Monday, June 21, 1999
The bare bones underlying merger decisions may come to light
over the next 18 months as the Financial Accounting Standards Board makes good
on its proposed changes to U.S. accounting rules that govern business combinations.
Under FASB's contemplated alterations, nearly all M&A transactions
would be expected to load charges on the profit and loss statement over a period
of years, taking a toll on the earnings of the acquiring company.
In a nutshell, FASB is proposing changes that would eliminate
"pooling of interest" accounting for business combinations in favor of the "purchase"
method, and would eliminate the ability of the acquiring company to take a one-time
write-off of purchased in-process R&D.
In the former case, the purchase method would result in the
so-called excess purchase price being recorded as goodwill on the acquirer's
books, while the acquired R&D would remain on the books as an intangible
asset. In both instances, the assets would be amortized, conceivably lowering
the company's profitability for years (see Q&A on FASB, A4).
Indeed, in an SEC filing last week, Genentech Inc. reported
that it would be required to amortize some $3.1 billion of goodwill and intangibles
as a result of its buyout by Roche (see Ebb & Flow, A14).
But while many accountants and biotech CFOs bemoan the impact
on earnings, others point out that the changes should not adversely affect the
rate of value-adding mergers and acquisitions - those done for economic rather
than accounting reasons. They also believe that investors in biotech may begin
to look at cash flow rather than earnings to value companies and will not penalize
those that make shrewd M&A decisions that coincidentally may dock earnings.
Economics vs. accounting
FASB's impact will depend on the basis companies have for making acquisitions. Those done merely to pad a pipeline, for example, may not be worth the expense under the proposed rules.