The penalty is a penalty in some respects, and not really a penalty in others.
Here is an example of Pooling vrs Purchase based on a January 1st merger:
Billy sells newspapers at "Billy's" on a corner in New York City. He nets $100,000.
Bob sells newspapers at "Bob's" on the corner opposite Billy. He nets $100,000.
They decide to work together - merge. They each figure that each corner is worth 10x earnings, or $1,000,000.
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Pooling:
BEFORE
Billy's Balance Sheet -zero- (he has no inventory)
Billy's Income Statement $100,000 earnings
Bob's Balance Sheet -zero- (he has no inventory either)
Bob's Income Statement $100,000 earnings
AFTER POOLING
Billy Bob's Balance Sheet -zero (they still have no inventory)
Billy Bob's Income Statement $200,000 earnings
Billy Bob's EBITDA $200,000 earnings
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Now for purchase accounting:
BEFORE
Billy's Balance Sheet -zero- (he has no inventory)
Billy's Income Statement $100,000 earnings
Bob's Balance Sheet -zero- (he has no inventory either)
Bob's Income Statement $100,000 earnings
AFTER PURCHASE
Billy Bob's Balance Sheet "Goodwill" $1,000,000 & "Stockholder's Equity" - $1,000,000
Billy Bob's Income Statement $200,000 earnings minus $50,000 goodwill amortization = $150,000
Billy Bob's EBITDA $200,000 earnings (this remains the same as with pooling)
Wall Street looks to EBITDA, and Wall Street discounts Intangible items like Goodwill.
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The earnings penalty of $50,000 is offset by a benefit - the increase in stockholder's equity. This is a game abused by many small companies. They overstate goodwill to make their balance sheets look bigger. That's way savvy Wall Street types discount the intangibles. |
