PepsiCo, Inc. is going to great lengths to satisfy its latest case of the munchies.
The snack food and soft drink maker said late Monday that it agreed to sell 13.2 million shares of its stock to ensure that its pending merger with The Quaker Oats Co. will qualify for the “pooling of interests” method for merger accounting.
Its offering, which is being underwritten by Merrill Lynch & Co., specifically satisfies the requirement that merging companies for a period before and after the transaction do not repurchase stock in excess of 10 percent of the number of shares that are being issued in the pooling.
But it is PepsiCo’s timing more than the stock sale that has intrigued some experts. After all, “No one wants to have to issue 13.2 million shares into this (volatile stock) market,” says Bob Willens, Lehman Brothers’ tax and accounting analyst.
With FASB’s elimination of pooling expected by June 30, why would PepsiCo go to such trouble? After all, the new rules for goodwill accounting under the purchase method are intended to have all the benefits of pooling, including asset divestiture and share buybacks, without the earnings dilution.
Is Pepsi signaling that pooling still better?
“I’m seeing people really straining to qualify for pooling treatment,” Willens tells CFO.com. “It doesn’t seem to be a fair trade off or an even trade off and people are scrambling to get the last bits of the pooling apple.”
Why? Companies are still not sure which intangibles would have to be amortized in a purchase transaction. “It’s not so clear that if you did a purchase that a substantial portion might be allocated to goodwill,” Willens says. “A very large amount would be allocated to other intangibles that still may have to be amortized.”
He suspects that PepsiCo faced this uncertainty with Quaker’s intangible assets. The Gatorade brand and trademarks are likely not considered to have a determinable life and therefore do not need amortization, Willens says. But other Quaker assets, including customer lists and supplier relationships, may need to be separated from goodwill and amortized.
(CFO.com covered this very issue last month in an article entitled “FASB’s Goodwill Proposal Confounds Experts.”)
Other pooling issues surfaced in the recent Johnson & Johnson and Alza deal announcement. M&A activity among pharmaceutical companies is expected to be hurt under FASB’s new rules because patents will need to be amortized under the purchase method.
If American International Group Inc. buys insurer American General, Willens suspects the pooling method will be used here as well. Why? Life insurance companies would have to amortize existing life insurance policies under the new purchase accounting rules.
In order to get pooling treatment, a company must initiate pooling by announcing the major terms of the deal, such as the exchange ratio, on or before June 30.
Senior financial executives at PepsiCo declined to give reasons for the pooling push. “We weighed all of our options and arrived at our decision that pooling made the most sense for us,” says a PepsiCo spokesman, without further comment.
Still, Willens says the PepsiCo offering, which is expected to close on April 16, sends a message of its own. “That’s a pretty strong testimony to the uncertainties here and how I think the new purchase accounting is not a substitute for pooling,” he says. “They are putting their money where their mouth is.”