Accounting Rule Change May Spur Rash of Mergers

A change in an obscure accounting rule is likely to result in a new surge in corporate mergers over the next 19 months.

In a decision aimed at helping investors understand the impact of corporate takeovers, the Financial Accounting Standards Board voted Wednesday to eliminate “pooling of interests,” an accounting tool used in such recent mergers as the combination of Chrysler and Daimler-Benz and the union of Citicorp with Travelers Group.

The action is expected to accelerate corporate takeovers as companies race to find partners before the accounting change takes effect Jan. 1, 2001.

“We would expect there will be a flurry of deals,” said John Bishop, a partner at PricewaterhouseCoopers.

Nine of the 10 largest acquisitions last year were classified as pooling of interests, according to Securities Data Co. Only AT&T;’s deal with Tele-Communications was tallied under “purchase accounting” rules.

Despite its popularity, pooling accounting has earned some vocal critics, among them Texaco, General Motors and IBM.

When two companies merge under the pooling method, they simply add their balance sheets together, line by line.

While it sounds easy, opponents of the rule argue the method hurts investors for several reasons: Companies tend to be generous in paying for their targets and don’t disclose the premiums they pay for the assets being acquired. What’s more, the companies can’t sell off assets or buy back stock for two years after the acquisition.

“With pooling, an investor has a hard time telling what actually happened in the transaction, because you’re not seeing what the company actually paid,” said Deborah Harrington, a spokeswoman for the Financial Accounting Standards Board. By contrast, “In a purchase [transaction], the investor has a whole lot more information about the deal.”

Wednesday’s decision, a major step in a process that will be completed next year, will require all mergers to be accounted for as a straightforward purchase.