End of Poolings of Interest Could Slow Mergers but Help Financiers
Tarquinio, J. Alex, American Banker
Commercial bankers may not like the possibility that pooling-of-interest accounting for mergers will be eliminated, but the move could create a money-raising boomlet for securities firms.
Banks and other companies planning mergers would, under a proposed accounting change, be required to lay out more cash up front. That, in turn, would mean more loans, bond issues, and other financings, experts said.
Lewis W. Coleman, chief executive officer of Bank of America Corp.'s securities affiliate, NationsBanc Montgomery Securities LLC, said in an interview here that much of the additional financing business will go to securities firms aligned with banks. That is because these units can more easily line up the loan portion of any financing deal, he said.
"A lot of people haven't realized this," Mr. Coleman said, "but without pooling there will be a lot more need for acquisition financing." He was in London attending a NationsBanc Montgomery investment conference.
Pooling-of-interest accounting allows an acquirer to simply add together the book value of the two companies' assets and liabilities, without charging any premium to future earnings. Under pooling, any premium paid is deducted directly from equity and does not affect the bottom line.
In purchase accounting, the alternative method, an acquirer must write off the premium, or goodwill, over a period that could be as long as 40 years, though usually about 25. The writedown of that goodwill creates a constant drag on earnings in each of those years.
"The actual economics are not really different with a pooling, but the numbers look better," said Diane L. Merdian, Montgomery's head of finance research. She is convinced that poolings-which have become a popular way to account for mergers in the United States-will cease to be an option within the next two years.
U.S. regulators are expected to eliminate the pooling method, because they want U.S. accounting to be more in line with foreign accounting methods, especially in light of the trend toward international mergers. …