Questions

Navigant Restates Poolings of Interests For 1999 as Purchases

The Wall Street Journal - 01/25/2000

(Copyright (c) 2000, Dow Jones & Company, Inc.)

CHICAGO -- Navigant Consulting Inc. restated financial results for the first nine months of 1999 to change the accounting treatment of four acquisitions.

Navigant, a Chicago management-consulting firm, recharacterized as purchases acquisitions originally treated as poolings of interests. Purchase accounting requires that an acquiring company record an intangible asset called "goodwill" in an amount equal to the excess of the purchase price over the book value of the acquired company. The goodwill then must be amortized over time as a noncash charge against earnings.

In restated financial statements filed with the Securities Exchange Commission yesterday, Navigant booked $203.5 million in goodwill in connection with the 1999 acquisitions. Amortization of $16.5 million of the goodwill, along with other adjustments, reduced net income for the nine month period to $26.5 million, or 61 cents per diluted share, from $43.8 million, or 98 cents per share, reported previously.

Chief Financial Officer James Hillman said the remaining goodwill would be amortized at a rate of about $8 million per quarter during a seven-year period.

Navigant was shaken last year by the disclosure that top executives bought $17 million in company stock in the weeks before Navigant announced the hiring of an investment banker to explore "strategic alternatives" including the possible sale of the company.

Auditors for Navigant questioned whether the insider transactions disqualified the acquisitions for pooling-of-interests treatment. The company said a special committee of its board of directors appointed to investigate the matter "instructed management to restate financial statements to account for these acquisitions as purchases rather than poolings."

Navigant rose 1.375 cents to $11.3125 in New York Stock Exchange 4 p.m. trading.

1. What is the difference between pooling of interest and purchase accounting methods for a business acquisition?
2. According to Ray Beier and Richard Stewart (The Pooling of Interests Regulatory Decision: Does It Influence Value?), pooling "is an accounting method that treats a merger as the combination of two businesses, rather than as one business acquiring another. Effectively, it treats the two businesses as if they had grown up together."  Keeping this in mind, explain why the FASB has the following restrictions on companies that opt for pooling:
   • Selling businesses that don't fit is severely prohibited.
   • Restructuring is curtailed, including asset dispositions, plant close-downs, and spin-offs.
   • Share buy-backs are minimized.
   • Adjustments to enhance stock-option incentive plans are proscribed.
3. Can you explain the Board of Directors' recommendation "to restate financial statements to account for these acquisitions as purchases rather than poolings?" Under which of the categories listed in the previous question, if any, would the insider transactions fall?
4. Here's what FASB Chairman Edmund L. Jenkins said on Sept. 8, 1999:

• The pooling method provides investors with less information-and less relevant information-than the purchase method.
• The pooling method ignores the values exchanged in a business combination, while the purchase method reflects them.
• It is difficult for investors to compare companies when they have used different methods of accounting for what is essentially the same transaction.
• Business combinations are acquisitions and should be accounted for as such, based on the value of what is given up in exchange, regardless of whether it is cash, other assets, debt, or equity shares.
• Because cash flows are the same no matter what accounting method is used, the boost in earnings under the pooling method reflects artificial accounting differences rather than real econ

Evaluate the validity of these points.  You may be interested to know that according to a study done by PriceWaterhouseCoopers, there is " no long-term difference—from the shareholders' point of view—whether pooling or purchase accounting is used."

5. If the PriceWaterhouseCoopers study is correct, can you explain why Navigant's stock price rose after the accounting change was announced?
6. Now read this January 14, 2000 news item (http://biz.yahoo.com/bw/000114/ny_pomeran_2.html).  Would you change your mind about your answer to questions 3. and 5?