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Two years ago, Silicon Valley lawyers feared that nixing the “pooling of interest” accounting rule could doom most technology company deals. But now that the rule has been officially abolished, it’s hardly an issue. The sputtering economy, war in the Middle East and terrorist attacks at home have proved to be much bigger factors in squelching deal flow in the Valley. “There are so many different things, the pooling issue is the least of it,” said Deborah Marshall, a partner in the San Francisco office of Cooley Godward. Among tech companies, “pooling of interest” accounting was the method of choice for recording the costs associated with a merger. Two companies simply merged their balance sheets, line by line, into one. The alternative, “purchase accounting,” was more costly. It forced one company to act as a buyer and record the acquisition costs on its balance sheet. Plus, the buyer had to amortize over 20 years or more the value of so-called goodwill assets, which are things like name recognition or a company logo. That meant taking a hit against earnings every quarter for years. Tech executives opted for pooling because the bulk of what they were buying was often goodwill assets. Without pooling, lawyers feared clients would do fewer deals. “In the heyday of a lot of mergers and acquisitions going on, there were some deals that were killed, because they weren’t poolable,” Marshall said. “Buyers just weren’t willing to do them.” Now, there is a host of reasons not to do such deals. Tech stocks have fallen in value so companies can’t use shares to buy other companies. Plus, with the tech sector taking a real beating in the economy, executives are having a hard time deciding what to buy or how much it’s worth. In addition, investment bankers say the stock market is more hostile to deals, pounding the stocks of companies that announce deals much harder than in prior years. “For any [deal] you structure, there’s a good chance it’s not going to reflect reality,” Marshall said. It actually came as no surprise to Valley lawyers when the Norwalk, Conn.-based Financial Accounting Standards Board formally deep-sixed pooling in July. The quasi-public board had first put the issue on the table in 1996. Critics of the method complained that companies abused pooling to cushion their balance sheets from merger costs. And foreign companies use the purchase method; the FASB wanted to bring the United States into uniformity. Still, it was a contentious issue, and tech companies fought to keep pooling. Three years and countless hearings later, the FASB voted to abolish the method. But the board spent another two years trying to come up with an agreement on goodwill. The compromise they reached allows companies to value their goodwill assets annually and take a charge against earnings only if the value dropped. The potential upside is companies don’t have a recurring long-term drag on their earnings that the original version of purchase accounting called for. Nevertheless, not everyone’s sold on the idea. “The good news is they took away the amortization of goodwill,” said Roger Lazarus, an Ernst & Young practice leader in San Francisco. “The bad news is they replaced it.” M&A lawyers are also warning clients against adopting a false sense of security when it comes to goodwill charges. “People may get lulled a bit unless they pay attention,” said Jonathan Layne, a Gibson, Dunn & Crutcher partner in Los Angeles. “They’re not going to expect to take a hit until it hits them in the face one day.” While M&A lawyers mull the long-term effects of the change, tech companies are putting the new method to good use. The pooling method carried with it strict rules on deal structure, and with the purchase accounting method, almost anything goes. “It’s a much more flexible environment,” said Diane Holt Frankle, a partner in the Palo Alto, Calif., office of Gray Cary Ware & Freidenrich. “There are definitely some deals that could not have been put together when everyone was insisting on pooling.” “There’s a lot more negotiation now,” Frankle said. “Buyers are tailoring their deals.” All the increased negotiations because of accounting rule changes and the economy are making M&A lawyering more interesting than it has been in years, lawyers say. But that has a downside for clients. “It’s going to lead to increased deal complexity and probably more expense in terms of getting deals done,” said Cooley Godward’s Marshall. “And a higher likelihood of dispute, renegotiation and remorse.”

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