Accountants Preparing for Fight on Corporate Mergers Rule
MARKET PLACE
By LAURA HOLSON -- February 19, 1999
In the first round of what is expected to turn into
months of intense lobbying and debate, the
accounting establishment is set to consider whether the
most favored method companies now use to account for
mergers should be abolished.
The Financial Accounting Standards Board, which sets
the nation's accounting rules, has been seeking comment
from investment bankers, corporate executives and
others on a controversial plan to limit the
pooling-of-interest method of accounting, which allows
merged corporations to combine assets and report
financial information as if the companies had always
been one.
To the uninitiated, the proposed change sounds like
just another yawnfest best left to pencil pushers. But
if adopted, it could radically alter the way mergers
are done in the United States.
That is because the standards board would like most
mergers to be treated as purchases. Under that method,
the price above the acquired company's net worth is
treated as good will, which must be written off against
the acquiring company's earnings, often over several
years. The deadline for comments to the standards board
was Feb. 15.
Most deal makers involved in big-ticket megamergers
prefer the pooling-of-interest method. While less than
5 percent of all announced domestic deals last year
were done using pooling of interest, the dollar value
of those mergers amounted to 52.5 percent of all deals,
according to Securities Data Co.
Critics of the method say it allows executives to make
huge acquisitions and leave barely a trace of what may
have been an ill-advised move or an excessive price in
the accounting ledgers.
Investment banks are concerned that a change in the
accounting rules would bring merger activity to a
grinding halt. If a merger is accounted for as a
purchase, some people fear the acquirer will be
unjustly punished by analysts and investors who judge
companies and their peers primarily on quarterly
earnings per share. Certain industries, like banking,
which has strict capital rules, could also find the
rules too restrictive.
"Any change is sure to have an immediate impact on
corporations and investment banks," said Janet Pegg, an
accounting analyst at Bear, Stearns. But, she added,
"People should understand that it is just bookkeeping."
Merger activity should not fade if the tenets of the
current boom hold true for the future -- that deals are
done for competitive reasons, not because of fancy
financial engineering. If the strategic rationale for a
merger prevails, industry professionals say, the
accounting method should not matter.
"The way I look at it, you have to look at what's
behind the numbers," said Tim O'Neil, a wireless
communications analyst at Soundview Technology Group in
Stamford, Conn. "A write-off of good will has nothing
to do with whether the transaction is good or not."
Besides, the number of cross-border deals is increasing
and regulators are more than eager to make United
States accounting rules on par with those in foreign
countries.
"Borders are not borders with trans-country
transactions any more," said Lynn Turner, chief
accountant at the Securities and Exchange Commission.
"For most businesses, even small companies, your
business is conducted on an international basis."
And the standards board is hoping too that the change
will aid investors who want to better evaluate whether
a proposed merger makes sense. The mission of the
board's review, said Kim Petrone, project manager for
business combinations, is to improve the disclosure of
financial reports. "Pooling, you could say, masks
disclosure," she said. "You don't get full
information."
But despite the debate expected in the year ahead,
changes are far from certain. Analysts say the
standards board expects to have a first draft of a
proposed rule completed by this summer, which bankers
and corporate executives will comment on.
Depending on how smoothly that process goes, new
accounting rules might not be introduced until the end
of 2000. Then deals will still be done, although cash
takeovers are likely to reappear in greater numbers.
In the meantime, warned Jack Ciesielski, publisher of
the Analyst's Accounting Observer, corporate executives
can expect to hear a lot of hype from bankers to get
their deals done before the new rules take effect.
"It's the same old end-of-Western-civilization argument
that gets made whenever there is an accounting rule
change," he said. "There are players out there who do
deals just to do deals. Maybe some of them will go
away."
Copyright 1999 The New York Times Company
|
