Gateway buyers without Gateway's help.
Of course, AOL gets Gateway stock for its $800 million; it's not as if the company were shelling out that much just for marketing exposure. AOL has also effectively shut MindSpring, Prodigy (PRGY) and others out from gaining competitive face time via Gateway.
Bean-Counting Conflict
One thing on which Gateway and AOL apparently did not agree is accounting. The press release says AOL will treat its $30 million payment to Gateway as a one-time charge. But in its Oct. 20 earnings conference call, Gateway said that its side of the deal ledger would amortize the $30 million from AOL, "which should allow us to have a recurring revenue stream."
There are accounting arguments for each approach - but not for using both at once. Neither company responded inquiries about the incongruity. The SEC has nailed AOL and AtHome for similar accounting disconnects in the past.
Amortization helps Gateway more than a charge-off helps AOL. Gateway said it would amortize over "somewhat greater than a year." If that's five or six quarters, we estimate it would add $0.04 per share after tax in 2000 - not much when compared to Wall Street's $1.75 forecast prior to the deal announcement. But with high-flying stocks, every penny carries weight. Because AOL has four times as many shares outstanding as does Gateway, AOL would lose essentially nothing by amortizing the $30 million as an ongoing expense.
Meanwhile, there's another $885 million worth of as-yet-undisclosed accounting flying around in this complex deal.
David Simons is managing director of Digital Video Investments, an institutional research firm. Write to him at simonsd@digvid.com.
At the time of publication, neither DVI (DVI) nor any of its employees had securities positions in any of the companies mentioned herein. This column is solely for information purposes. Under no circumstances is it to be construed as a recommendation to buy or sell securities. Neither DVI nor the author can provide investment advice to individuals.
