MAXIMIZING POSTACQUISITION REPORTED EARNINGS
Among technology companies, a popular way to boost earnings in the pooling-of-interests era involved write-offs of in-process research and development of acquired companies.
By getting rid of that component of the acquisition price at the outset, the acquirer could avoid a drag on future earnings through goodwill amortization. The Securities and Exchange Commission cracked down on the practice, forcing some companies to restate their earnings and limiting the practice in future years. Closing down that scheme did not exhaust corporate managers’ bag of M&A-related tricks.The conglomerate Tyco International devised an ingenious means of dressing up postacquisition performance in its 1998 acquisition of United States Surgical. Shortly before closing its deal with Tyco, the acquiree took a $190 million write-off, reducing future depreciation charges and thereby boosting future earnings. United States Surgical filed no further financial statements after taking the write-off, however. The reduction in asset values was consequently never reported to investors. After the renowned short-seller James Chanos drew journalist Floyd Norris’s attention to the issue, Tyco’s chief financial officer provided more details than the New York Times columnist had managed to back out of the Tyco’s SEC filings. Norris commented that the unreported write-off was significant for the light that it shed on Tyco’s reputation for improving the operations of companies that it acquired.8
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- Fridson M., Alvarez F.. Financial Statement Analysis. John Wiley & Sons, Inc.,2002. — 413 p, 2002
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