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Technology Stocks : 3Com Corporation (COMS) -- Ignore unavailable to you. Want to Upgrade?

To: Alski who wrote (38954)	2/4/2000 11:22:00 PM
From: mr.mark	Read Replies (1) \| Respond to of 45548

this from today's sf chronicle... " Tech Chiefs Protest Proposed Merger Rules New accounting plan could end goodwill tax benefit Tom Abate, Chronicle Staff Writer Friday, February 4, 2000 Silicon Valley big shots faced the crowned heads of accounting at a public hearing in San Francisco yesterday, hoping to preserve a rule that has made it easy for them to grow through acquisitions. The Financial Accounting Standards Board, a seven-member private body that governs the profession, wants to eliminate an accounting practice called ``pooling of interests' that lets companies make acquisitions without taking write-offs that would hurt their bottom line. Silicon Valley executives, led by venture capitalist John Doerr and former Netscape CEO Jim Clark, said FASB would be foolish to kill the rule. ``This is a direct frontal assault on the New Economy,' said Doerr, arguing that an end to pooling would slow mergers, discourage venture capital investment and hurt Silicon Valley entrepreneurs who have become ``the envy of the world.' FASB has said it might eliminate pooling of interests accounting in 2001, because it conceals the true costs of mergers and makes it difficult for investors to evaluate deals. FASB wants all mergers to be accounted for under the older ``purchase method' of accounting. Here's the difference: Suppose Company A spends $100 million to take over Company B, whose hard assets -- such as land, real estate and equipment -- have a book value of $60 million. Under purchase accounting, the part of the purchase price that exceeds book value -- $40 million in this case -- is considered goodwill, and must be written off over time, decreasing the company's earnings. In a pooling-of-interest mergers, the company is not required to write off any goodwill. The two companies simply combine their expenses and revenues and go forward, with no impact on the bottom line. With certain limitations, companies can decide which type of accounting treatment they want to use. Purchase accounting is tough on high- tech companies, which typically have relatively few hard assets. Their value is often tied up in patents and other intellectual property, which would be considered goodwill that must be written off under purchase accounting. Barksdale, who sold Netscape to America Online for $10 billion in a pooling-of-interests deal, said that if AOL had had to write off the huge goodwill involved, it would have depressed AOL's earnings by so much, for so long, the deal would never have happened. ``Why change this (rule) when it's workin' real well?' Barksdale asked. FASB Vice Chairman James Leisenring retorted, ``I don't think it's working at all.' FASB contends that because they can avoid writing off goodwill under the pooling method, high-tech firms have been able to pump up the price of acquisitions, especially those done with stock. This has made tech pooling deals seem hotter than mergers involving purchase accounting, said FASB staffer Todd Johnson. ``Investors aren't able to make accurate comparisons between companies in the high-tech versus the smokestack or the brick-and-mortar world, so capital may not be going where it should,' Johnson said. Dennis Powell, corporate controller for Cisco Systems, which has made dozens of pooling acquisitions in the last three years, said FASB is trying to impose asset-based accounting from the industrial era on companies that don't fit that mold. ``We're investing in the know-how, the people and other things that have no easy book value,' he said. This isn't the first time FASB has clashed with Silicon Valley. In the early 1990s, when FASB proposed new accounting rules that would have made companies write off the cost of stock options given to employees, Silicon Valley companies and workers held sidewalk protests that forced the accountants to back off. Meeting with reporters outside yesterday's hearing, Doerr said such street tactics might be revisited if FASB doesn't retreat on pooling. FASB will hold a similar public hearing next week in New York and decide the issue by the end of the year. Though FASB is a private body, its standards are accepted by the Securities and Exchange Commission and have something approaching the force of law on U.S. firms."

To: Alski who wrote (38954)	2/6/2000 11:50:00 AM
From: The Phoenix	Read Replies (1) \| Respond to of 45548

Alski, I'm not a financial expert and I think I stated this earlier on.. but there are some glaring oversights - I believe. The one I've pointed to is: The pooling issue does not apply to cash purchases and given COMS cash position I believe the pooling assumption becomes a non-issue... But also the writer has made other assumptions which I think are a little too black and white... I for one am not an expert here but I think we owe it to the FASB to do the required due diligence... our assumptions and opinions are just that... What about... it is well-settled that an "equity carve-out," of the type planned by Palm Computing, will be more successful (from a pricing viewpoint) if, at the time of the offering, the market is informed that the subsidiary will, via an ensuing spinoff, become an independent entity Well, EB has not committed to this... leaving open the possibility that the remaining 80% is not distributed. The rules also prohibit the spinoff of a corporation where control of that corporation was acquired during the five-year predistribution period. In this case, 3Com acquired control of Palm Computing in 1997. Well, COMS hasn't had control of PALM for 5 years yet... the writer states as much... However, to qualify for pooling, there can be no "intention or plan" to dispose of a significant portion of the assets of either combining company within two years after the combination, This is at the core of the second argument I've made... that pooling (which the writer doesn't define at all) can only be used for a company planning to divest a portion of the company. This leaves an acquisition open to a suitor that doesn't wish to divest assets. SO the two year rule only applies to those suitors that have product overlap probably. THis has been a problem for COMS in the past and probably the only reason they haven't been purchased already.. in fact I've been making this very argument since September. BUT, with their cash position this issue changes. A suitor, given the cash reserves would now be willing to hold undesirable business for 2 years. The cash makes the decision easier. This is the problem with looking at this from a financial position only. Still... other than disposals in the ordinary course of business or to eliminate duplicate facilities or excess capacity. Product overlap will be handled via anti-trust and become a non-taxable and legal divistiture. I think there are a few other assumptions the writer has made that are not written in stone... this is problem with business accounting practices and business law... It's simply not black and white and there are all kinds of issues which I believe could be argued with the writers position. OG OG