Poolings’ Demise May Give Firms a Leg Up –

The Financial Accounting Standings Board (FASB) last month took the first step toward eliminating poolings of interest for corporate mergers when it voted to end this method of accounting. The impact of this decision, which has yet to be finalized but may take effect within the year, likely will resonate throughout the buyout industry.

According to Mark McDade, a partner in the transactions services group at PricewaterhouseCoopers, the FASB first began considering altering the current rules, which in addition to the pooling-of-interest standard also allows for the amortization of expenses over a 40-year period, in July 1996. Among the changes being considered is requiring companies to employ purchase accounting techniques-which would stop strategic buyers from being able to write off goodwill in mergers-and the reduction of amortization of expenses to a maximum of 20 years. “[The FASB] basically wanted to eliminate poolings and that is what likely will happen,” Mr. McDade said. “Poolings, by the time they finish, will either be dead or extremely limited.”

Although the FASB’s vote is subject to a three- to four-month comment period, Mr. McDade said the ruling likely will take effect by summer 2000, and, once the final bulletin is issued, all mergers inked after that date will not be able to take advantage of pooling of interests.

Industry sources predicted the proposed changes-which were motivated largely by a desire by the FASB and the Securities and Exchange Commission to align U.S. accounting standards with the standards used abroad, which for the most part do not allow for pooling-could give buyout firms a leg up on strategic buyers, which now will be forced to account for goodwill on their balance sheets. “In the short-term, it could take a lot of strategics out of the game,” said David Mussafer, a managing director at Boston-based Advent International. “If you could have done a transaction where goodwill was written off, and now you have to put in an additional $200 million in goodwill, that’s something.”

The change also may make buyout firms’ portfolio companies more attractive acquisition candidates to strategic buyers, Mr. McDade said. Currently, the FASB does not allow for the use of pooling of interests when acquiring a company from a financial buyer but does allow for this type of accounting when the acquisition of a family-held business is taking place. Should pooling end, portfolio companies and family-owned businesses would be viewed as equally viable acquisition candidates in the eyes of strategic buyers, sources said.

However, while proving a boon to financial buyers in the short-term, the proposed changes may impact the way LBO firms account for their own acquisitions. Currently, the FASB allows for recapitalizations of companies by private equity groups that push the boundaries of traditional recaps-allowing the seller to maintain as little as a 5% stake in the company, rather than the standard from a few years ago of at least 20%. The current rules also allow goodwill, the amount paid in excess of the actual value of a company, to be recorded as debt rather than a balance sheet expense item, thereby keeping higher acquisition prices from dragging down a company’s earnings.

However, sources stressed the FASB may not end up changing the standards for recapitalizations, as the group is focused on making a decision as soon as possible, and the consideration of recaps likely would delay the process.