Is Fair Value Flawed?

Some say FASB's reform proposals for M&A expense-reporting could stifle corporate management planning.

Some experts say this change simply flies in the face of traditional business practice — and may lead to an unhealthy reaction by some acquirers.

“I see a real risk that companies may be inclined to reduce spending on due diligence and other transaction-related costs as a way of reducing current-period expense charges,” says Charles Mulford, professor of accounting at Georgia Institute of Technology’s College of Management and director of its Financial Analysis Lab. “The fair value of an asset is what someone is willing to pay for it, which has traditionally included the transaction costs.”

Adds Sam Rovit, head of the worldwide M&A practice at Bain & Co., “I think it would be very unfortunate if [the guidelines] put a damper on merger planning. The planning for a merger is crucial to its success.” Rovit professes to be enthusiastic, however, about the general requirement that fair-value accounting be made to apply to acquisitions.

Expect Few Waves

Even though it may take time to work out ambiguities in the new provisions — an exposure draft and the associated comment period are expected in the first quarter of 2005 — Corporate America seems ready to accept what FASB has prepared. For one thing, the changes have far less impact than previous merger-accounting revisions, especially the elimination of pooling. And, of course, they follow the fair-value trend outlined by regulators years ago.

Indeed, in some quarters companies already are operating according to the guidelines, even before they become an official regulation. “We’ve done three recent deals,” says Rovit, “and in each case, the company received advice to essentially implement the new rules before they come out.”

Jordan Klear, managing partner at Washington, D.C., investment-banking boutique Gutman Group LLC, doesn’t expect most merger-minded companies to scrimp on preplanning just to show better up-front numbers. And he sees the new proposals as good for both investors and businesses. “I believe that restructuring reserves, used in connection with mergers and acquisitions, have long been abused by the corporate community as a way to hide the lack of performance of companies that have been acquired,” he says. “I view this move by FASB as a positive one that will only reinforce the integrity of proposed mergers.”

While there may be some short-term negative effect on M&A, Klear believes that over time, the changes will force companies to take a more thoughtful approach to acquisitions from the very beginning. “We believe that long term, the primary tool used for corporate growth will always be M&A,” he says. “This will be just another rule they’ll have to abide by.”

So far, CFOs also seem unfazed by the proposed changes. “When you evaluate M&A, you should look at the ultimate cash flow the combination will create, not the accounting treatment associated with certain charges,” says Digitas Inc. finance chief Jeff Coté. “The question is, will the cash flow be positive and accretive to the existing business?” The new rules, he adds, would likely have little effect on acquisition activity at his Boston-based marketing-services firm.

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