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NetScout's Capital Structure: Too Much Goodwill?

Mar. 03, 2018 5:03 AM ETNetScout Systems, Inc. (NTCT)
Kelly Stewart profile picture
Kelly Stewart


  • Despite the tax savings, Reverse Morris Trusts are no guarantee of success. As we know, two unrelated parties in well-publicized Reverse Morris Trusts experienced significant financial distress post-transaction.
  • Tax savings can't save a bad - or expensive - deal.
  • With the goodwill value of its Comms transaction over 66% of the total purchase price, the Comms transaction may not represent good value for shareholders.
  • Worse, over half of its capital structure is comprised of goodwill.
  • Based on its capital structure, combined with its recent insider sales, I believe NetScout presents a poor risk-reward profile for investors.

NetScout's (NASDAQ:NTCT) recent earnings call included some conservative guidance for 2018. Given the risks of its capital structure - in part due to the goodwill incurred from its recent Danaher (DHR) transaction and overall goodwill representing over 50% of its capital structure - as well as some recent insider sales, I believe that investors would do well to skip this name and seek value elsewhere.

Danaher Transaction

As many of you know, one of the first things I look at when I analyze a company is to see whether it has recently and/or substantially diluted its shareholder base. Dilution mutes investor return, and should, in my opinion, be avoided at virtually all costs. As you can imagine, then, I wasn't pleased to read about NetScout's recent Reverse Morris Trust transaction. As described in its 10-K:

On July 14, 2015, we completed the Comms Transaction, which was structured as a Reverse Morris Trust transaction whereby Danaher contributed the Communications Business to Newco. The total equity consideration was approximately $2.3 billion based on issuing approximately 62.5 million new shares of NetScout common stock to the holders of common units of Newco, based on the July 13, 2015 NetScout common stock closing share price of $36.89 per share.

A Reverse Morris Trust is a tax savings strategy that occurs when a parent company creates a subsidiary to spin off unwanted assets; that subsidiary is sold to an unrelated company; then, the unrelated company issues more than 50% of its shares to shareholders of the original parent company.

Despite the tax savings, Reverse Morris Trusts are no guarantee of success. Notably, the two unrelated parties in recent, well-publicized Reverse Morris Trust transactions - Citadel Broadcasting Company (buying ABC Radio from Disney (DIS)) and FairPoint Communications (FRP) (buying lines from Verizon (

This article was written by

Kelly Stewart profile picture
Check out my tipranks: https://www.tipranks.com/bloggers/kelly-stewartContrarian. Former CEO of a small publishing company. I've been researching stocks for several years now, and my philosophy is geared towards the preservation of capital as the most important goal of investing.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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