New Trouble for Mergers

Though the trustbusters are tough, money is tight and stock prices have crashed, the corporate merger movement is far from crippled. There were 2,552 merger announcements in this year's first half, only 9% fewer than during the first six months of 1969. A new obstacle to future mergers, however, has been raised by the top rule-making body of the nation's accounting profession, the Accounting Principles Board.

The 18-man board has adopted some controversial proposals designed to make it difficult for merging companies to show an instant increase in their profits by the stroke of an accountant's pen. The most important reforms apply to a popular method of accounting for mergers known as pooling of interests. In pooling, an acquiring company writes the assets of another firm into its books at their original cost rather than their present value. Many conglomerates have later sold off a portion of such assets at a high price and reported the difference between that and the original cost as a fat profit. To discourage this practice, the rule-makers not only prohibited the use of pooling if merger plans call for disposing of acquired assets within two years, but decided to require special disclosure if assets are in fact sold.

Costs of Goodwill. To the dismay of many acquisition-minded corporations, the accountants also tightened the conditions under which pooling may be used at all. From now on, companies may pool their assets only if the common shareholders of the smaller firm in a merger get at least a 10% holding in the merged company. Nor will merging firms be permitted to pool if the combination involves confusing packages of securities like convertible preferred stocks or warrants.

In mergers ineligible for pooling, companies will be forced to adopt "purchase accounting." The disadvantage of this system is that acquiring companies must often enter part of the cost of acquisition on their books as "goodwill" and write it off over a 40-year period. Because goodwill is not tax deductible, the writeoffs become a direct and sometimes substantial drain on profits.

Season for Scrutiny. The accountants' rulings come close to having the force of law. Any companies that fail to follow the board's changes in "generally accepted accounting principles" must explain their deviations to stock exchanges and government regulatory officials. Although the board's aim was to eliminate abuses that have been much criticized on Wall Street, some accountants are upset over the outcome. Last week Chairman Leonard Spacek of Arthur Andersen & Co. condemned the new pooling rule as "highly discriminatory and completely unacceptable." One effect of the furor is to raise questions about the whole practice of accounting. If accountants themselves disagree over proper ways to keep books, critics complain, how in the world can investors tell whether reported profits are real or illusory? In the financial community, earnings statements face a season of considerable scrutiny.

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