Is the US pooling ban good for the UK?
5 October 1999
7 May 2013
24 June 2013
20 December 2013
16 September 2013
7 April 2014
David Cheyne, head of M&A, Linklaters
Andrew Harting, senior associate, Weil Gotshal & Manges
Michael Goroff, partner, Milbank Tweed Hadley & McCloy
The US Financial Accounting Standards Board (FASB) has voted to ban the pooling of interests accounting method for mergers and acquisitions. Pooling allows companies in all-stock transactions to combine books without recording merger-related charges against earnings.
The FASB is proposing that pooling is replaced by purchase accounting, which requires a company to charge against earnings the goodwill or premium over book value it paid for assets. This will bring the US in line with international accounting standards.
This week the forum asks what the implications will be for lawyers and clients if pooling is banned in the US.
Pooling was originally intended for companies of a similar size, but the measure was increasingly abused, and the the forum's panel agrees action was needed.
David Cheyne, head of M&A at Linklaters, says: "You were able to use pooling on transactions that were outright acquisitions, and I'm not surprised that the [US Securities and Exchange Commission] has cracked down."
Andrew Harting, senior associate at the London office of US firm Weil Gotshal & Manges, has advised on a number of pooling transactions for US acquirers and UK targets. He agrees that pooling had become discredited, adding: "It created an anomaly in that the pooling accountancy treatment is not available under the international standards or UK general accounting principles."
Harting believes the change is good news for UK acquirers in the US, who will now operate on a "level playing field". However, the news is less welcome to UK sellers to US companies, "because they will not be able to unlock the same value, in the short term at least, as they would in a pooling transaction".
He also believes it is good news in the longer term for UK lawyers. "Ultimately it's not going to disturb deal flow, because transactions will still be done where there are commercial opportunities, and it may also create additional work for UK lawyers advising acquirers looking at targets in the US."
Cheyne is sceptical about the effects of the change. "We tend to act for UK companies acquiring out of the UK or for UK companies acquiring into the UK, but that's mainly on a cash basis. The big pooling deals have been in the States."
But Michael Goroff, M&A partner at the London office of US firm Milbank Tweed Hadley & McCloy, says the abolition of pooling will make cash offers more attractive. "It's rare to see a pooling transaction beaten by a cash offer, and that will become more common," he says.
This is good news for lawyers, he says, "because cash deals are more interesting you can have alternative cash transactions that compete with one another".
Goroff believes that by making cash offers more attractive the end of pooling could shake up the market in cross-border transactions. "Anything that takes away the artificial constraints and considerations in transactions will stimulate activity because there is more force for assets to go to their best use.
"The availability of pooling creates an artificial advantage for US stock-based acquirers competing with European acquirers," says Goroff.
Harting says in the short term, smaller deals will be carried out using purchase accounting, with less value being offered to UK vendors, perhaps causing transactions to slow down. But he adds: "I would also expect US acquirers to complete their blockbuster acquisitions while pooling is still available."
Cheyne is again doubtful about the effects of what he sees as a technical change. "If someone wants to acquire a company, the fact that the accounting rules have changed won't stop them. Investors will rapidly adjust.
"Mergers are driven by economic factors, most importantly the values on the relevant stock exchanges."
He adds that large goodwill write-offs are possible without pooling, citing the Vodafone-Airtouch merger, which, if completed, will write off goodwill for some years.
All three lawyers agree that analysts and investors will have to change their methods for valuing companies. Goroff says: "A lot of the US merger activity in the 1980s came from a shift in how people value companies in terms of cash flow rather than book value and other accounting measures, and this could create a similar type of change.
"There will be less emphasis on reported earnings, and it will be interesting to watch."