A PIG-OUT FOR CORPORATE PARENTS
COME NEXT YEAR, DOZENS OF companies may start buying up shares of their subsidiaries held by the public. Why? A rule change the Financial Accounting Standards Board is mulling likely will make such deals cheaper for the parent corporation.
At issue is the bookkeeping treatment of so-called goodwill, accounting for the premium that the parent must pay to buy the stock it doesn't own. Under current FASB rules, goodwill is written off against earnings for 40 years. But with the proposed rules, expected in early 1997, there would be no such charge for a parent.
Big money is involved. Today, says Lehman Brothers Managing Director Robert Willens, if Harcourt General bought the 49% of retailer Neiman Marcus it doesn't have, the goodwill charge would knock $25 million off Harcourt's yearly earnings--15% of its 1995 profits.
Here's why the FASB change should goad parent companies to buy all of a subsidiary. A 51% owner can keep just 51% of its subsidiary's earnings. A 100% owner gets every penny. The FASB plan would be good news for public shareholders--they could sell out to the parent for a premium. Possible FASB plays: Exxon and its 70%-owned Imperial Oil, and American Home Products and Immunex (55%). Neither will comment.
EDITED BY LARRY LIGHT
Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.