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Undue Diligence

New accounting rules for mergers take a bite out of deal activity.
Alix Stuart, CFO Magazine
September 1, 2009

Merger-and-acquisition volume has been dragging in 2009; it was down more than 40% over last year at the end of July, according to Thomson Reuters. One reason for this moribund market: accounting rules.

Some 44% of executives polled in a recent Deloitte Webcast say they have changed their deal strategy in response to FAS 141(R), new merger accounting rules that may require ongoing fair-value testing of assets and liabilities that are acquired, and disclosures of any changes. As a result, potential acquirers are intensifying due-diligence efforts, according to Stamos Nicholas, Deloitte's national Business Valuation service line leader, and looking carefully at the accounting implications of deal structures very early in the process. "No one wants to get blindsided on a bad deal with these new rules, which require a lot more transparency," he says.

Backlash from past mergers, in the form of huge goodwill-impairment charges last year, may also be cooling enthusiasm. Public companies are already required to test goodwill, or the value of an acquisition's intangible assets, at least annually, and write-downs imply that the company overpaid. More than 400 public companies recorded such charges between August 2008 and August 2009 for past acquisitions, according to data retrieved from CapitalIQ, slicing $234 billion out of shareholders' equity and earnings per share over that time.

"If I were looking to buy a company right now, I would look at the valuations with a much more critical eye," says Paul Genova, CFO of Wireless Telecom, supplier of components to the wireless industry. His company took a $33 million write-down on goodwill and intangible assets last year related to a 2005 acquisition. "If you're going to end up writing the value down," he says, "you're basically giving away shareholder value."




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