Chuzz: Here's an interesting IBD article on Tech Mergers....Any Comments?
<<Tech Mergers Might Decline With New Accounting Rules
Date: 7/15/99
Author: Tom York
Goodwill could become a bad problem for tech firms - thanks to accounting.
Regulators have proposed a change to accounting rules that might sound like numerical semantics, but actually could curtail -perhaps sharply - future mergers and acquisitions, especially in tech.
The Financial Accounting Standards Board said in April that it will eliminate the so-called ''pooling of interests'' method of accounting for M&As. Pooling generally is favored among tech firms because they don't have to write off goodwill against future earnings.
Instead of pooling, companies will have to use so- called purchase accounting, which could cut future earnings as goodwill is amortized.
There's still a chance FASB will change its mind. Otherwise, the rule will take effect in early 2001. That angers some tech executives.
''This (accounting change) is a big deal,'' said Dennis Powell, controller for Cisco Systems Inc. ''We're gambling with something that could have a huge negative impact on our economy.''
San Jose, Calif.- based Cisco, the largest seller of networking gear, will examine future acquisitions much more closely, says Powell, adding, ''It will curtail merger activity.''
Another Silicon Valley-based company, chip equipment software maker Synopsys Inc., agrees.
''Pooling is the accounting option of choice for the big deals in technology,'' said Paul Lippe, a senior vice president. ''Purchase accounting is much less reflective of what's going on from an investor's point of view, or even a business point of view.''
FASB has another take on the issue.
''We think purchase accounting gives investors a better idea of the initial cost of a transaction and the investment's performance over time than does pooling of interests,'' said FASB spokeswoman Deborah Harrington.
The Securities and Exchange Commission looks to FASB to set rules that the U.S. accounting industry must follow.
The accounting issues are complex. In a nutshell, pooling proponents say thir method lets acquiring companies best reflect the value of goodwill items such as intellectual capital.
Under accounting rules - pooling or purchasing - when companies merge, the buyer and seller combine their financials to reflect the new, single entity.
In many mergers, companies aren't just buying tangible assets like a building or a product line, but also patents and other intellectual property. The price paid often exceeds the target company's fair-market value. That premium is goodwill.
Under the pooling method no goodwill is created. Under purchasing, goodwill must be amortized over many years - thereby cutting profits.
There are other issues, but accounting for goodwill is the main one, analysts and company executives say.
Further complicating the debate is that some people think the issue is much ado about nothing.
Those predicting little impact include Gabrielle Napolitano, an analyst for Goldman, Sachs & Co. in New York.
In a recent report, Napolitano wrote that she quizzed 60 Goldman analysts and found that most believe the proposed rule change won't reduce the number of mergers and acquisitions.
But the critics appear to be the majority. Many say that ending pooling could dramatically slow the number of mergers and acquisitions, especially in tech fields. Many of those marriages involve many millions of dollars of intellectual capital.
Cisco, for example, has used pooling for most of its 30-plus acquisitions over the past few years, Powell says.
Synposys buys three or four companies a year, mostly using pooling, says Lippe.
Despite the critics, FASB says the purchase method gives investors a better idea of what a merger costs over the long term. ''If it's a good deal, it's a good deal'' regardless of the accounting method used, FASB's Harrington said.
The threat of pooling's end could spark a lot of activity this year and next, especially in tech, say some analysts.
''I definitely think you're going to get a wave of activity from the poolers'' ahead of the rule change, said Patrick Burton, an analyst at Salomon Smith Barney in New York.
Steve Smith, managing director of investment banker Broadview International and a spokesman for TechNet, a 2-year-old lobbying organization that represents more than 100 technology firms, calls purchase accounting a 17th century concept.
TechNet has made its opposition to the rule change a top priority this year.
''When assets were tangible, there were things like railroad tracks and locomotives, and they would wear out over time and then be replaced,'' Smith said. ''Then they would be amortized.
''In the Information Age, assets are intangible - like the cumulative experience of your technological expertise, like your brand or your customer list. It could be all kinds of things, and the value doesn't go down, it goes up. Purchasing accounting is an anachronism in the information economy.''
(C) Copyright 1999 Investors Business Daily, Inc. >>
Best Regards,
Scott |
