| BUSINESSWEEK ONLINE : MARCH 1, 1999 ISSUE | ||||||||
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| FINANCE
Commentary: What Could Burst the Net's Merger Bubble For Wall Street and Silicon Valley, it's bubbly time. Dealmakers are breaking out the champagne for a merger boom that's inflating the value of every stock that can tack a dot-com onto its name. This stock-swapping exuberance is rendering meaningless all standard measures of value. Take GeoCities (GCTY): Although the Internet Web-site host loses money, it's worth $2.9 billion to acquirer Yahoo! Inc. (YHOO)--largely because Yahoo! can pay with the cheap currency of its own soaring shares. Up in Norwalk, Conn., though, accountants are sharpening the pencils that could burst this Internet bubble. The Financial Accounting Standards Board wants to do away with pooling of interests, the bookkeeping tactic that allows acquirers to record a target's assets at book value instead of the far higher purchase price. Without pooling, such tech deals as America Online's (AOL) $4.2 billion acquisition of Netscape Communications (NSCP) probably wouldn't have been possible. Between the reforms that FASB will polish up later this year and the current crackdown by the Securities & Exchange Commission on merger write-offs, dealmakers are facing a two-pronged assault on their high-priced bidding spree. BLUNDER BUNTING. Regulators need to tread carefully. Standard accounting has fallen behind the needs of the high-tech economy, and careless reforms could set up roadblocks to valuable deals. But the case against pooling is clear: Regulators should wipe out this accounting haven that allows managers to hide overpriced deals and other blunders from investors forever. Pooling lets companies that merge through a stock swap combine their books just as if they have always been one business. The acquired assets are recorded on the new balance sheet at book value--not the purchase price. ''The concept is that they're twins separated at birth--the merger just puts them back together,'' explains FASB senior project manager L. Todd Johnson. The mergerpremium simply disappears. Although extreme, the GeoCities deal illustrates the problem. Last Sept. 30, GeoCities had shareholder equity of $103.3 million. That's a book value of only $3.28 a share, vs. the $93 that Yahoo!'s bid is now worth. If Yahoo! succeeds in booking the deal as a pooling, it'll carry GeoCities' assets at $103.3 million--notwithstanding that it's issuing stock currently worth $2.9 billion, Plus $828 million in options. Using book value allows Yahoo! to earn a higher return on assets--but not through any management skill. What would happen if Yahoo! had to use the alternative, known as purchase accounting? Its assets would shoot up by $2.9 billion, so its return would plummet. More important, $2.8 billion of those assets would be booked as goodwill, which would have to be written off against earnings. Even with a 40-year write-off, that's an 8 cents-a-share quarterly drain on a company that earned only 10.5 cents a share (adjusted for splits) in its best quarter ever. So it's little wonder that the use of pooling is soaring (chart). CONTORTIONS. FASB wants everyone out of the pool. Accountants say that pooling distorts business decisions, favoring mergers over internal investment and stock swaps over cash purchases. They also don't like the way companies contort themselves to qualify for pooling treatment. Indeed, the SEC has recently struck down some pooling deals, forcing the acquirers to book goodwill retroactively. Technology industries insist that they need pooling because today's accounting standards don't capture the assets that matter in their world: technological savvy, employee skills, customer loyalty. Accountants are scrambling to fill that void. Researchers at the Brookings Institution and the Wharton School are studying ways to value such intangible assets as patents, brands, and share of the Internet market. And FASB hopes to incorporate better measures of intangibles into future merger rules. But pooling isn't the answer. It doesn't help anyone figure out the value of intangibles--it just keeps them off the book. Perhaps the boom isn't a bubble, and these deals are really bargains. If so, Internet entrepreneurs don't need accounting tricks such as pooling to justify their spree. And if the deals are blowing up a bubble--well, sharpen those pencils. By Mike McNamee _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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