At face value, FAS 141 and 142, the new purchase-accounting rules issued by the Financial Accounting Standards Board, would seem to be another blow to a mergers-and-acquisitions market already down in the dumps. The new disclosures required of companies about their mergers will, in theory, provide investors with more-meaningful information about the performance of acquired businesses and, by extension, of the managers who execute the deals.
Under the former pooling-of-interests accounting method, the purchase price of a company was unaccounted for after the deal was done. And under the old purchase-accounting method, goodwill amortization charges could be passed off as meaningless bookkeeping entries. The new rules, which force companies to annually review the value of acquired goodwill and book impairment charges if that value drops, would seem to hold managers more directly accountable for the prices they pay for other companies.
Why then would Pfizer Inc. offer a hefty 44 percent premium over market price for Pharmacia Corp.? In the largest deal of the year, the pharmaceuticals giant forked out $60 billion in stock for Pharmacia, which on June 30 had a book value of just $12.2 billion. Pfizer has yet to issue financial statements reflecting the Pharmacia purchase. “We have an opportunity to be the poster child for the new purchase-accounting method,” says David Shedlarz, Pfizer’s chief financial officer.
Intangible Safety Nets
Like all CFOs involved with mergers, Shedlarz has had his hands full in the wake of FAS 142. The new rules require him to allocate the $60 billion purchase price to Pfizer’s existing business units. He also has to mark up Pharmacia’s assets to fair value and identify intangible assets to be amortized going forward. “I like the pooling-of-interests method better,” says Shedlarz.
At the end of the day, however, the new rules aren’t likely to hold Pfizer management any more accountable for the success or failure of the merger than the pooling method did.
Even if Pharmacia’s drug pipeline dries up or generic competition erodes its margins, the combined entity still might not face impairment charges in the future. How so? FAS 142 and the rules for allocating goodwill to the business units of the acquiring company are such that impairment charges, particularly for large companies like Pfizer, are unlikely to occur. That being the case, FAS 142 isn’t likely to foster any more pricing discipline on the part of buyers.
The new accounting rules require companies to assign all acquired assets, including goodwill, to identifiable business units. If the purchaser is a large company with a fair value that is much greater than its book value, the acquired assets can disappear into the combined entity. Any deterioration of the acquired assets would be masked by the company’s other businesses, particularly if the goodwill can be divided into small pieces and allocated to multiple reporting units.
“Large, diversified companies that don’t have fully loaded balance sheets [that is, little goodwill] have less risk of future impairment,” remarks one public accountant who asked for anonymity. In Pfizer’s case, its largely unaccounted-for intangible value will shelter it from the risk of future impairment to goodwill arising from the Pharmacia transaction.