SAY GOODBYE TO POOLING

                            The popular merger method may soon meet its demise, but many say good riddance.

In mergers and acquisitions, one rule is simple: If you can possibly account for a business combination as a pooling of interests, you pool. Compared to the alternative
purchase method, poolings provide the party without the hangover. With pooling, there's no cash to change hands, only stock -- cheap currency in today's market --
no assets to write up, and, best of all, no goodwill to drag on earnings over the next 40 years.

Not that it's ever been easy to pool. Given that the method adds no economic value to the transaction yet skews the comparability of financial statements, poolings
have been frowned upon for years by regulators, who have continually raised the bar on the criteria for allowing the method. Of course, that has never stopped
companies --yearning for a pooling's cosmetic boost to earnings per share -- from trying. In fact, the value of poolings has increased as a percentage of all
acquisitions, from 14.1 percent in 1994 to 22.9 percent last year, a total of more than $140 billion, according to Securities Data Co. Meanwhile, pooling's share of
deal volume has risen from 7.8 percent to 9.1 percent.

But this era of goodwill-free coupling may soon come to a close, due to actions by the Securities and Exchange Commission (SEC) and the upcoming deliberations
on the issue by the Financial Accounting Standards Board (FASB). Critics say the rule regulating the pooling method -- Accounting Principles Board Opinion 16,
established back in 1970 -- is a complex mess of conditions, interpretations, and bulletins that is expensive and onerous for both companies and regulators. In
addition, the role is out of sync with accounting standards in some other countries, where poolings are rarely allowed. Finally, crusaders for financial statement viability
say pooling makes comparisons of financial statements increasingly deceptive, and creates an unlevel playing field between the few companies that can pool and the
majority that cannot.

Pooling won't go quietly, however. In its corner are companies such as Republic Industries Inc., which last year tripled revenues by making approximately $1.6 billion
worth of acquisitions, including Alamo Rent-A-Car Inc., yet booked less than $100 million of goodwill, thanks to pooling on nearly every deal. Mattel Inc.'s pending
buy out of Tyco Toys Inc. for $755 million in stock promises to do similar wonders for its financial statements if the deal qualifies for pooling treatment as expected,
with none of the purchase price accounted for as goodwill. The same goes for The Gillette Corp.'s recently approved $8.5 billion stock swap merger with Duracell
International Inc.

While none of the CFOs at these firms would comment on their pooling deals -- for fear of additional scrutiny by regulators and investors --many financial executives
are furious at the prospect of losing the method. Some even predict a significant change in their willingness to make acquisitions if such changes occur.

Yet most finance executives agree that having a double standard for M&A accounting undermines generally accepted accounting principles (GAAP) and does a
disservice to shareholders. Says Scott Sullivan, CFO of WorldCom Inc., of Jackson, Mississippi. "Having two standards ruins comparability of earnings and the
balance sheet, one of the basic principles of accounting. What a firm pays for an acquisition should be recognized on the balance sheet -- anti for many firms today it's
not. It's crazy. We need one standard, both domestically and internationally."

CLOUDS IN THE FUTURE

While the merits of pooling have been debated for almost 30 years, the latest round began when the SEC killed a major pooling deal a year ago -- the $10 billion bid
for First Interstate Ban-corp, of Los Angeles, by First Bank System Inc., of Minneapolis. The culprit? FBS's announced intent to buy back shares as part of its offer
-- a violation of 1 of the 12 conditions of a pooling laid out in APB 16.

To strengthen the FBS ruling, the SEC issued Staff Accounting Bulletin 96 in March 1996, further restricting a pooler's ability to make major stock repurchases for up
to 24 months around any pooling transaction. In response, really companies, including Cisco Systems Inc. and Gillette, canceled announced buy back plans to
preserve their ability to pool.

Then, in August, the SEC's chief accountant, Michael Sutton, spoke openly of the need to review APB 16, saying, "The time is now ripe for reconsidering ... the
circumstances, if any, in which pooling of interests accounting should be permitted." To that end, the SEC stopped allowing exceptions to the 12 conditions, denying
pooling status to several deals. Shortly thereafter, FASB placed the "business combinations project" on its agenda, with the intent of scrutinizing the use of pooling,
and the harmonization of U.S. GAAP on combinations with international standards. In short, pooling's days look numbered.

MARKET MYOPIA?

To most finance executives, the main reason to preserve pooling can be summed up in two words -- stock price. "While it shouldn't matter that much if we book
goodwill, or whether we write it off now or over time, to the markets it does," says Christopher Paisley, CFO of $2.8 billion 3Com Corp., of Santa Clara, California,
which used pooling with four out of six acquisitions in the past two years. "The fact is, EPS plays a huge role in the market's valuation of our stock. I'd be nervous that
our market cap would be adversely affected if we didn't pool."

Michael Downey, CFO of Nellcor Puritan Bennett Corp., a $744 million maker of medical equipment, in Pleasanton, California, concurs. "We've had a traditional
bias toward pooling, not only because of our view of our stock as an excellent currency, but also because we don't want to carry any more baggage on our balance
sheet than we have to," says Downey, who has also overseen five acquisitions over the past two years, the largest three of which were poolings. While many investors
certainly understand cash flow analysis and goodwill, he says, many don't want to rely on such measures for long. "You can break things down into parts, and you can
do a lot with reporting to highlight operating performance, but the market will only digest so much. In the end, they always want a simple measure -- EPS."

Because of this perceived myopia, companies regularly let the ability to pool drive corporate transactions. "It's become more frequent that combinations are
contingent on [applying] pooling," says Mark McDade, a partner in the corporate finance group at Price Waterhouse LLP. "Companies walk away from deals all the
time if they can't pool, because of the fear of dilution caused by goodwill."

According to a growing body of academic research, however, avoiding goodwill through poolings actually has no positive effect on share prices. In fact, in some
cases, the opposite is true. A recent paper by Michael Davis, associate professor of accounting at Lehigh University, for example, points out that the stocks of
companies that use purchase accounting show better aggregate performance in the short term (six months) and no difference in the longer term (one to three years)
than companies that have combined through the pooling method. In addition, the study, which was published in the Journal of Applied Corporate Finance, showed
that poolers frequently bend over backwards, often incurring extra costs, to meet the 12 pooling conditions. Even worse, poolers as a group pay much larger
premiums over current market valuations -- in one study by Davis, up to 200 percent higher -- than do purchase-method buyers, as the lack of goodwill amortization
and the rising value of their stock allows them to pay more for the marginally better reported earnings per share.

"Many management teams feel the market is not efficient, and that they can fool the market by pooling. But they can't," says Davis. "Poolers pay more for
cosmetically better performance, but the market seems to see through that."

Many think the day of short-term accounting irrelevance is already here. "I totally disagree that the market is EPS driven. From the perspective of the owner or
manager of capital, what matters is cash in, cash out, not reported earnings," says Bart Madden, a partner at Holt Value Associates LP, a portfolio management and
valuation advisory firm in Chicago. "Unfortunately, many CFOs live in a world of accounting rules, and haven't had the chance to really look at the empirical evidence
of what drives the stock market. What creates value is the skill level of management at generating more cash than they put in on an ongoing basis. EPS is totally
useless for gauging that."

MATTER OF ECONOMICS

Of course, the M&A frenzy of the past few years has been driven by companies bent on creating long-term value, not on accounting methods. Disney-ABC,
IBM-Lotus, and NationsBank-Boatmen's Bancshares were all completed despite being accounted for as purchases with huge amounts of goodwill. More recently,
long-distance service provider WorldCom acquired MFS, a local telecommunications concern, for $13.6 billion in a purchase method stock-swap last December, a
transaction that the SEC did not allow as a pooling.

"We bought MFS because of the economics -- the deal will double our cash flow growth, improve our EBIT-DA, and create huge revenue growth for us, all at a
price that will be accretive to EPS in three or four years," says WorldCom's Sullivan. "To let the accounting drive the deal would have been crazy."

As a result, Sullivan, like many CFOs whose combinations haven't qualified as poolings, would welcome a single method for all deals. But there is little agreement on
what that method should require. The trickiest point is how, or even whether, goodwill should be amortized to make the income statement more relevant. Current
domestic practice in purchases is wide ranging and arbitrary; some companies accelerate the write-off of the goodwill based on internal estimates of its lifecycle and
impairment tests, sometimes as short a period as a year or 2, while others take the maximum 40-year period as a given. Plus, many companies apply as high a value
to in-process research and development as possible, and write it down as an expense upon the combination, a practice some CPAs call "shadow pooling," which
also drew SEC scrutiny last year.

Others would like to see goodwill remain on the balance sheet indefinitely, but require occasional impairment tests to determine writedowns. But the SEC's Sutton has
"serious reservations about that approach. We had that model before APB 16, and it didn't work very well; we shouldn't go back to it." But, he says, he is open to
reconsideration of not recognizing goodwill as an asset.

As usual, FASB is approaching the project without a preconceived notion on how to proceed, says Gaylen Larson, the project's lead board member. "Unfortunately,
behavior is sometimes driven by accounting standards because accounting is the measuring stick we start with to compare corporate performance. That has been the
case with pooling and purchase accounting," he says. "Our goal is to take a neutral approach."

Many finance executives, however, are skeptical. While publicly they are unwilling to predict the outcome of the debate, most believe privately that the majority of
FASB members are determined to end pooling. Obviously such a move would eliminate the method's short-term boost to EPS, but then, if Davis and other analysts
are right, what's the harm in that?

BUBBLING-UP

POOLING SHARE OF BUSINESS COMBINATIONS
% OF DEAL VOLUME

'91                            4.0
'92                            6.5
'93                            6.5
'94                            7.8
'95                            9.3
'96[*]                         9.1

% OF DOLLAR VOLUME

'91                           14.4
'92                           16.2
'93                           23.6
'94                           14.1
'95                           20.5
'96[*]                        22.9

Source: Securities Data Co.
* Through 12/17/96

ILLUSTRATIONS

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By IAN SPRINGSTEEL

Ian Springsteel is CFO's staff writer.