April 22, 2016

The Dark Side of M&A


Highlights from our comments at the NYSSA panel event, “The Dark Side of M&A” held April 14: GAAP and IFRS-based M&A accounting materially distort comparability, create misleading trend analysis, as-reported results are a far cry from economic reality

  • 70+ were in attendance at the New York Society of Securities Analysts panel, discussing the serious problems with mergers and acquisitions (M&A) reporting
  • It’s not just problems with goodwill. Under GAAP, Generally Accepted Accounting Principles, M&A accounting mixes apples and oranges throughout the financial statements, e.g. AT&T/Direct TV, Becton Dickinson/CareFusion, and Dollar Tree/Family Dollar
  • Parent company assets are held at book value while many acquired assets are restated significantly to “fair value.” This means the parent’s assets continue to depreciate from historical book values, while the acquired assets come on the books at “new,” usually lower, fair values
  • The parent continues expensing R&D as GAAP requires, while the acquired firm’s R&D is capitalized as an asset. It’s as if the GAAP rule-makers took leave of their senses
  • In the income statement and the statement of cash flows, the parent reports a full year of activity while the target only reports activity from the date of acquisition. With 70+% of acquisitions closing in the last three quarters of the parent company’s fiscal year, net income, revenue, and their components are often materially distorted
  • Even in this “low M&A environment” as much as a quarter of the S&P 500 non-financials have had an acquisition that exceeded 10% of market cap in the past two years, and one out of seven exceeded 25% of market capitalization
  • GAAP is unlikely to be repaired. The onus is on the user of the financials to repair the distortions, line by line, before being misguided by the as-reported numbers