Merger Drain

MERGER DRAIN

Most everyone knows that consolidation-related IT savings rarely live up to the premerger hype. Once touted as a benefit of mergers, the integration of information technology systems and the elimination of duplicate ones often costs more than it saves in the short term. Add one more IT cost to the merger money pit: Lawyers say companies have failed to notice early-termination fees linked to software licenses. "Multi-billion-dollar merger deals can carry $10 million worth of software license termination fees," says Rob Kiesel, an attorney with Schulte Roth & Zabel, in New York. "And smaller deals often carry proportionate penalties."

In general, software vendors restrict transfer of assignment, so merger partners cannot shift their licenses to a new parent company to avoid triggering termination clauses. As a result, companies are left with few alternatives save to pay the fees. Due diligence isn't even enough. The payout is usually the aggregate fees of thousands of small IT contracts, making it virtually impossible to review all the nonmaterial pacts before the merger is approved. Flexible contracts are one answer, but they carry higher up-front costs. -- Marie Leone

CFO IN SHINING ARMOR

Fixing Frederick's

Want more proof that turnarounds are more challenging in this economy than they were during the last recession? Consider the task facing Craig Boucher, interim CFO at Frederick's of Hollywood. (Boucher is on loan from Irvine, Calif.-based Crossroads LLC.)

Not only is he fixing a highly leveraged balance sheet, he's also got to firm up the company's business plan and operations.

Saddled with $44 million in debt from a 1997 leveraged buyout, the lingerie retailer's fortunes declined when it experimented with a more upmarket image and committed the cardinal sin of limiting the trademark décolletage on its catalog covers. "Cleavage is the Holy Grail," says Boucher of his adopted company, which has been in Chapter 11 since July 2000.

All interim CFOs establish a relentless grip on cash, but Boucher also worries about fixing IT, upgrading shabby stores, and retooling the Web site. Among the tasks he helped to tackle was a study of Frederick's retail operation. Because some malls refuse to accept the racy retailer, "stores were opened haphazardly," says Boucher. The stores also suffered from a pattern of deferred maintenance, which was blamed for a drop in sales that took Frederick's from its onetime peak in the catalog business of $70 million in 1997 to $30 million last year. "The stores were buoying the company, yet they were being neglected," he asserts. Even worse, there was no coordination between store and catalog, as the same items were assigned separate inventory and SKU numbers. "They were buying the same stuff from different vendors."

Boucher even took a strong interest in the company's Web site, which was, he says, "big on bells and whistles, but low on functionality." Like most turnaround specialists, he has a low opinion of the failed dot-coms that litter the current landscape, but he was keen to come to this demoiselle's distress. "Frederick's is a very innovative company," says Boucher. "It introduced black lingerie from France in 1945. It sold the first bikini in the U.S. And in 1981, it brought the thong from Brazil." What dot-com can claim that kind of cultural impact? --Tim Reason

THE SEC OFFICE of the Chief Accountant seeks candidates to fill four accounting fellow positions. The two-year terms begin June 2002.

TREASURY ALERT

Plugging Another Loophole

Timing is everything, especially when it comes to taxes. So the Internal Revenue Service wants to tighten the leeway corporate treasurers enjoy when they "pick and choose" the tax treatment of contingent, nonperiodic notional principal contracts (NPCs).

Typically swaps that tie payments to movements of a specific index, NPCs fall outside IRS rules for derivatives taxation. This makes them the perfect vehicle for turning capital losses, which are amortized over a certain number of years, into ordinary losses, which are deducted in their entirety--or vice versa, depending on which saves the most taxes in any given period.

Without IRS guidance, treasurers can choose among several treatments of NPCs so as to produce a desired tax result. At least that's the case for now.

The IRS, well aware that treasurers can easily "whipsaw" the government with this flexibility, plans to codify and regulate the timing and characterization of nonperiodic payments, as well as those for other financial instruments, just as soon as it figures out how. According to the July Internal Revenue Bulletin, "The existing rules for various financial instruments are so inconsistent with each other...that it is difficult to decide which set of existing rules should be followed."

So the IRS is soliciting comments on four suggested taxation methodologies, and inviting original ideas, until late November. "The focus may be on specific products, but it really seems as though the IRS is interested in revamping the tax rules for financial products in general," says William Pomierski, a tax attorney with McDermott, Will & Emery and co-editor of the Journal of Taxation of Financial Products.

• 1
• 2
• 3
• 4
• next »