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methodologies. Ultimately, however, the focus was on the worth
of Rose’s revenue stream and cashflow. In determining
petitioner’s operating costs to be attributed to the revenues
generated by the acquired Rose accounts, petitioner used a
methodology which was denominated the “five years to fully
loaded” approach. Under that approach, revenues from the newly
acquired Rose accounts were not considered to bear the cost of
any of petitioner’s operating expenses for the period immediately
following acquisition and then to increasingly bear petitioner’s
operating costs to a level of parity after 5 years (when the Rose
accounts become “fully loaded”). At the time of the Rose
acquisition, petitioner’s “fully loaded” profit margin was 21
percent, which included consideration of petitioner’s
depreciation of fixed assets.
Mr. Dodds determined that there were both positive and
negative synergies in connection with the acquisition of Rose.
The positive synergy was considered the account base or revenue
stream that could be coupled with petitioner’s excess capacity to
service customers in its brokerage business. Petitioner expected
to strengthen its market presence in its role as the largest
discount broker and to increase its geographical marketplace
activity in Chicago and New York. Because petitioner had excess
customer capacity, it did not have to acquire Rose’s
infrastructure. Accordingly, the negative synergy consisted of
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