Dulles, Virginia, March 31 (Bloomberg) -- America Online Inc.'s accounting methods for its $10.2 billion acquisition of Netscape Communications Corp. will likely be allowed by U.S regulators, though the methods may be outlawed in the future, experts said.
America Online, the No. 1 online service, acquired Internet software maker and Web-site operator Netscape two weeks ago using a ''pooling of interests'' accounting method. Technology companies favor that method because it lets the combined company avoid taking acquisition-related charges. One requirement is that the combined company must stay intact for at least two years.
AOL also forged an alliance with computer maker Sun Microsystems Inc. to jointly sell and develop Netscape's software, with Sun agreeing to pay AOL a minimum of $1.28 billion over three years. Analysts said AOL appears to be complying with the pooling rules because it's retaining legal ownership of Netscape's software assets, even though Sun is helping market the products.
''Everything that AOL is doing right now is above board,'' said Abhishek Gami, an analyst with William Blair & Co. ''There is no danger here that AOL would not do it correctly.''
The Wall Street Journal reported today that AOL could face between $96 million and $243 million in annual charges over a 40- year period if regulators decide Sun's involvement should require AOL to employ the purchase method of accounting, the other method used for acquisitions.
AOL shares rose 1 3/4 to 146 1/4.
The U.S. Securities and Exchange Commission could compel Dulles, Virginia-based AOL to change its accounting at any time, although such a scenario is unlikely, experts said.
AOL seems ready to hold onto Netscape's software business even though its traditional customers are consumers, not companies, and it lacks software expertise, analysts said.
''The rules for pooling-of-interest accounting are quite clear and we intend to abide by them,'' AOL spokesman Jim Whitney said.
Potential for Write-Offs
Under the purchase method, buyers can sell or disband acquired assets immediately, and are required to write off the difference between the acquisition price and the company's book value. AOL would face especially steep write-offs because its purchase price for Netscape, paid entirely in stock, has soared as its shares have more than doubled since January.
Investors are closely watching discussions on the pooling-of- interest method now being held by the U.S. Securities and Exchange Commission and the U.S. Financial Accounting Standards Board.
The regulators are considering tightening the rules or doing away with the pooling method altogether, on concern that the two different accounting methods make it difficult for investors to compare companies, said Todd Johnson, a senior project manager with the accounting board.
The agencies also want to prevent abuse of the system by companies aggressively using the pooling method to avoid charges, Johnson said.
The move would mean that acquisition-hungry Internet-related and technology companies, which often use their high-flying stocks as a currency to buy out smaller rivals, would face stiff charges for their purchases.
Impact on Shares
The charges against earnings could drag down stock prices, although the charges wouldn't impact a company's operating performance, Gami said.
''If it happens, the question is whether shareholders will be willing to overlook those charges,'' he said. ''They're non- cash charges that don't affect the business.''
Lowered shares could be troublesome for Internet companies, which use their rich stock prices as currency for not only acquisitions but also to keep employees happy with lucrative stock option packages.
''If it does dampen the stock price, anything you use your stock for is suddenly more expensive,'' said Steven L. Camahort, a partner at the law firm Brobeck Phleger & Harrison, which represented GeoCities when it was acquired by No. 1 Internet directory Yahoo! Inc. ''You could have less acquisition ability, but it all depends on whether or not you get penalized in the market.''
Camahort said he expected regulators to eventually make the criteria for pooling-of-interest accounting more stringent, though such changes wouldn't be made retroactively.
16:54:18 03/31/1999
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