Information Circular for Dummies - 3Time to discuss GOODWILL__And NO, this is NOT the place where you can buy cheap clothes__LOL!
Goodwill is a rather obscure, not well known, accounting term__and with this one, the devil truly is in the details.
Once again with reference to the Pro-Forma 9 month financial statements for the period ending June 30, 2008, we see that there are Total ASSETS of $19,346,469__which looks pretty good considering the small number of outstanding ABM shares__even after the AMI amalgamation.
However of this Total__$11,123,318 is classified as GOODWILL, plus another $2,376,506 is classified as Resource Properties.
In other words, almost 70% of the listed Toal ASSETS is composed of GOODWILL and Resource Properties__the latter basically being how much ABM has spent exploring and maintaining its numerous mineral leases.
Now here is what is stated about the GOODWILL entry in the Notes to the financial statements___
''''The unaudited pro forma consolidated financial statements give effect to the following transactions:
a) To record, on a consolidated basis, the acquisition of AMI and PHL and related financing. This acquisition is considered a purchase of shares for accounting purposes. The consideration paid to acquire AMI and PHL is allocated, based on fair value, to the net monetary and non-monetary asset.
The purchase price discrepancy between consideration paid ($13,500,000) and fair value of net assets acquired ($2,551,682), in the amount of $10,948,318, is allocated to goodwill.'''''
So basically what this all means is that ABM shareholders are paying 13.5 million to buy AMI assets which have a fair market value of ONLY 2.5 million. The difference is called GOODWILL and is considered an "ASSET" in the balance sheet__Oh, and the 175,000 closing costs have also been added to the above 10,948,318 to end up with the 11,123,318 Goodwill total in the balance sheet.
And what fair market value means is that would be the estimated amount that an arms lenght buyer would likely be willing to pay for the assets. However, often companies are so anxious to buy assets that they often do pay a premium over the fair market value to make sure that they do get to buy the assets they desire for strategic reasons.
But with the AMI deal, this is a NON- arms length deal__thus the rationale for a very large Goodwill payment becomes a delicate situation considering the potential conflicts of interest.
And if ABM after the AMI amalgamation were ever to run into financial difficulties and need to sell assets in order to survive__well VERY likely interested buyers would be willing to pay ONLY the fair market value and not the inflated Goodwill values__plus they would likely pay only pennies on the dollar for the $2,376,506 expenses incurred by ABM on their Resource Properties.
With almost 70% of the Total Assets in these two opaque asset categories, it becomes much more difficult to establish a fair value per share and that is likely why Mr. Market, ever since the proposed ABM/AMI deal was announced last May, has been quite cool to the proposed deal.