Don't know if this is entirely on topic but now is the time to do so you will see many mergers in the next few months.
The Financial Accounting Standards Board decided Wednesday to eliminate an
accounting method that has greased the way for major mergers and acquisitions in
Internet and other industries. However, the decision, subject to additional comment and
a final approval, was not made without a fight.
The FASB, the nonprofit organization that sets accounting rules for U.S. companies,
unanimously voted in favor of eliminating pooling-of-interests accounting and treating all
business acquisitions in the U.S. as purchases. Assuming the new rules are adopted,
they won't take effect until at least a year from now.
This accounting method has played a major role in many business mergers and
takeovers, including high-profile Internet deals such as America Online's (AOL:NYSE)
acquisition of Netscape Communications and Yahoo!'s (YHOO:Nasdaq) proposed
acquisitions of GeoCities (GCTY:Nasdaq) and broadcast.com (BCST:Nasdaq).
Pooling has not just been limited to Net stocks: It also helped the mergers that created
Citigroup (C:NYSE) and DaimlerChrysler (DCX:NYSE).
"We believe that the purchase method of accounting gives investors a better idea of the
initial cost of a transaction and the investment's performance over time than does the
pooling-of-interests method," said FASB Chairman Edmund L. Jenkins in a statement.
The new rule, though, won't affect companies any time soon, because the FASB
expects it to be implemented in late 2000, at the earliest. Companies who have already
initiated combinations by that time won't be affected, even if their deals haven't closed.
A December invitation to comment, in advance of Wednesday's meeting, on plans to
eliminate pooling of interests drew 140 letters from interested parties in the financial
community: venture capitalists, accounting firms, investment banks and companies large
and small.
That's no surprise, since the change could have a marked effect on any company
thinking of acquisitions. At issue is how best to describe a merger of two companies in a
financial statement. When companies account for a transaction through a pooling of
interest, they can simply combine their financial results as if they had always been one
unit. But if an acquisition is made through a purchase, the acquirer has to amortize
goodwill -- the difference between the purchase price and the fair market value of the
assets of the acquired company -- over many years and thus depress future earnings.
Based on responses from companies, the FASB will have to contend with debate over
how to properly account for goodwill acquired in the course of a purchase.
In fact, though the FASB has already made some tentative decisions about changing
accounting for goodwill, Jenkins says the comments it received on the subject have
prompted the board to revisit treatment of goodwill. "I think we were impressed --
maybe not convinced, but impressed," Jenkins says, by a "pretty unanimous" lack of
support for the board's current proposals. "I think that caught our attention," Jenkins
says.
Eliminating pooling did have its supporters. A committee of the Association for
Investment Management and Research argued that pooling doesn't faithfully represent
premiums paid by the acquirer in a transaction. Purchase accounting also had the
support of some established hardware-intensive firms, including 3M (MMM:NYSE),
General Motors (GM:NYSE) and IBM (IBM:NYSE).
Arguing forcefully for preserving pooling of interests, Sevin Rosen Funds -- where
Compaq (CPQ:NYSE) Chairman Ben Rosen is a founding partner -- urged the FASB
not to pursue "the risky and potentially economically disruptive path" of eliminating
pooling-of-interest accounting. The firm regards traditional accounting as irrelevant to
high-tech companies. "Increasingly, hard assets that traditional accounting was designed
to account for are just not important to measuring value," stated Sevin Rosen.
Though pooling of interest has been used a lot among high-tech companies, at least one
of the letters reminded the board that this issue touches other companies too. Craig
Jones, managing partner of Ticonderoga Capital, warned how pooling would affect the
fate of the corrections management industry, where it has invested in Cornell
Corrections (CRN:NYSE). In the absence of any appetite in the public market for 10 to
15 companies in the corrections business, it makes sense to roll up the companies
together before an IPO, Jones wrote. But without pooling rules, he said, "such
combinations would not make sense for the seller."
"There is no doubt your proposed rules would slow down acquisitions both small and
large and therefore make such combinations much more difficult," Jones wrote. "You
would rob the U.S. of one of its strongest competitive advantages, the smooth and rapid
combination of businesses."
But comments like those held no sway with the board. An FASB staffer made clear, in
a presentation to the board before its vote, that it shouldn't make decisions based on
what the consequences of new accounting procedures might be, including whether they
might increase or decrease the number of transactions that get done.
Many companies, though, have to start thinking of how this ruling will affect the bottom
line. Yahoo!, a company that is employing pooling to make acquisitions, will not make
any "reckless" deals "just because the clock is ticking on pooling," says its president, Jeff
Mallett. But he argues that if and when new rules are put in place, Yahoo! will be one of
the few Internet companies big enough to do deals without getting hurt by purchase
accounting.
"There will be a shorter and shorter list of companies that have the scale to do that, and
we think we're going to be there," Mallett says. |
