on EBITDA

Why EBITDA is the only financial justification presented by Mr. Weber? 

Could the financial indicator that is not defined in corporate accounting rules assure dividends to be secure for shareholders?

Dividend is the bottom line and the most important factor for shareholders and investors, furthermore is the basis of share price valuation.

At a news conference, when Takeda CEO Mr. Weber was asked whether he was worried that the proposed Shire acquisition might cause a downturn in the company's earnings, he responded that EBITDA would triple, and that the merger would be wonderful for Takeda shareholders. But what is EBITDA? Why didn't he talk about net profit?

--- EBITDA means "earnings before interest, taxes, depreciation, and amortization."   There is no set way to pronounce it. Some people say, "ee-bit-dah," others say, "ee-bit-dee-ay." This is not a formal corporate accounting term that companies generally show on their financial statements. It was widely used as a financial indicator around the year 2000, but the collapse of Worldcom in 2002 highlighted its problems and weaknesses. For one thing, EBITDA does not regard losses from excessive capital investment or M&A as negative factors. During the Internet Bubble of the 1990s, U.S.-based communications company Worldcom exploited this blind spot, with disastrous consequences. (Wikipedia) ---

The citation from Wikipedia is rather long, but it explains an important problem in an easily understandable way. We would focus on the masking of "losses related to excessive capital investment and M&A" as a particular problem that is also present in the Shire situation.

Three years ago (2015), Shire was a mid-sized company with sales of about 600 billion yen. Then in 2016 it acquired Baxalta, a Baxter’s subsidiary dedicated to blood plasma business, and a bioventure Dyax that was successful in the area of the rare disease hereditary angioedema (HAE). These acquisitions boosted its sales 140%, to 1.63 trillion yen.

At the same time, however, its costs skyrocketed, and gross margin dropped sharply. Amortization of intangible fixed assets caused a steep decline in operating margin.

"Merger synergies" (mainly cost savings) have failed to materialize as anticipated, and profit margins have not recovered. As of the end of March, when speculation about the Takeda acquisition started to appear, the share price had fallen 20% from the start of the year.

In 2017, Shire's pretax profit was $1.9 billion (200 billion yen), but EBITDA was $6.2 billion (670 billion yen).

Investors and shareholders should note that the main difference between these two figures stems from a sharp increase in the value of intangible fixed assets. Goodwill and intangible fixed assets account for fully 78% of Shire's total assets. This is untenable.

The table above shows just the asset side of Shire's balance sheet (left side). The unit is millions of dollars.

The table below shows the right side of the balance sheet (liabilities), showing a sharp increase in borrowings, to $16.7 billion (1.8 trillion yen), and additional paid in capital to $25 billion (2.7 trillion yen).

This “additional paid in capital” is the result of M&A and other capital transactions. It is part of shareholder equity, but unlike retained earnings, it is capital that will not come back unless the company itself is dissolved. 

In Shire's case, if the company should be liquidated, the value of its "goodwill and intangible fixed assets" would evaporate, and its entire “Additional paid in capital” would disappear.

The idea of paying 7 trillion yen to acquire a net asset of $36.1 billion (3.9 trillion yen), of which 70% is in “Additional paid in capital”, is an unjustifiable risk.