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Thanks Rick! It's nice to know the perspective is appreciated. It's a high-level articulation, but the concept seems valid. Koala didn't simply trade $68.8 mil for a one-time $3.5 mil, but rather a growing annuity.

The market hasn't been too forgiving as of late, perhaps to extent where the sell-offs are exaggerated. In any case, the punishment could very well be a short-term phenomenon. Whereas the market may be over-complimentary of success' in two years. If the market is punishing Koala for not creating a scenario of over-night gelling of a rather large series of asset integrations than it is quite possible that the market is acting in a short-sighted paradigm, which in turn creates opportunity for the long-term investor. It simply isn't reasonable to expect Koala to achieve it's merged operating potential over such short time frame, and if the price is based on the straightening of these short-run results, the price may be artificially low.

I'd like to provide another example to sure up the thinking. Let's continue with the paradigm of a 13% annual discount rate and that NI equals $3.5 which in turn converts to cash. I'm oversimplifying here but time is of the essence in my particular case.

Typically invest bankers charge 1% - 2% of the transaction value as does legal counsel (this is probably being amortized in the IS (but we're considering CF)). Using TMF Centaur's numbers, Koala paid $30 mil. during 2000 for future annuities. Using the greater in the aforementioned range, 4% (total) of $30 mil. ($1.2 mil.) would be spent in year 1 (2000) of the deal which would not occur in 2001 and beyond. This obviously affects the valuation.

I've revised my perpetuity to demonstrate $3.5 mil. in year 1 and $4.7 mi. in year 2 compounding into eternity.

At a 3% growth rate this scenario yields a present value of $46.3 mil.
At a 6.2% growth rate, this scenario yields a PV of $68.8 mil.
I've dropped my 0% growth rate scenario. Even if management maintains the status quo and fails to grow the business in real terms, the nominal results should follow the CPI to some extent, I'll use 3%.

Now, these are two save areas, and there are potentially many more. If I assume there's another $1 mil. in saves outstanding to be realized in year 2, I yield $3.5 in year 1 and $5.7 mil. in year two compounding through eternity. To get back to the $68.8 mil. price tag, the nominal results must grow at 4.9% per annum, or 1.9% in real terms. This doesn't strike me as such a tall order, especially if they can get a couple of extraordinary years in the first 10 years of the deals. Obviously, this type of revenue/expense shifting would affect the ROA & P/E calculations TMF Centaur was cringing over. I do agree with TMF Centaur that in the short run, the debt:equity ratio does cause some heartburn. Although, as the old saying goes, 'if Koala owes the bank $1 mil., Koala (it's shareholders) has a problem. If Koala owes the bank $100 mil., the bank has a problem.' And Koala in turn may find itself with a collaborative partner.

If this were a duel and I put some more time into itemizing the real numbers, I believe I could nobly defend the bull argument. In fact, I may even be so bold to argue that Koala could very well be a value oriented buying opportunity.

More food for thought.



P.S. - Slee, I can't be too sure. What's your take? Have a nice day.
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