Forget about regulatory approval. This time, FASB could decide a deal’s fate.
The $2.4 billion merger of AmeriSource Health Corp. and Bergen Brunswig Corp. announced on March 19 is the first to be contingent on the issuance of the Board’s new accounting standards for business combinations, a fact overlooked by most news accounts.
The wholesale drug distributors say they expect to close the merger by the end of summer, following approval by the Federal Trade Commission— which at this point is clearly not guaranteed–and, of course, shareholders of both companies.
Bergen Brunswig’s CFO Neil Dimick will become CFO of the new entity, which will have about $35 billion in annual operating revenue.
However, the two companies also insist they won’t close the deal until FASB finalizes its guidelines for the revised Exposure Draft: “Business Combinations and Intangible Assets — Accounting for Goodwill.”
“The deal was conditioned on FASB’s changes being confirmed,” says Robert Willens, Lehman Brothers’s accounting and tax analyst. “That’s the first time we’ve seen that. If FASB doesn’t take action, that deal doesn’t happen.”
Why? Because the transaction price was computed as if the new rules regarding pooling and intangible assets were already in effect.
“We’ve had our respective accounting advisors, Deloitte & Touche and Ernst & Young, review all the exposure drafts, and they’ve done evaluations of the effects of that exposure draft as if we were a combined entity,” Dimick tells CFO.com.
According to a statement released by the two companies when the deal was announced, there will be approximately $10 million in annual expenses related to purchase accounting adjustments. However, these adjustments will be more than offset by the elimination of $23 million per year of goodwill amortization for the combined company, provided FASB’s new rules go into effect.
The pro forma analysis suggests how intangibles would be allocated versus goodwill. It is an interpretation of the rules in the revised Exposure Draft on treating intangibles, Dimick says. “We went through respective balance sheets allocating certain values,” he adds. “We’ve made acquisitions [in the drug industry] in the past so we have a good feeling of how the valuation would have been.”
FASB is widely expected to finalize the Exposure Draft and end the pooling method by June 30.
Just in case it doesn’t, however, Dimick says the companies have a backup plan. “If FASB doesn’t put the new rules in place, we will have the alternative to meet to decide whether we want to wave the contingency,” he says. “That very much would be the case. It’s going to take both parties.”
FASB realizes the concerns that acquisitive companies have about the Exposure Draft thanks in large part to a fast comment period. “We have about 200 letters,” says Tim Lucas, FASB director of research and technical analysis. “We are in the process of getting those analyzed.”
Re-deliberations on the Exposure Draft begin April 11.
“Assuming the comments don’t require us to go back to square one and invent something new, we’re still operating under the assumption that we will finish up around June 30,” he adds.
And the AmeriSource-Bergen deal? “I find that a little surprising,” Lucas says. “If it’s a good economic deal, which presumably they think it is, then you would think that perhaps the financial reporting wouldn’t make it a bad deal.”