As presently configured, the plan by accounting rule-makers to junk pooling-of-interest treatment for most mergers is a multidirectional squeeze play on acquirers that are anxious to minimize post-deal earnings hits.

After a long study, the Financial Accounting Standards Board (FASB) in April 1999 formally endorsed the virtual demolition of pooling, which is allowed in deals using stock as the acquisition currency. A principal advantage of pooling is that the acquirer can avoid acquisition goodwill -- basically the difference between the fair market value of acquired assets and the purchase price. Under the rival form of m&a accounting -- purchase treatment -- the acquirer must book the price/value gap as goodwill.

But the pooling ban is only for openers. If the new rules take effect in their present form - an effective date in early 2001 is anticipated -- they will toughen the standards for getting goodwill off the books and hit acquirers hard at the bottom line. Presently, goodwill can be written off for up to 40 years, with the annual write-downs bolstering cash flow but cutting into net income. FASB's proposal would require acquisition goodwill to be amortized on a "straight-line basis over its useful (finite) life." That useful life, the board said, should be "presumed to be 10 years or less and should never exceed 20 years." That means faster and larger per-year write-offs and deeper cuts into the bottom line.

Under the present proposal, the only format that could still employ pooling would be so-called mergers of equals in which two or more companies come together and ownership of the combined entity is evenly divided so a specific acquirer or target cannot be identified. Those deals are tough to piece together and they are not likely to increase significantly when the anti-pooling rule finally goes into effect.

Despite the earnings hardship that acquirers may face, some authorities saw a silver lining in the outcome. They said elimination of pooling actually could speed a movement among investors and stock analysts to judge company performances on the basis of cash flows rather than book earnings.

On the flip side of the goodwill issue, the board's proposal includes a major change in accounting for the bargain purchase - in which the acquirer buys the target for less than the fair value of its assets. In those cases, the acquirer would have to book the difference, which now can be spaced out over years, as a one-shot extraordinary gain. That would generate an artificial boost to earnings and make future results look bad by comparison.

The rule would not outlaw stock-swap deals nor remove the capital gains tax shelter from sellers who accept stock. It would require them to be accounted for as purchase transactions in the same manner now mandated for deals swung for cash.

According to accounting and dealmaking professionals, some likely effects of the pooling ban include:

An upsurge in pooling deals over the next year-and-a-half to get in under the wire. That could increase m&a market competition and raise selling prices.

A depressing effect on very large deals -- north of $30 billion for argument's sake. These deals now are done largely for stock because raising and paying the huge prices in cash is a formidable challenge for even the largest and most well-- heeled acquirers. But the megadeals also pack the potential for the largest amounts of goodwill overhang.

An increase in the number of part-cash, part-stock deals to spread the acquirer's currency risk and make a deal more affordable. These transactions already are accorded purchase treatment. Combination packages could be a viable alternative in megadeals when the merger accounting playing field is leveled.

A much tighter handle on target asset valuations to narrow the goodwill gap.

Despite the controversy engendered by FASB's move, the pooling ban may have limited the overall impact on the sprawling m&a market below the megadeal tier. In fact, data supplied by the SDC Merger & Corporate Transactions Database demonsti-ate that only a fraction of the deals down in the last five years have used pooling treatment. But in a testament to the prominence of pooling in larger deals, the values have grabbed a much larger share of aggregate purchase prices (see table). Thus in 1998, only 517 of 9,734 completed deals were treated as poolings while their combined value of $580.6 billion captured a nearly 45% share of the m&a market's total dollar volume of $133 trillion.

Indeed, Stephen M. Blum, m&a director of KPMG Peat Marwick and a middle-market practitioner, said that at the peak no more than 20% of the deals in his segment involve pooling, and the more typical proportion is between 5% and 10%. He said there might be some shift of positions in tax-driven deals in which the seller is fervent about avoiding capital gains payments. "In those cases, it will be the seller, rather than the buyer, who decides on the currency, which is a shift from the present," he commented.

There are even a few positive notes from the pooling elimination. Robert Willens, vice president and tax expert at Lehman Brothers, noted that to qualify for pooling, dealmakers must comply with 12 strict rules which will disappear with pooling itself. The result could be more flexibility for companies to better balance acquisitions with other corporate initiatives. For example, the two most onerous rules bar acquirers from using pooling if they have made large share repurchases in the two years before a deal and prevent the pooling company from selling any target assets for two years after the deal. When they die, acquirers will have much greater freedom to pursue stock buybacks and to restructure quickly after a deal.

Many deals, Willens stated, could resemble the recently announced acquisition of EVEREN Securities by First Union Corp. for more than a billion dollars in stock. First Union went into the open market and bought an equivalent amount of stock to prevent a large increase in shares outstanding. "You can't do that in pooling," Willens said. "The net effect is that it is a cash deal."

Willens is not sanguine about the impact of the pooling ban for dealmaking, given the potential of purchase accounting for diluting earnings. But he said that the erasure of pooling might be a catalyst for getting stock analysts to judge companies on the basis of their cash earnings, as opposed to their current fixation on net income. Activity in the future m&a market, he asserted, "has a lot to do with how quickly the (stock) market goes through the transition to cash earnings as a measure of performance" because of the contribution of goodwill amortization and depreciation on cash flow. "We need a uniform way of calculating cash earnings that will be accepted by everybody," he said.

Raymond G. Beier of PricewaterhouseCoopers said that the FASB move to curb pooling actually may be a "manifestation" of a slowly moving trend toward rating public companies on cash flow generation. The movement has been going in "baby steps," he said, but he sees the coming rule as a "medium step toward the cash flow discipline."

"Value," Beier stated, "is cash-flow driven." "Companies will have to reassess whether the quantitative measures are going to match the qualitative story they have put into the market," he said.

Taming In-Process R&D Write-Offs

In regard to another controversial feature of merger accounting that is closely related to pooling, a new study suggests that acquirers have gotten the message about regulatory pique over writing off in-process research and development of targets and have started to chop the size of the write-offs. FASB also is weighing elimination of in-process r&d writeoffs and the Securities and Exchange Commission has pressured some bold acquirers into trimming huge initially planned write-offs that tamp down or dry up the goodwill portion of a purchase price.

Baruch Lev, professor of finance and accounting at the Stern School of Business at New York University, said that his newest study - of major deals done in the second half of 1998 - showed increased restraint in claiming r&d write-offs. Lev played a huge role in surfacing the issue with a 1996 report that found postacquisition r&d write-offs averaging 72%. But in the latest study, the write-off average had fallen to 45%. "That really quantifies how much they want to push," he said. "They apparently are willing to defend that and that is what they can justify."

Lev opposes all in-process writeoffs on the grounds that acquired r&d should be treated as an asset with value. He considers those write-offs to be "pooling by the back door." "It's like pooling because there is no goodwill left," he asserted.