Profitable Growth by Acquisition 585B.B. Lean Inc. ($ millions)
Pooling Method
Cash $ 9 Equity $40
Land 22
Building 9
Goodwill 0
Total $40 $40Under the pooling method, there is no goodwill and the acquired assets
are put on B.B. Lean’s balance sheet at their book value.
Entire volumes have been written on the accounting treatment of acqui-
sitions and this is a very complex and dynamic issue. In fact, as this chapter is
being written, accounting-rule makers in the United States were proposing to
eliminate the pooling of interests method of accounting for acquisitions. Be-
cause of this, it is important to get timely, expert advice on these issues from
competent professionals.
Tax Issues
Taxes were discussed brief ly in the paragraph comparing cash and stock deals.
In a tax-free transaction, the acquired assets are maintained at their historical
levels and target firm shareholders don’t pay taxes until they sell the shares re-
ceived in the transaction. To qualify as a tax-free deal, there must be a valid
business purpose for the acquisition and the bidder must continue to operate
the acquired business. In a taxable transaction,the assets and liabilities ac-
quired are marked up to ref lect current market values and target firm share-
holders are liable for capital gains taxes on the shares they sell.
In most cases, selling shareholders would prefer a tax-free deal. In the
study by Weston and Johnson (1999), 65% of the transactions were nontaxable.
However, there are situations where a taxable transaction may be preferred. If
the target has few shareholders with other tax losses, their gain on the deal can
be used to offset these losses. A taxable deal might also be optimal if the tax
savings from the additional depreciation and amortization outweigh the capital
gains taxes. In this case, the savings could be split between the target and bid-
der shareholders (at the expense of the government). Again, it is important to
get current, expert advice from knowledgeable tax accountants when structur-
ing any transaction.
Antitrust Concerns
Regulators around the world routinely review M&A transactions and have the
power to disallow deals if they feel they are anti-competitive or will give the
merged firm too much market power. More likely than an outright rejection
are provisions that require the deal’s participants to modify their strategic