GM-Hughes Merger Delayed by Accounting Questions From SEC

General Motors’ acquisition of Hughes Aircraft has been delayed by the Securities and Exchange Commission over accounting questions that could have a financial effect on the $5.2-billion merger, The Times has learned.

“It is an awkward delay,” said David J. Taylor, vice president and general counsel of the Howard Hughes Medical Institute, which agreed to sell Hughes Aircraft to GM last June. “It is inconvenient, but we do not think it will be a problem.”

SEC Chief Accountant Clarence Sampson has raised complicated technical questions over how GM plans to account for certain charges against its income that will result from the Hughes acquisition, according to Taylor and another knowledgeable source close to the deal.

The issue is important because the charges could affect the profitability and ultimately the stock price of the new subsidiary created to hold Hughes Aircraft, according to the knowledgeable source. GM has given $2 billion worth of guarantees on the price of that stock to the Hughes Medical Institute.

“We are discussing this, the whole acquisition, with the SEC,” GM spokesman Clifford D. Merriott said. “We are working out the details. This is a very complex transaction. We fully expect to have it satisfactorily completed by year-end.”

Prospectus Not Yet Issued

Nevertheless, the prospectus for GM’s acquisition of Hughes was expected to be issued three or four weeks after the deal was announced in early June. Taylor said he hopes that the prospectus could be issued as soon as next week.

Sampson has been on vacation, and GM officials are said to be anxiously awaiting his return next week to resolve the accounting issues.

Meanwhile, it was also learned that Hughes’ profits in 1985 will be substantially lower than forecasted internally before GM agreed to buy Hughes. Hughes had projected in early 1985 that it would earn more than $300 million, but it now appears that the profits will be less than $200 million.

“They are looking at all the financials,” said a source close to GM. “There is no re-examination of the basic GM deal. The approach of top management is not to upset the apple cart before the deal is even closed.”

The earnings decline has resulted from several factors, including the cost of improving product quality at Hughes’ troubled Tucson missile factory, substantially higher costs to complete development of an advanced missile for the Air Force and a change in the timing of federal contract payments that is hurting all defense firms.

Belt Tightening at Hughes

Hughes has instituted a corporate-wide belt tightening, partly as a result of the lower profit forecasts. Its six major operating groups have been asked to reduce costs, Hughes officials say. Hughes ground systems group has laid off 300 workers this month, and Hughes space and communications group has reduced expense accounts, for example.

“This is something that should have been done a long time ago, regardless of GM,” one Hughes executive said. “But it is fair to say that part of it is the result of the lower profits.”

Despite the delays in obtaining SEC approval of its deal, GM is moving into position to take ownership of Hughes. D. J. Atwood, president of GM Hughes Electronic Co., the newly created parent for Hughes Aircraft, has taken up residence at the Marina City Club, a large Marina del Rey apartment and restaurant complex owned by Hughes Aircraft.

The SEC questions reportedly are directed at how GM will treat the goodwill created by its large purchase of Hughes. Goodwill is the amount of money over book value that a company pays in an acquisition.

In this case, goodwill is the excess of GM’s purchase price over the amount of Hughes’ net worth and certain undervalued assets carried on Hughes books.

Hughes has a net worth of about $1.5 billion, according to Hughes sources. That leaves $3.7 billion of the purchase price that GM must account for, through a combination of goodwill and the re-evaluated worth of such undervalued assets as patents and real estate.

This issue of how GM will account for the goodwill is unusual because GM will own Hughes through GM Hughes Electronics, which will have its own publicly traded stock tied to Hughes profits.

If GM is forced by the SEC to write off the goodwill against GM Hughes, the subsidiary’s profits would be depressed, which in turn could hurt its stock price in public trading, according to knowledgeable sources close to the deal.

Set $2-Billion Limit

When GM agreed to buy Hughes, part of the payment was in the form of 50 million shares of GM Hughes stock. GM guaranteed that the Hughes Medical Institute would realize at least $60 per share but set a $2-billion limit--$40 per share--on what it would have to make up to the institute if the stock fell in value.

It is believed that GM is seeking to charge off the goodwill against its own income, a charge that would have a relatively minimal effect over a 40-year period. Since GM Hughes will have many fewer shares outstanding than GM has, any goodwill charged against its earnings would have a greater impact on its stock.

In acquisitions that are not all stock mergers, goodwill generally must be charged off against income over a 40-year period. GM agreed to pay $2.7 billion in cash and an estimated $2.5 billion worth of the new stock.