| Topic Name: |
pooling of interest? |
| Message Name: |
wow! |
| Date Posted: |
07/12/2001 |
| In Reply To: |
At the most basic level, it means adding the financial statements of the acquiree to the acquiror's financial statements. This is done when the acquiror pays for the acquisition using an all stock transaction, and then does not immediately dispose of a substantial portion of the acquired business.
Companies tend to use this method to avoid recording a large fair value bump (creating goodwill and/or increasing the recorded book value of identifiable assets to fair value), which would result in significant amortization or depreciation charges in the future. Plainly put, pooling can help preserve future earnings per share. This generally happens when an acquiror overpays for an acquisition, so it will use pooling to try to hide the effect. The market generally sees through this, especially when the stock is followed closely by many people.
The question is whether this really matters. Most people would say that the market sees through this crap. Analysts generally do the following things to deal with this:
-Valuations are generally based on either normalized earnings or cash flows.
-Under normalized earnings, the analyst would determine the appropriate valuation multiple, which would be aligned with comparable companies using comparable accounting methods.
-Under cash flows, depreciation and amortization are backed out of the equation, and replaced by an estimate of cash outlays for capex.
Bottom line, whether purchase, pooling or some other crazy new method of accounting comes out, M&A will be driven by real economics (such as industry consolidation due to overexpansion and declining profitability) and not by the choice of accounting standard.
Study economics, finance, marketing and strategy to understand why companies do what they do. Study accounting to learn how the results of these companies are presented, and the adjustments you need to make to suit the appropriate purpose.
The death of pooling wll not make any big difference.
|
| Message: |
Thanks a lot for the detailed reply...I'm only a freshman and really appreciate the insight you gave. I was wondering whether you knew any good introductory books for accounting?
|
|
