The following article is adapted from reprinted from the M&A Tax Report, Vol. 7, No. 12, July 1999, Panel Publishers, New York, NY.
POOLING—ONE MORE WORD
By Robert W. Wood, San Francisco
Last month we looked at the controversial change to the pooling of interests rule that will end one way of accounting for M&A transactions. See Wood, "‘Pooling of Interests' Accounting to be Ousted," Vol. 7, No. 11 (June 1999), p. 1. As we noted, pooling transactions are now slowly marching toward their deathbed. But the impact has been (or apparently will be) greater than we at The M&A Tax Report expected.
In fact, Fortune magazine has gone out on a limb with "It's Time for Merger Mania II" (an article by Shawn Tully, Fortune, June 7, 1999, p. 231). With the Financial Accounting Standards Board ("FASB") voting unanimously to end pooling of interests accounting, Fortune threw out some pretty amazing numbers. Pooling is used in over 70% of mergers (measured in total dollars), including the Travelers-Citicorp and the NationsBank-BankAmerica behemoths. See Fortune, June 7, 1999, p. 231. Fortune covers the basics of pooling, although talks more of advantages than characteristics. Pooling, they say, "artificially inflates return on equity."
Still, we at The M&A Tax Report stick by our prediction last month that pooling transactions should accelerate between now and whenever the FASB sets the new effective date for the replacement to these venerable rules. Sure, some last minute shopping will take place, but Fortune seems to suggest the shopping will truly be a mania.
Regardless of who is right about how much will happen during the waning days of pooling, clearly deal activity will still go on afterwards. The Wall Street Journal recently reported on a what-about-after-pooling study by Goldman Sachs. Although a one sentence precis of the piece probably would not be appreciated, at least it does not paint a grim picture of deals post-pooling. See MacDonald, "Pooling's End Won't Clobber M&A Activity," Wall Street Journal, June 9, 1999, p. C1. Goldman says that after pooling is nixed (probably January 1, 2001), four industries may have a merger drought: health-care information technology, medical devices, precious metals and advertising. The study goes on to identify eight more industries where a temporary slowdown could occur: banking, brokerage firms, computer software, information-technology servicing, paper and forest products, tobacco, cosmetics and household products and waste management. Id.
All in all, though, the effect—even once the rule becomes final—is not expected to be pervasive. Even so, until then, there will be a bit of last minute shopping...
Pooling: One More Word, Vol. 7, No. 12, The M&A Tax Report (July 1999), p. 7.