When I watched the Industry Committee meeting on Friday, I was struck by what appeared to be a lack of understanding of basic accounting by some of the Members of Parliament. I suppose I shouldn’t have been surprised; let’s call it disappointment.
Of note was the apparent inability to reconcile the “$149M book value” of the Nortel wireless business unit with the substantially higher amount ($1.13B) being paid by Ericsson. These numbers are important, because the foreign investment review rules kick into play if the book value of the asset being acquired exceeds $312M.
Considering that this business unit is basically a group of knowledge workers, it isn’t really surprising to have such a discrepancy between the book value and the market value.
What would make up the book value? Depreciated computers and office equipment, some lab equipment, inventory, some cash, accounts receivable? The total value of the employees and the utility of their collective knowledge would not likely be reflected on the books – we outlawed ownership of staff about 175 years ago.
I found that part of the meeting troubling.
Update [August 10, 10:00 am]
Mike Z. has stepped down from Nortel and Nortel’s board has been reduced from 9 people to 3.
I wouldn't discount Parliament's confusion so easily here. First, a large portion of the value of this business unit is based on the value of its Patent portfolio. And while you are correct that some accounting does remove the value of Patents from "tangible book value", or so-called "net asset value", it is by no means universal to discount the value of patents and certain other intangibles. Per Graham and Dodd's Security Analysis, Fifth Edition, pp 318 – 319, in many cases it is reasonable to include certain intangible values such as Patents in a book value calculation. This is certainly one of those cases in my opinion.