Techdom's New Bean Counting Battle
Pity the kingpins of Silicon Valley. Their stocks are getting slammed, and their revenues are under a microscope. What could go wrong next? Well, by yearend, America's top bookkeepers plan to pull the plug on "pooling of interests," the accounting technique popular at merger-happy high-tech companies. Accountants argue that pooling lets companies--especially tech and financial companies--hide and minimize the true cost of deals.
But Silicon Valley is not going to leave the pool without a fight. The tech world is lining up heavyweights from Congress to lean on the Financial Accounting Standards Board and its patron, the Securities & Exchange Commission. High tech's argument: The New Economy's growth is powered by mergers that combine startups' new ideas with the capital, production, and distribution resources of established tech companies. Make those deals more costly, they say, and you'll slow the growth of the country's hottest companies. "Chilling another company's desire to buy something we've built is not in the interests of our shareholders," argues Gene Hoffman Jr., CEO of online music distributor EMusic.com in Redwood City, Calif.
INTENSE. Techdom does not expect a win like it got in 1995, when the Valley reversed FASB's drive to count stock options as an expense. But at the very least, the heat from Capitol Hill is likely to delay FASB's final ruling by as much as a year beyond its December target. And the board may ultimately ease the pain of eliminating pooling by adopting rules that give tech companies more credit for their chief assets--intellectual property and superior market position.
Why the intense lobbying? Pooling allows some companies that pay for mergers with stock to claim favorable treatment. In a pooling deal, the merging companies combine all of their assets at the assets' historical value. The merger premium--how much the acquirer pays over the target company's book value--never shows up in the post-merger balance sheet.
When deals use the more common "purchase" method of accounting, that premium must be recorded as goodwill. And goodwill must be written off over time, putting a drag on earnings. Such earnings hits are particularly painful for tech companies, given the huge gap between their book values and what they command in the market. Take Applied Materials Inc.'s recent $1.8 billion takeover of Etec Systems Inc., a Hayward (Calif.) maker of laser gear. Etec's book value on Jan. 31 was just $249 million--so $1.5 billion of the purchase price won't be recorded on the books.
By taking away pooling, FASB would stall the industry, techies and their allies in Congress argue. But accounting rulemakers retort that their job is to produce reliable numbers for investors. FASB argues that pooling confuses investors and lets companies hide the true cost of overpriced takeovers. "It's hard to argue for the current pooling rules, which say you can put two companies together and pretend nothing happened," says Elizabeth A. Fender, accounting standards director at the American Institute of Certified Public Accountants.
Still, the high-tech lobbying is likely to force a compromise. FASB is apt to try to help New Economy companies by improving its rules for recognizing intangible assets--items such as patents, brands, subscriber lists, and share of the Internet market. Meanwhile, banks are pushing a proposal that would let merger partners write off such assets selectively. That might not pass muster with the SEC, which doesn't like to give companies discretion to manage earnings. Another potential compromise: Write off goodwill, but on a separate statement that won't affect earnings.
Silicon Valley doesn't apologize for seeking special treatment. "When people ask, `Do you expect to have different rules than General Motors?' we say, `Yes!"' says Cisco Systems Inc. CEO John T. Chambers, whose company is spearheading the lobbying. "They led the industrial revolution, but we're leading the information revolution." That argument can still turn heads on Capitol Hill--and may even tilt green eyeshades in the Valley's favor.