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To: Don Lloyd who wrote (30605)	10/24/2000 5:25:15 AM
From: Ilaine	Read Replies (2) \| Respond to of 436258

I know we argued about this in the past, but don't remember how it resolved. How do you address the issue raised in the Barron's article, as follows: >>under the pooling method of accounting for a business combination, if Company A acquires Company B paying, say, $100 million in stock, it would show as its cost a mere $10 million, assuming that was the amount listed on Company B's books as its shareholders' equity. In consequence, $90 million of costs actually incurred by A will never pass through A's income statements. Company A thus will be able to realize $90 million of revenues derived from the acquired properties without those revenues being burdened with even $1 of cost. And, a safe bet is, A's earnings will be correspondingly engorged.<< >>To see such outlandish twaddle for what it really is, our chosen representatives need look no further than Cisco. In the company's fiscal year ended July 31, 1999, it made three acquisitions, all of which were accounted for as poolings of interest. Of the three, Cisco deemed the historical operations of two not material to the company's consolidated operations on either an individual or aggregate basis, a status that relieved Cisco of the need to restate its prior period results to reflect the revenues and deficit of this "not material" pair. There's no blinking the fact, though, that for these supposedly insignificant acquisitions, Cisco parted with 16 million shares worth roughly $400 million. For that $400 million, Cisco booked a cost of $45 million, net of a 70 million charge to retained earnings, implying that throughout their pre-merger life the two had accumulated losses of $70 million. The really big deal in fiscal '99 was the takeover in June of GeoTel Communications. For the latter, Cisco forked over 68 million shares, worth some $2 billion. How much of this $2 billion of cost found its way on to Cisco's books? To find out, one has to burrow into the company's financials, which are not a model of transparency. The rules require that prior-period statements must be restated to reflect any "material" acquisitions for which pooling was used. By juxtaposing the fiscal '98 balance sheet in that year's annual with the fiscal '98 balance sheet in the fiscal '99 annual, we can come up with a reasonable answer to the question posed above. In a nutshell, the $2 billion cost of the acquisition surfaced in Cisco's accounts as a mere $41 million! A zero addition to retained earnings clearly implies that GeoTel was bereft of earnings. So, all due thanks to the legerdemain of accounting, Cisco had acquired $2 billion of value capable of being insinuated into its bottom line, with hardly a penny of related cost. Cisco grew far more audacious in fiscal 2000, ended July, snapping up no fewer than 12 companies in exchange for stock worth a total of $16 billion. Five of the dozen were deemed immaterial; hence, they were not included in the pooling restatement process. Cisco paid $1.2 billion for the "immaterial five," a cost that showed up in Cisco's books as a mere $1 million (of the purchase price, only $75 million went into the company's capital stock account, offset by a $74 million deduction of retained earnings).<< interactive.wsj.com (Subscription required).