VideoThey came to see The Man Who Wants to Kill the New Economy --the man who, they fear, could wreak more havoc than a mere millennium bug. About 85 technology executives and venture capitalists assembled at a hotel along Massachusetts's fabled Route 128 to take a swat at Edmund L. Jenkins, the chairman of the Financial Accounting Standards Board. Here was their chance to voice objections to two proposed accounting-rule changes: one, to end pooling-of-interests accounting for business combinations in favor of the purchase method; the other, to slap tough restrictions on the repricing of stock options.
For the past year, conventional wisdom has held that these pet practices would eventually be history. No more pooling, which has fueled the New Economy's acquisition frenzy, allowing companies to expand rapidly without diluting earnings. No more free chances to reprice options, which has helped emerging businesses retain valuable employees when their volatile stock has been hammered.
But conventional wisdom meant nothing to the high-strung crowd that gathered outside Boston in late September. As far as they were concerned, FASB's new rules would ground the high-flying high-tech sector. Surely Jenkins could be made to see that.
There was the CFO who wondered if investors were really all that perplexed by the quirks of pooling accounting. And the venture capitalist who advanced the notion that purchase accounting, in stock deals, creates a double hit on earnings through dilution and amortization charges. And another finance executive who pleaded the case that companies must reprice underwater options to keep employees from being poached by competitors. And the fervent CEO who insisted that pooling was a necessary tool for "creating winners" in the New Economy.
But in the end, none could wring concessions from the accounting guru before them. "There was nothing I hadn't heard before," an unruffled Jenkins remarked afterwards.
Or won't hear again.
Avoiding a Blowup
In the months ahead, Jenkins's resolve will be put to the ultimate test, as FASB goes in for the kill. The accounting board is expected to finalize its new dictates on stock compensation early next year. At the same time, it will sift through comment letters, due this month, on its plans to eliminate pooling by January 2001. In a rare move that augurs the level of opposition to the business- combinations project, FASB has already called for public hearings in February, in New York and San Francisco.
"The board is cognizant that it has to win support [for its proposals], as opposed to pushing something down on us," says Ken Goldman, CFO of Excite@Home, an Internet media company based in Redwood City, California. "Holding hearings symbolizes that they understand they have to listen to their constituents." In recent months, Goldman has been doing a lot of talking, spearheading efforts in Silicon Valley to challenge FASB's plans by arranging private meetings with Jenkins and other board members. "They are still very much interested in getting input," he says optimistically.
But to what effect? So far, FASB has shown no sign of wavering on plans, as spelled out in an exposure draft issued on September 8, to chuck pooling (which inflates earnings) and keep purchase accounting (which deflates earnings with goodwill). Similarly, the board has stuck with the most crippling component of its March 31 exposure draft on stock options: companies that reprice options must record a charge against earnings.
At the Route 128 confab, Jenkins invited "constructive comments" in order to "make sure we haven't missed anything in this process." Translation: If you want to accuse FASB of sabotaging the New Economy, don't bother.
"Jenkins is a real sharp cookie who has a great deal of confidence that he's covered all the angles," says Robert Willens, an accounting expert at Lehman Brothers Inc. "He's made strategic compromises, and he's been reasonable in the sense that he gives and he takes." The effect, Willens adds, has been "to take the starch out of the opposition."
Or as Phil Ameen, comptroller of General Electric Co. and a longtime FASB watcher, puts it: "Ed has managed difficult issues to avoid a blowup."
Yet, a blowup is what many still hope to provoke. Throughout the fall, technology trade groups and loosely formed coalitions of executives, including many CFOs, have been weighing plans of attack. Some believe they can still save pooling--at least when the merging companies are nearly equal in size. Others, however, see that as a lost cause, and will go after FASB's proposed rules on purchase accounting. By picking at conceptual details around goodwill and other intangible assets, they hope to force a more favorable compromise.
And as in the nasty stock-option war of 1994, when the board caved (and in the more polite debate on derivatives, when it stood tall), FASB's critics once again are threatening to get Congress involved. A Senate banking subcommittee has considered holding hearings on FASB's recent accounting moves, but had not scheduled any as of mid-November.
"The people I represent are not in favor of going to Congress, but somebody has to look at the real-world economic impact of these changes" in accounting rules, gripes Washington, D.C., attorney Mark Gitenstein. Gitenstein is chief lobbyist for The Technology Network, an influential Silicon Valley organization backed by a veritable who's who of the high-tech elite, such as Cisco Systems Inc. CEO John Chambers and former Netscape Communications Inc. CEO Jim Barksdale. "We're not seeking a legislated solution, but we want an accommodation," warns Gitenstein.
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