Hello!
I think IBM is not sinking but actually building the most rounded company in the industry. It's MSFT's ship I'd be more careful about. Here's something that should put some reality into the "internet craze":
Is FASB the killer acronym?
By Maria Seminerio, ZDNN
May 23, 1999 3:16 PM PT
URL: zdnet.com
The high-tech industry's love of acronyms has become the butt of jokes, but FASB is one acronym nobody's laughing about.
FASB, the Financial Accounting Standards Board, sets the nation's accounting standards. The group wants to change the rules governing mergers and acquisitions, eliminating "pooling of interest" accounting in mergers. The proposed rule change has put the arcane topic of accounting standards front and center in the minds of high-tech executives and lobbyists, who are rallying against it.
But the high-tech lobbying group TechNet, which includes such high-tech high-fliers as Cisco Systems Inc. and Yahoo! Inc. as members, has moved the pooling of interest question to the front burner.
"For TechNet, the FASB issue is the top priority for this year," said Gretchen Beyer, director of public policy at TechNet in Palo Alto, Calif.
In Silicon Valley, the buzz is that the proposed rule change would stunt the growth of the high-tech economy. But some argue that it represents a long-overdue return to financial sanity.
Pool or purchase?
The pooling of interest model allows companies to combine assets as if they've been together all along. Pooling also lets companies account for mergers without taking a hit to future earnings. Under "purchase" accounting, which some experts say offers a more accurate view of the actual costs of corporate takeovers, companies must attach specific
dollar values to "company intangibles." the costs associated with their partnerships.
These costs are carried forward, or amortized, in future quarters as "goodwill," and hit the bottom line for periods up to 20 years.
Prominent pooling-of-interest mergers include such high-profile Internet industry deals as America Online Inc.'s (NYSE:AOL) takeover of Netscape Communications Corp. and Yahoo!'s (Nasdaq:YHOO) purchase of GeoCities and Broadcast.com. Softbank Corp., which owns ZDNN publisher Ziff-Davis Inc., also has a major stake in Yahoo.
The bottom line difference between pooling and purchase accounting is dramatic. For example, Mindspring (Nasdaq:MSPG), which has built its business through numerous acquisitions and carries goodwill expenses, is expected to lose 79 cents a share in 1999 including goodwill. But if you back out the goodwill expenses -- and most Wall Street analysts do -- Mindspring is expected to post profits of 81 cents a share for 1999.
A good rule
FASB says the change, proposed last month, would force companies to keep their accounting houses in better order.
"It means they have to balance their books," explained Kim Petrone, a project manager at FASB.
FASB -- which is an independent body, not a government agency -- roposed the change because the pooling-of-interest option was originally designed for 50/50 mergers, rather than partnerships where one company swallows another, Petrone said.
"Most business combinations are one company acquiring the other now," she said. "True merger combinations are very rare."
The change will mean more accurate accounting, which will ultimately be a boon for all shareholders, Petrone maintained.
But industry executives, who are lobbying Congress to intervene on the issue, aren't so sure.
No more mergers?
Many officials fear a shift to the purchase model will mean fewer business combinations. They argue that blockbuster mergers such as the AOL-Netscape deal would have been impossible under purchase accounting, and that the pace of the industry's growth would slacken if it were the norm.
But Yahoo CFO Gary Valenzuela, fresh from pooling deals to buy GeoCities and Broadcast.com, says it will ultimately depend on how Wall Street reacts.
"Would we have done these deals differently (under purchase accounting rules)? Strategically, they still make sense," Valenzuela said. "Financially, if you look at them from the point of cash flow and operating results, it's a question that hasn't been answered yet, which is can the market view the earnings and adjust for the goodwill?"
Valenzuela, who "unfortunately and begrudgingly" thinks FASB will make the rule change, says he also thinks the markets will adjust.
One equities analyst concurred.
"Who cares, as long as it's a non-cash write-off?" said Dan King, an analyst at LaSalle Street Securities in Chicago. King said analysts are already used to accounting for special charges.
But another thinks companies will face a hard sell with the Street.
"None of these Internet acquisitions would make any sense whatsoever," said Janet Ramkissoon, prinicipal at Quadra Capital in New York. Ramkissoon said that since the typical Internet deal involves paying a significant multiple of revenues, using purchase accounting makes it a tough proposition to write off the goodwill, or the value of the
technology assets, over 20 years. "With a young industry like the Internet, who's to say what the value of these assets will be 20 years from now?"
Such industry heavyweights as Cisco Systems Inc. (Nasdaq:CSCO) CEO John Chambers have issued dark warnings about the proposed change.
"The FASB regulation of pooling is a challenge to the new economy," Chambers said during a conference call with industry analysts on May 12. "You can't apply old-world accounting to the new world. It is not a time to threaten the ecosystem," he said.
Cisco Systems' corporate comptroller, Dennis Powell, said in an interview that purchase accounting would force companies to record losses that hadn't really occurred.
"In a successful merger, there is no deterioration of the goodwill value" of the purchased company, Powell said. Since most observers would agree that Netscape has a huge -- if intangible -- value simply because it's Netscape, forcing AOL to take an enormous long-term financial loss on the purchase wouldn't make much sense, he
maintained.
"This would be a very ill-advised move," said Dave McClure, executive director of the Association of Online Professionals trade group. "The reason there's so much panic (about the FASB proposal) is that with so many tech companies, the revenue and profits are minimal, so they don't have much cash on hand to make strategic investments," he
said.
The rule-making process takes time. FASB must issue a draft version, expected this summer, and a final version, expected by the end of next year, then take public comment.
Some observers said it could be five years before the switch is completed; though high-tech industry officials predict the switch could be fast-tracked to happen in less than two years.
Counting 'soft' money
What's really at issue is a question that doesn't have an answer yet: How to put dollar values on cyber assets. But the outcome of the debate will be more important to Internet companies than to businesses dealing strictly with tangible goods.
"How do you attach a dollar value to hits, or potential hits, on a Web site?" asked Rick Telberg, editor-in-chief of Accounting Today, a bi-weekly newspaper covering the accounting field. "These are intangibles, and part of the problem is that accounting has yet to come into the techno age and account for the soft things."
But accounting for the "soft things," like the value of Internet companies with little material worth, should really be the job of the executives promoting the deals, Telberg maintained.
Still making sense?
"The businessmen want the accountants to do their jobs for them, to justify all these deals, and it just doesn't work that way," he said. "If these deals made sense under pooling of interest, then they still will under the purchase model."
But Steve Smith, managing director of Broadview International LLC, a high-tech investment firm specializing in mergers and acquisitions, disagreed.
"The assets of the information economy are fundamentally intangible," Smith said. "Business combinations stimulate the speed of development at larger companies, and let them buy up the best technology out there and rapidly disseminate those new ideas" throughout the marketplace.
Some experts say that all the hand-wringing over how to account for the dollar value of "intangibles" is beside the point, maintaining that many deals relying on "intangibles" don't make much business sense to begin with.
Cash and carry
"If the underlying deal makes economic sense, you use cash," instead of swapping stocks with over-inflated values, maintained Howard Schilit, president of the Center for Financial Research and Analysis, an independent financial research group.
"From an economic standpoint, the healthiest thing would be to make it harder for these companies to use Monopoly money to make these deals," said Schilit, also a former professor of accounting at American University in Washington.
Michael Fitzgerald and ZDII's Larry Dignan contributed to this story. |
