PROPOSED FINANCIAL RULES COULD SPUR ACQUISITIONS

DAVID GHITELMAN

WASHINGTON -- The pace of supermarket mergers could be affected by proposed changes in merger and acquisition accounting rules by the Financial Accounting Standards Board.

The proposal could help accelerate the pace of takeovers in the supermarket industry in the short-term, as companies race to close deals before the possible changes take effect in 2001.

The proposal would, among other things, eliminate the pooling of interests method of accounting for business combinations, said the FASB.

Under pooling accounting, merging companies simply add their assets together. There is no assessment of what the replacement (or book) value of the assets are.

Perhaps even more important, the pre-acquisition history of the acquiring company will be reported as the history of the two combined firms.

This makes it difficult for investors to determine the pre-merger and post-merger performance of the acquiring company.

"It makes for a more complex analysis," said David Collins, director, KPMG retail ventures, Washington. Also, with pooling, neither party needs to be identified as acquirer or acquired.

The FASB is seeking comments on its proposed rule change through Dec. 7. The board also said it plans to hold hearings on the subject early next year in New York and San Francisco.

A private organization, the FASB develops standards of financial reporting and accounting recognized as authoritative by both the Securities and Exchange Commission and the American Institute of Certified Public Accountants.

The FASB proposes to replace pooling with purchase method accounting, which is more widely used in Europe, although both pooling and purchase methods are employed by U.S. companies.

Under the purchase method, one party must be identified as the acquirer. An assessment must be made, usually by an accountant hired by the acquiring company, of the replacement value of all the acquired company's assets.

The difference between the purchase price and the value of these assets is classified as goodwill.

Goodwill usually includes such factors as the recognition value of a company's name, its customer-base and so on.

Acquiring companies are permitted a set period of time in which they may amortize goodwill.

The FASB has proposed the period should be no more than 20 years, as opposed to the 40 years currently allowed. Economists say that amortizing goodwill over a relatively short time, such as 20 years, tends to depress corporate profits.

The acquisition of Fred Meyer, Inc., Portland, Ore., by the Kroger Co., Cincinnati, would have been a much harder sell to Kroger shareholders if pooling accounting wasn't allowed, Collins told SN. "Kroger would have had $5 billion in goodwill to write off," he said.

"The loss of pooling will cause companies to think twice about acquisition or to lower the price they are willing to pay," Collins added. "Companies will have to recognize goodwill and write it off and this will impact earnings per share."

Collins said that when investors "see the earnings per share is depressed, they assume the stock price in the future will be lower."

However, Collins also said he expects "the effect [of a ban on pooling] will not be hugely dramatic" in the supermarket industry. "There are not that many transactions," he added, "and there are not that many attractive takeover opportunities left." The few that remain could be acquired between now and whenever the pooling ban goes into effect. "The fact that pooling is expected to change in 2001 could cause a bit more activity than you would ordinarily see," he said.