Yes, I do have some comments <VBG>. There are really two issues: one is purely accounting and the other has to do with taxes.
The accounting issue is basically this: when companies combine under pooling of interests accounting the investor really doesn't get a picture for the premium paid under the terms of the deal. Basically, all of the asset and liability items of the balance sheets of the combining firms are added up and the equity section is altered to reflect the exchange of shares. So if you looked at the balance sheet you would never get an idea of what was paid for the intangibles: the intellectual property owned by the acquired company and the value place on its market position.
Under purchase method accounting the difference between the amount paid and the market value of the assets less the liabilities is explicitly captured in an item called "goodwill", which is amortized for a period of up to 40 years.
Now, it seems to me that the intangibles -- the technology of the acquired company -- is largely of a short duration. So it would seem that adapting purchase accounting more realistically reflects that fact. Many tech companies would simply attempt to write off the goodwill in one period under the umbrella of "acquired research and development", but the SEC has recently cracked down on that loophole (FORE and NETA come to mind).
When you come right down to it, the issue is one of accounting for "earnings" -- not of cash flow which will remain precisely the same. In other words, the effect will be to change the accounting treatment of "earnings", but there will be no affect on the true economic profit of the firm.
I suspect that eliminating pooling will reduce the number of deals because companies will be unwilling to show shareholders just how much they paid for technology with a limited shelf life.
The tax impact to shareholders may be great, however, because pooling is generally a tax-free exchange of shares. I am not sure of this, but I believe that purchase accounting may require treating the acquisition event as taxable -- the shareholders of the acquired company may be required to recognize a gain (or loss) on the sale of their securities in the acquired firm and recognize a new basis in the combined firm. Perhaps a tax expert could comment on this.
TTFN,
CTC |
