example:
http://news.morningstar.com/doc/article/0,1,4382,00.html?hSection=fromAnalysts
---excerpt---
...
One Hand Washes the Other
I was talking to a reporter a couple of days ago about some upcoming
accounting changes that could potentially boost some companies' reported
earnings by changing the way they account for merger costs. She mentioned
that she'd seen a study that predicted a wave of increased merger and
acquisition activity as a result of this change, since companies' earnings
wouldn't be as affected by merger-related accounting charges.
It turns out that this study had been done by a major investment bank--which
makes more than a small amount of money from advising companies on mergers
and acquisitions. By itself this wouldn't be too remarkable, since
investment banks' proclivity for producing self-serving research is well
known. However, there's a little bit more to the story that makes this
pretty funny.
First, the proposed accounting changes have to do with the way companies
account for what's called "goodwill," which is the amount of the purchase
price paid by an acquiring firm above and beyond the target firm's book
value. This amount is generally charged off against earnings over a period
of time, but the charge is purely an accounting one--it doesn't mean that
the company has seen cash flow out the door. Moreover, study after study has
shown that investors tend to "look through" accounting changes like this,
and base their investment decision on the true economic--rather than
accounting--effects of mergers.
So, it seems to me that asserting that M&A activity will increase just
because of an accounting change isn't a tenable argument. In any case, you
don't have to take my word for it--take Wall Street's.
This is where things get fun. During the dot-com boom, most Wall Street
analysts were adding back goodwill and other merger-related charges when
making their earnings estimates, effectively saying that those noncash
charges weren't very important in assessing companies' performance. (Enough
analysts were doing this, in fact, that First Call starting collecting "cash
earnings" estimates for a number of Internet companies.)
So last year, Wall Street was saying that noncash merger charges don't
really matter, and basing its estimates around this idea. Now, a respected
Wall Street firm is saying that these merger charges are so darned important
that companies will be more inclined to do acquisitions once the charges
aren't so onerous. Can’t have it both ways, folks. Either investors should
pay attention to goodwill charges, or they shouldn't. Which is it?
...
Pat Dorsey is director of stock analysis for Morningstar.com. He can be
reached at [EMAIL PROTECTED]
Pat Dorsey does not own shares in any of the stocks mentioned above.
---end---
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Author: Eric D. Pierce
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