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EisnerAmper Blog

Technology and Life Sciences Blog

The Big To-Do over Zillow’s Bid to Acquire Trulia in a $3.5 Billion Stock Deal

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August 20, 2014

 

By Marc Fogarty, CPA, CFE

Fogarty,MarcZillow, one of the most popular real estate websites, is set to acquire competitor Trulia (next in line) sometime next year.  Even before the announcement, the stock price for both companies was comparatively high, even though neither company is changing the landscape of the real estate market; nor are they profitable. The CEO of Zillow has even said, “We sell ads, not houses.” So…why the acquisition?

Both sites are popular for buyers and sellers. Buyers start their search online and sellers check to see what their homes are worth. Real estate agents want to attract both markets with advertising. Some agents are concerned that the combining of the two companies could lead to an increased price for advertising, since the two companies would no longer be competitors for the same market.

If nothing is changing for the consumer, and the price of advertising remains about the same, then who are the real winners of the merger? The answer is the shareholders of both companies. The slightly-less-popular Trulia stands to gain the most, with existing Trulia shareholders set to own approximately one-third of the combined company.  In addition, if the deal goes through, Zillow will now have a larger share of the market, and they also expect to save about $100 million in costs by 2016. That’s good news for Zillow shareholders too!

 

Can My Company Pay for That? A look at when a company’s earnings belong to the owners.

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August 14, 2014

By Aaron Berson

Berson, AaronA question I am often asked when dealing with private companies – especially startups here in New York City – is, “Can my company pay for this?” This question is complex and is based on the facts and circumstance of each item; however, here are some basic guidelines to think about when you run into this issue.

Many owners wish to pay for their taxes, their children’s tuition, car payments, etc. from the company due to the availability of cash. All of these are perfectly fine; however, you may not take them as expenses to the company; they must be taken as distributions.

Depending on the structure of the entity (LLC, S corporation, C corporation, etc.) you may or may not have the ability to take these distributions tax free.  This comes back to the question of when is the money the company makes available to the owners.

In the case of an LLC or S corporation, this is dependent on the initial investment of the owners and the cumulative earnings over the life of the business. To the extent the earnings are positive, you may take distributions tax free; however, if this is negative and you take a distribution, you may have to recognize the payment as income. This is a distinction you need to be aware of. Just because the company has money doesn’t mean you are able to use it personally as an owner without tax consequences. In the case of a C corporation, any of these payments would be considered dividends paid to the owners from the corporation and would be taxable as dividend income personally.

This is the concept of “basis.” Money put into the company and earnings provide basis while losses and distributions lower your basis, generally speaking. The short answer to can the company pay for an item is, “Do you have basis?” The long answer consists of a basis calculation and tax analysis.

Before making large payments for personal items from a business, you should always consult your accountant or financial advisor for help in structuring the transactions as advantageously as possible.

GoDaddy Joins GoPro in the Race to Go IPO

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August 6, 2014

By Marc Fogarty, CPA, CFE

Fogarty,MarcGoDaddy is joining the ranks of other high profile tech companies looking for an IPO to raise capital. GoDaddy, a website hosting and domain registration company, is planning an IPO of $100M or more, but the company has not made a profit since 2009. In fact, they have had substantial losses in the past few years including an approximate $200million loss last year.

The GoDaddy IPO is a classic example of a company looking to raise capital to pay off debt so it can grow the business. It might be an opportune time for GoDaddy to jump on the bandwagon because tech company valuations are high and the tech IPO market is making a comeback. But how much will they raise and how much do they need to pay off? New investors generally don't like a situation where a company needs to pay off debt before they can see growth. Participating in the GoDaddy IPO would be a long term investment.

On the positive side for investors, GoDaddy currently reports steady growth with an expanding customer base of approximately 13% per year. The customer base is reported to be about 12M, which seems low compared to the number of potential customers. This could give them plenty of room for growth. There is also potential growth if they gain the ability to sell new top-level domain names, such as ".nyc," which might get approved by the Internet Corporation for Assigned Names and Numbers (ICAAN).

An IPO can work in GoDaddy’s favor by raising significant capital. However, GoDaddy is not dealing with new technology; nor is it revolutionary or enhancing the technology or commerce landscape. The company itself has not made any major changes. If that continues, then they are solely banking on the continued growth of the Internet and its viable future business.

The most notable thing GoDaddy will need to change is their marketing. They are known for their ‘racy’ ads, in especially large advertising venues such as the Super Bowl. My guess is that they will need to beef up their marketing efforts if they want to continue to grow.  It is one thing to answer to a few private equity firms; it is another to answer those growth questions to the investing public.

Has Target Managed to Regain Investor Confidence?

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August 4, 2014
By Marc Fogarty, CPA, CFE

Fogarty,MarcIn a previous blog on Cyber Security and Instilling Investor Confidence, I said, "Only time will tell whether Target’s response to their customers and their investors will have a positive impact in instilling confidence in the brand." Maybe that time has already arrived, as some are saying “the data breach was disastrous for the company,” while others see some merit in recent actions and lessons to be learned.
Let’s look at the facts…

After the breach, there were several immediate response tactics that Target took to instill brand confidence, such as a 10% discount the weekend following the reported breach and a free year of credit monitoring for customers. Even so, the stock price did dip considerably from January to February. However, by the end of February, there was a stock price recovery that almost reached pre-breach levels.

Target’s stock price has shown a rocky road of ups and down since then, with another noticeable dip towards the end of May. This dip interestingly occurred shortly after it was announced that CEO Gregg Steinhafel was stepping down and Bob DeRodes, who was formerly of Homeland Security, was to be the new CIO. Perhaps these changes, which were meant to instill investor confidence, did not immediately produce the desired effect.

There are other ongoing changes that Target is making to respond to the issue. If you go to the Target investor relations website, there is still a prominent area addressing “Response & resources related to Target’s data breach.” In April, Target announced that, starting in early 2015, all Target branded credit cards and debit cards would have MasterCard’s chip-and-PIN technology to enhance security.  On June 10, Brad Maiorino was announced as chief information security officer, reporting to Bob DeRodes. Mr. Maiorino used to work for General Motors and, as stated by the Target press release, was “…responsible for leading the transformation of the company’s global information security and IT risk organization.”

Target’s proactive stance on security upgrades and corporate restructuring may have also had a positive effect on consumer confidence.  Target did not see a sharp decline in consumer sales in the first quarter. In fact, Target’s first quarter U.S. sales increased, albeit very minimally, over last year. But Target did report an overall net loss because there were a lot of expenses related to the data breach and measures taken to prevent future security breaches.

From the stock market stats and the first quarter earnings report, it’s still not clear whether the Target data breach and their response has been ‘disastrous’ for the company.  When you look past the hype, there is a lot to be learned from Target’s recovery process: This can help companies in evaluating their own risk management plans.

Tech IPOs – NYSE vs. NASDAQ

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July 29, 2014

By Marc Fogarty, CPA, CFE

Fogarty,MarcWith several recent tech companies choosing to list their stock on the NYSE instead of the NASDAQ, I thought of Facebook's IPO stumbling blocks, and how their rocky market entrance may still be looming in the back of people’s minds. Is today's shift of technology IPO companies listing on the NYSE instead of on NASDAQ a direct result of the recent and highly publicized Facebook IPO difficulties, or could it be rooted in the lessons we learned from the rise and fall of the 2000 tech bubble? 

My research for my recent blog about the Alibaba Group  and their choice of the NYSE unearthed some interesting stats which may provide insight to what we are currently seeing in the markets. 

  • In the late 1990s, the majority of tech companies were listing with the NASDAQ exchange.  At the same time, the NYSE had a reputation for larger, more stable companies on its roster. 
  • On March 10, 2000, the NASDAQ was at 5048 and at its year close it had fallen to 2292. That’s a decline of over 55% and the NASDAQ has not gone above 5000 since. 
  • In contrast, the DOW was at 11723 on January 14, 2000 and closed for the year at 10646. That’s only a decrease of about 10%. 
  • The NYSE during the same period showed even less of a decrease with 6870 on January 14, 2000 and 6785 at its year close. That’s just a little over a 1% decrease. These stats seem to point toward the NYSE’s relative stability during a reputed time of instability.  
  • During the financial crisis of 2008, both the NASDAQ and the NYSE took a hit, with their lowest points occurring in January 2009.  
  • But, if slow and steady wins the race, then the 5-year charts for both the DOW and the NYSE show a steady climb with both now at historic highs. 
  • In contrast, the NASDAQ is still slightly under their historic high that occurred during the bubble.

So for companies that are entering the public market, that are concerned about the possibility  of another tech bubble, maybe it’s not NASDAQ’s recent Facebook drama but rather the NYSE’s more solid track record that’s driving tech companies their way.

 

Alibaba Chooses the New York Stock Exchange

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July 24, 2104

By Marc Fogarty, CPA, CFE

Fogarty,MarcWhen the Chinese internet retail giant Alibaba enters the public U.S. stock market later this year, they plan to use the stock ticker name BABA. The word ‘ba’ means 8 in Chinese, and using 8 twice -- BABA -- coincides with their requested first day of trading, 8/8 (subsequently pushed back to September). While there's no historic evidence that proves such symbolism is a guarantee for a successful IPO, the investing public's emotional support, enthusiasm and confidence are clearly at play on the days leading up to and following a company's entry to the market.   

The technology boom of the 1990s had a similar enthusiasm, with investors gossiping and lining up for the NASDAQ’s latest tech offerings. But along with the fanfare and exponential growth, there was also a higher degree of risk looming below the surface. When the public technology market collapsed in 2000, NASDAQ had the vast majority of tech companies while the NYSE had more of the larger, more stable companies. On Jan 14, 2000, the NYSE was at 6870 and it closed for the year at 6785, which is very little change when compared to the NASDAQ, which had declined by more than half during the same period.  

As we approach the 15-year anniversary of what we now refer to as "the technology bubble," it appears that the NASDAQ has lost its ‘swagger’ with technology companies, especially those entering the public market. In line with recent trends, Alibaba Group has chosen the New York Stock Exchange for its upcoming IPO.  As such, Alibaba would be the third largest tech company listed with the NYSE.

While there has been continued talk that market might be in for a "correction" someday soon, the NYSE might still be perceived as providing a more stable market with more promising returns. Alibaba's decision regarding what date to launch their IPO may be based upon symbolism, but their decision where to list their IPO seems to be based on history, reputation and changing trends. 

Dow Above 17,000

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July 17, 2014

Fogarty,MarcBy Marc Fogarty, CPA, CFE

Even though the economy shrank in the first quarter, the stock market continued to rise. This seems contradictory, until we take a look at some of the facts.

For the first time, the Dow broke the 17,000 mark shortly after a better-than-expected jobs report indicated that the economy might be picking up.  If you look at the stats from the period after the financial crisis of 2009, the market has been consistently bullish with a slow and steady rise. As reported by the S&P Dow Jones Indices, it’s the fourth longest bull market since the 1929 market crash.

Interest appears to be running high, with investors betting on continued advances in the technology and life sciences sectors. Most of the recent IPOs in those sectors have been considered successful. Even slightly older public technology companies like Netflix and Facebook are continuing to generate interest and revenue in the market.   For example, in the last twelve months, Facebook stock rose approximately 170% and Netflix approximately 114%.

So how long will it last? Before the technology bubble in 2000, there had been a rapidly growing economy. What makes this current market unusual is that, while the overall economy might seem sluggish, the equities markets are making a steady climb. Some believe that the stability of the stock market will make for a stronger economic recovery overall.

No one knows how long the current bull market will last; but for right now, tech IPOs are on the rise and many companies are contemplating entering the market. Even if the overall economy isn’t doing well, now might be a great opportunity to raise capital with an IPO.

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