After all the shouting, the pooling-of-interests method of merger accounting is coming to an end with a whimper, not a bang. The predicted rush of firms launching pooling deals before the June 30 deadline didn’t materialize. Generally, in fact, CFOs seem to be taking the loss of pooling in stride, thanks in no small part to new rules for treating acquired goodwill and intangibles in a purchase acquisition.
Consider the battle for control of Wachovia Corp. The new purchase- accounting approach “provides us with a lot more flexibility than pooling” would have, says CFO Robert Kelly of First Union Corp., which agreed in April with Wachovia to merge the two financial concerns, valued at $12.7 billion.
Kelly says that if the deal is completed, “we can immediately undertake much more active balance-sheet management, like stock buybacks and divestitures, if we so desire.” What’s more, First Union has constructed the Wachovia terms to include a hefty breakup fee, in the form of an exchange giving First Union options to buy Wachovia shares. That element certainly makes competing bids–like the one SunTrust Banks Inc. initiated for Wachovia–more difficult. (SunTrust has challenged First Union in court, and a SunTrust spokesman argues that “breakup fees are not designed to be poison pills.”)
The Wachovia First Union situation is just one case suggesting to M&A experts that the new accounting standards set by the Financial Accounting Standards Board are finding acceptance. Coming in for special praise: FASB’s revision to the purchase-accounting rules, allowing firms to forgo the amortization of acquired goodwill. (Goodwill from previous transactions stops being amortized at the start of an acquirer’s fiscal year.)
“I think nonamortizing goodwill has gone a long way toward alleviating the concern of many who wanted to keep the pooling model,” says Norman Strauss, director of accounting standards at Ernst & Young LLP. “Under the old rules, companies would not do the deal unless they got pooling accounting,” he says. Companies, especially financial firms and those in the high-technology and pharmaceutical industries, often chose pooling as their way of avoiding the long-term earnings dilution from such amortization of goodwill–the excess of the cost of an acquired entity over the net of the amounts calculated for assets acquired and liabilities assumed. FASB’s banning of pooling, of course, reflected concerns that it tends to hide the financial impact of a transaction from investors.
Instead of the old approach of amortizing goodwill for up to 40 years, companies now must subject the acquired goodwill to a complex annual “impairment test” aimed at determining whether there has been a decline in the value of that goodwill. Write-offs would be required only if the value has been impaired.
That new approach is fine with First Union’s Kelly. He sees the biggest challenge in the acquisition of Wachovia –after winning out over SunTrust, presumably–to be “focusing on business as usual, providing and improving top customer service, and revenue momentum.” He says that, “conceptually,” he foresees no difficulty dealing with the impairment test.