Summary
Microsoft Corporation and Nokia Corporations announced a deal on September 3, in which Microsoft would pay $7.17 billion USD to purchase Nokia’s Devices & Services business and license Nokia’s patents. Microsoft will utilize its overseas cash reserves to complete the transaction. At the end of Q2-2013, Microsoft’s cash and short-term investments totaled more than $76 billion. Nokia’s mobile business, which Microsoft purchased for 3.79 billion Euros, generated nearly half of Nokia’s 30.2 billion Euro revenue. In all, the purchase was a bargain for Microsoft.
The challenge comes to integrating the businesses. More than 30,000 Nokia employees were brought into Microsoft, including former CEO Stephen Elop. The two companies have been in partnership since 2011, and this deal is the second largest acquisition Microsoft has ever done. The acquisition also marks a remarkable transition in the Windows business model: vertical integration, as Microsoft aims to introduce its Windows Phone software into the hardware units. Microsoft has long touted a separation of software and hardware in the PC era. But as mobile hardware has been less commodity-like than computer hardware, Microsoft expects this deal to be accretive to its adjusted EPS starting in fiscal year 2015. Microsoft had been receiving less than $10 in software licensing fees from Nokia, but now can make more than $40. The challenge becomes selling more Windows phones. Currently it lags behind Android and iOS. And with Apple introducing reduced-cost iPhone models, the challenge becomes even harder for Windows Phone to find its niche.
Two weeks after the Nokia deal, Microsoft announced that it would increase its dividend 22% over the previous quarter, and authorized up to $40 billion in share repurchases.
Sources:
The challenge comes to integrating the businesses. More than 30,000 Nokia employees were brought into Microsoft, including former CEO Stephen Elop. The two companies have been in partnership since 2011, and this deal is the second largest acquisition Microsoft has ever done. The acquisition also marks a remarkable transition in the Windows business model: vertical integration, as Microsoft aims to introduce its Windows Phone software into the hardware units. Microsoft has long touted a separation of software and hardware in the PC era. But as mobile hardware has been less commodity-like than computer hardware, Microsoft expects this deal to be accretive to its adjusted EPS starting in fiscal year 2015. Microsoft had been receiving less than $10 in software licensing fees from Nokia, but now can make more than $40. The challenge becomes selling more Windows phones. Currently it lags behind Android and iOS. And with Apple introducing reduced-cost iPhone models, the challenge becomes even harder for Windows Phone to find its niche.
Two weeks after the Nokia deal, Microsoft announced that it would increase its dividend 22% over the previous quarter, and authorized up to $40 billion in share repurchases.
Sources:
- http://www.microsoft.com/en-us/news/press/2013/sep13/09-02announcementpr.aspx
- http://www.slate.com/articles/technology/technology/2013/09/microsoft_nokia_deal_a_great_idea_that_came_too_late_and_killed_windows.html
- http://online.wsj.com/article/SB10001424127887324432404579052112731349626.html
- http://edition.cnn.com/2013/09/03/business/microsoft-nokia-boulden/index.html
- http://www.microsoft.com/en-us/news/press/2013/sep13/09-17dividendpr.aspx
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