Edwarda, I have lots and lots of thoughts on this issues. Like the song goes, if they asked me I could write a book ....
So, at the risk of boring you:
I believe that a merger must stand on its own two feet, regardless of the accounting gimmicks. Inevitably, there will be dilution because an acquiring company simply must pay more in whatever currency it uses -- stock or cash, for the acquired company than street valuation. The dilution will take place in either or both of earnings per share or growth unless there are real synergies. Real synergies should go way beyond the elimination of duplicated costs. At a minimum they should allow for cross selling, and should allow for bolstering a product line to allow sales that neither of the companies could have gotten prior to the merger. These kinds of advantages have nothing to do with how the accountants deal with them.
If, as you say, a merger is wise strategically, then it needs to be wise financially as well. That means that investors need to know whether the future benefits of the acquisition are justified by the cost. The problem as I see it, is that by using the ubiquitous wig and make up of restructuring charges and purchased in process R&D we simply can't tell from earnings whether the deal makes sense because the benefits are almost always overstated by the cosmetic elimination of very real expenses. That's why I think that the sooner analysts get rid of accounting earnings as a metric the better.
The problem is not in pooling of interest accounting per se. The difficulty is that the SEC allowed companies to write off a great deal of future expenses under the rubric of "one-time merger-related expenses". And if you think about it for a minute you might conclude that this subterfuge makes very little logical sense. The fiction that pooling of interests operates under is that the companies had always been combined. But the inclusion of restructuring charges flies in the face of that contention. What ought to have started out as a precautionary footnote to investors has been transmogrified by accounting sharpshooters into a way to fraudulently represent the merged company's prospects.
And as to your final point: how can brokerage houses hire analysts who don't understand finance? I suppose there are some, but that is a really frightening prospect. [It would explain their obsession with DSO and back-end loading. I wonder how many of them really understand the implications of DSO?]
The one advantage I see to pooling of interest mergers is that it frequently allows shareholders in the acquired company to avoid having to pay capital gains taxes.
TTFN,
CTC |
