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This was an interesting article.

It seems to me that Koala has not necessarily completely dropped the ball on these purchases. It really depends on the future compounding annual growth rate of the cash flows (cf).

For the sake of crunching some numbers, let us pretend Operating Income equals CF (in spite of logic).

Using some straightforward perpetuity pricing and a constant discount rate, we can determine whether value was created or destroyed. I'm going to use 13% as I see this being the opportunity cost of throwing $$ into VFINX. I've heard of much higher and much lower, and frankly, I haven't evaluated the risk of the business carefully enough to engage in an intelligent argument over the subject.

Here's what I get (keeping the $68,800,000 price tag in mind):

1) $3.5 million growing at 0.0% annually through perpetuity is worth roughly $26,923,000. Clearly, this is not what shareholders had in mind.

2) $3.5 million growing at 3.0% annually through perpetuity is worth roughly $36,050,000. Getting warmer, but again, clearly, this is not what shareholders had in mind.

3) $3.5 million growing at 7.5% annually through perpetuity is worth roughly $68,800,000. This is virtually getting exactly what Kola paid for, there is neither value creation or deterioration. Any growth above and beyond this will create incremental value under these assumptions. This could happen by not only growing at a faster rate but it could be related to one-time acquisition related expenses going away.

It seems that a fair amount of the transactions occurred in 1999 & 2000. There is definitely a transition period to ensue, the length is difficult to say. But one can imagine that there are expenses related to SG&A severance, corporate system/methodology training, asset integration, etc... that are one-time. Not only are the potential synergies outstanding, but, Koala has to pay even more early on to realize them, but they could & should ensue. This could understate the early results of the merged entities, rather than the results growing linearly, they could be moving along a curved line.

Even still, the opportunity may never be ceased for one reason or another. In which case, 7.5% annual, organic growth through eternity is a fairly tall order.

Food for thought. Cheers,

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