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  • normlasky normlasky May 12, 2012 9:50 PM Flag

    Crump Insurance

    IRR by definition is the rate that equate cash outflow with cash inflows. Tax is an important component of net cash inflows. Don't think there is a finance book that has ever suggested calculating irr on pretax basis. Makes no sense. Think bbt evaluates acquisitions based on after tax cash flows.

    I reread the Crump press release and it says the entire $570 million intangible will be accounted for as an intangible assets. Think it will therefore, be amortized over 15 years which should result in $38 million in annual amortization expense. The 15% irr is based on cash on cash - 15% times $570 equals $85 million pat. Factoring in amortization into the eps equation probably puts eps in the 2 cent range per quarter.

    About 75% of the Crump business is life and 25% is p&c. Bbt will get synergies off the later downstream and will take a significant acquisition charge in the 2nd qtr. to reflect this.

    Reread the 2nd quarter transcript. CFO Bible did not say the efficiency ratio would drop from .52 to .51 due to Crump. I stand corrected and apologize for misquoting Bible.

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    • Yes I agree with IRR as AT cash flows - but King never said IRR. He has always said 'Hurdle rate' and from memory 2-3 years back they mentioned it as pretax return on investment to an analyst question. I'm hi-lighting that King's/Bible's definition could be different to your text-book IRR view leading you to over-estimate the EPS from this transaction. The basic math at Bible's 30% margin also suggests 15% pretax as the hurdle rate.
      To me its ~12% after tax return on 570MM investment @30% margins (I'm assuming 570MM is bulk goodwill) and 25% tax-rate. Its a good use of capital but nothing spectacular.

      I can't see 16c EPS from this but I can't see CSFBs 4c either. 8-10c is my view.

      Anyway we'll see in Q2.


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