Despite repeated studies showing that most takeovers destroy shareholder wealth, doing acquisitions remains a bedrock strategy for corporate growth. In the past five years there have been 4,911 mergers of $100 million or more, with a total value of $4.66 trillion, according to Dealogic.
Investors may not be able to prevent wrongheaded combinations, but at least they will soon be getting help in figuring out whether a company is using a takeover to mask slow growth.
The Financial Accounting Standards Board is expected to propose by year-end that companies disclose revenues and profits directly attributable to an acquisition for the 12 months following the completion of the deal. That would allow shareholders to better assess how much of a company's results actually come from deals as opposed to "organic," or self-generated, growth.
The FASB proposal, which observers expect to pass despite opposition from companies, would also strike a blow against opaque merger accounting and skimpy financial disclosure. Corporations have long been able to employ aggressive bookkeeping techniques, such as establishing "restructuring reserves" for merger-related expenses (which can be tapped later to cushion profit shortfalls) while taking merger-related write-offs that temporarily depress earnings and thus make future growth look that much faster. Hyperacquisitive conglomerate Tyco International was accused of using such tactics before its near collapse last year.
"We met with analysts and users of financial statements and asked them what disclosures they would like to see," says Stefanie Tamulis, an assistant project manager at FASB. "The No. 1 request was a breakdown of the revenue and net income from acquired companies versus organic growth."
Accounting experts expect the new disclosures to lead to lower equity valuations for many highly acquisitive companies, particularly if they're not generating much internal growth. The hit on stock prices could be especially pronounced for large-cap businesses in the financial services, industrial and telecommunications sectors (see table).
"People feel like they've been burned," says Lehman Brothers accounting analyst Robert Willens. "Acquired growth got a bad name in the accounting and corporate mishaps we've seen over the past few years. Investors feel that the revenue and profit numbers attributable to an acquisition are somewhat suspect and ought to be valued at lower multiples than organic growth."
One hitch in FASB's proposal is that companies may not be able to determine the precise financial contribution of a business they've absorbed. After all, the idea of most mergers is to integrate two companies into one.
In the past corporations have used this argument to thwart similar disclosure proposals. FASB is leaning toward making an exception for fully integrated operations. But a company would have to explain in detail to shareholders why it cannot disclose any specifics.
The exception, however, may carry its own penalty. Notes Lehman's Willens, "It's possible that if you say to the market, 'We're unable to determine what the contributions are,' investors will get nervous and sell the stock."
|These companies -- the most active acquirers since January 2000 among public corporations -- stand to be affected disproportionately by a proposed accounting standard that would force them to report separately the earnings of newly acquired companies.|
|Acquirer*||Total deal value ($ millions)**||No. ofdeals|
|General Electric Co.||29,098||108|
|Wells Real Estate Investment Trust||1,765||32|
|Wells Fargo & Co.||8,599||24|
|L-3 Communications Holdings||2,502||24|
|J.P. Morgan Chase||34,831||17|
|Bank of New York Co.||2,530||16|
|General Dynamics Corp.||5,006||14|
|*Only companies that have completed more than $1 billion in acquisitions are listed.|
|**Excludes spin-offs and partial-stake purchases.|
|General Electric already discloses separately the contributions to revenue and earnings of recent acquisitions.|