The pooling-of-interest method of accounting, which has lost favor in banking industry mergers, is gaining desirability in the merchant processing market.
Observers of this rapidly consolidating segment of the credit card industry say the ability to use pooling rather than purchase accounting-an ability that not every company has-can separate the winners from the also- rans.
"Companies that can pool are at a huge advantage," said Robert Hyer, director, Smith Barney Inc. Poolings allow the acquiring company "to pay a lot more money" in the form of stock instead of cash.
Industry analysts and consultants say the majority of merchant processors would like to pool but can't. Without that capability, they lose flexibility to make acquisitions-a Wall Street imperative.
The chief benefit of pooling is not having to deal with goodwill, the premium above a target company's book value that must be amortized in a regular purchase acquisition.
"Processing companies don't have a lot of assets when they are bought," said Gregory M. Gould, vice president, Goldman Sachs & Co. "Goodwill would be high for independent sales organizations and processors."
What's more, poolings are a way to increase income and price-earnings multiples.
But analysts said poolings do not change the long-term financial picture of a company and its cash flow.
"This is a much bigger issue for regulated institutions," said Gregory M. Corkett, principal, First
Annapolis Capital, Linthicum,
Md. "It doesn't change the economics of the deal, but it changes the accounting presentation. Companies are interested in changing the picture, because the stock market prices at multiples of earnings per share."
First Data Corp. and PMT Services Inc. are among the few companies active in the merchant processing field that can do poolings. First Data used the technique in its landmark $6.7 billion buyout of First Financial Management Corp. in 1995.
First Financial "would have been more difficult as a purchase acquisition," said Mr. Gould of Goldman Sachs. First Data "would have booked a lot of goodwill, which it would have had to amortize for a long time."
PMT Services went on an acquistion tear last year. Seven of the nine deals it announced in 1996 and so far this year were accounted for as poolings of interest.
"When you are the only company performing poolings of interest, you tend to be less price-sensitive," said Richardson M. Roberts, chairman and chief executive officer of PMT Services, Nashville. "The prices we are paying are in line with what we would have paid in an asset purchase."
"It's a matter of battling for market share," added Clay Whitson, PMT's chief financial officer. "We have been employing poolings in the last year because our competitors couldn't do it. There were strategic alliances we wanted to draw."
PMT said it has acquired companies with sales staffs that can help it grow internally, another strong Wall Street desire.
Mr. Whitson said PMT's typical pooling candidates are young entrepreneurs "who want to realize the value for their company but do not want to exit the business."
Poolings were first done in the United States in the 1950s and came under scrutiny in the late 1960s after abuses surfaced at bankrupt company called Westec Corp.
Although the Financial Accounting Standards Board is again reviewing its policy on poolings, it is not expected to make changes anytime soon.
"The board is not on a definite schedule," said Deborah Harrington, a spokeswoman. The board "is looking at all of the existing options for purchase and poolings and associated intangibles like goodwill."
But some analysts think poolings will go the way of the dodo, because the accounting board and Securities Exchange Commission spend so much time answering questions about the complicated rules.
They specify, for example, that neither company in a pooling can be a subsidiary of the other or hold more 10% ownership in it. The transaction must be completed within a year of a public announcement, and it must stock-for-stock.
"Poolings will disappear," said R. Harold Schroeder, equity analyst for Keefe, Bruyette & Woods Inc. "The only question is when."
First USA Paymentech, the merchant-side subsidiary of First USA Inc., must wait for the dust to settle from its parent's merger with Banc One Corp. before it can consider pooling-of-interest mergers.
After the merger, Banc One is to own 57% of Paymentech's equity. Although Banc One has stated it plans to divest part of its equity-how much it hasn't said- Paymentech cannot do poolings until the bank's ownership is below 50%.
Paymentech's chief financial officer, David W. Truetzel, said that though poolings would be a valuable option, their lack has not put the company at a competitive disadvantage.
"We have made 20 acquisitions since the initial public offering" last year, he said.
Nova Information Systems Inc., on the other hand, is waiting for imminent pooling status. In the lingo of the field, its "clock is ticking."
E.M. Warburg Pincus & Co., the New York-based venture capital firm, had held a controlling interest in Nova until 1995, when Nova restructured ownership after a multibillion-dollar deal with First Union. Atlanta-based Nova got First Union's merchant processing business in exchange for giving the bank a 30% equity stake.
Nova will be eligible for poolings in 1998 completing the required two- year wait.
"Poolings create more flexibility in terms of the transactions we can do," said Edward Grzedzinski, Nova's chief executive officer. "The idea is that you don't want to be precluded from any transaction."
He said "some transactions would have been easier to complete" had the company been able to do poolings.
Industry leaders hope they are not precluded from poolings. But if the rules change, so will the acquisition environment.
"If poolings are outlawed," Mr. Roberts of PMT said, "it will level the playing field for everyone."
