BPal: I’ll put up a post about buybacks and treasury stock as there is a lot to talk about. Give me a little time and I’ll try to answer it for you.

Adobe%u2019s goodwill initially represents, as you said, the purchase price of Macromedia over the fair market value of net assets. In Macromedia%u2019s case the majority of their net assets was their software (intellectual property).

If a manufacturing company takes over a competitor just to eliminate the competition and closes the competitor%u2019s plant, then I would agree with your assessment that goodwill will have to be reduced. Management determines goodwill on assets (intellectual property) based on the assets ability to generate cash flow. Macromedia%u2019s programs may no longer be available to the public, but their intellectual property may be incorporated into current or future programs at a premium which would then offset the goodwill.

Another angle to consider.

Since this was a blog of random thoughts, I thought I’d post my random thought here as well. What’s your take on how to value treasury stock in your analysis? By default stockholders equity makes up a large part of your valuation since it is usually many times over the annual free cash flow of a company and is the only figure that is not present value discounted.

In the case of Texas Instruments, which I was looking at recently, they hold approximately $12 billion in treasury stock. I understand that for accounting purposes, TXN has to treat share repurchases as a reduction to equity, however, one could argue that short of going bankrupt (which I perceive as a remote possibility for a company like TXN), Treasury Stock is an asset that could be resold on the open market (hopefully at a profit). Even if you discount treasury stock to account for the possibility of reselling the shares below what management purchased them for, you still are reducing your stockholders equity figure by say $9 billion (assuming a 25% discount rate on treasury stock).

This $9 billion swing in the valuation of TXN is signficant for a company with a $42 billion market cap, and greatly affects the intrinsic value calculation. What are your thoughts on this matter? I personally am leaning towards adding back a portion of treasury stock to stockholders equity because I feel that in reality the company’s own shares are an asset that could be resold on the open market.

By just using net stockholders equity in your valuation, it would appear that TXN’s net equity was DECREASING from 2004-2007, however, this is only because of increased Treasury Stock, in reality TXN has been growing retained earnings at a pretty nice clip over this time period.

I would appreciate your input on this matter.

Adobe is one of the few software companies with a huge moat. As you run your own analyses, be mindful of the goodwill on the balance sheet. That represents, in large part, Adobe’s acquisition of Macromedia at a premium to net assets.

Why should you be mindful? If Adobe purchased Macromedia and ran it separately (under the Macromedia name), you could make a case that the Macromedia business could be sold at a continued premium and that goodwill could be recouped.

What actually happened is that Adobe took over Macromedia and ran it all under the Adobe name. Other than a few legacy Macromedia products, there isn’t much left to the business. Adobe After Effects is taking over Macromedia’s Flash. Adobe Photoshop has all but wiped out Macromedia’s Fireworks. And so on.

The acquision was a wonderful synergy of products, but also a move to wipe out a competitor. If the Macromedia business were sold today, it would not likely command the full premium that Adobe paid when Macromedia was a viable competitor.

How, then, should you approach Adobe? Consider using equity minus the $2.1 billion of goodwill. We haven’t really seen a situation like this on F Wall Street, but next week’s post will dive right in and tear it apart.

Above all, remember that there is a business behind that stock and you have to dig into the financials to see what is of value, and what is a mere accounting standard.

Hope that helps!

My question is, how would you decide if it was an attractive enough business to merritt buying with almost no MOS, the way WB did with Coke.

As a former Web designer, I can tell you that Adobe has several “Cokes” in the lineup. There is virtually no competition in the professional space for Photoshop, Illustrator, Flash or Dreamweaver.

From what I understand, the industry standard page layout program Quark is rapidly losing out to Adobe’s newer InDesign, which is amazing — Quark was considered untouchable just 5 or so years ago.

Adobe seems to be a company with a wide moat. I mean Adobe Acrobat Reader and Photoshop is used almost everywhere. If the financials are good and the price is right I don’t see a reason not to buy this interesting stock.

Cheers!

Moneychanger

Dean

Glenn: Because (you know) I have loved Adobe for a long time, I’ll post an analysis next week.