The arcane and complex world of merger accounting has taken on more importance than ever for banks considering deals.
When it bought First Interstate Bancorp, Wells Fargo & Co. used a style of accounting previously spurned by most banks. Apparently the tactic worked, and now observers are wondering how other banks will handle the accounting for mergers.
Also, the Securities and Exchange Commission has thrown a monkey wrench in most banks' plans by seriously restricting their ability to buy back stock before and after mergers.
"The SEC has hampered the merger plans of many banks," said Thomas Brown of Donaldson, Lufkin & Jenrette. Without the ability to buy back stock, he said, many banks are gun-shy about mergers.
Normally, banks use pooling accounting, in which the two companies' balance sheets are merged, and the accounting treats the new entity as if there never were two companies.
In this way, the price of the merger is not deducted from the balance sheet.
The SEC recently said companies must wait six months after a pooling to buy back stock. Many banks that acquired companies in 1995 have cleared that threshold, but are holding back on further share repurchases out of fear that the SEC may clamp down even further, observers say.
"One or two of them have gotten cold feet," said Robert Albertson, a bank analyst with Goldman, Sachs & Co.
First Bank System Inc. had planned a massive buyback following its purchase of First Interstate Bancorp, but the SEC denied that treatment, helping push First Bank out of that deal.
And banks like Chase Manhattan Corp. and National City Corp. have suspended or eliminated share repurchases following recent mergers.
"Those banks that are watching earnings per share dilution will be most affected," Mr. Brown said. These include Banc One Corp. and Norwest Corp.
But in a purchase transaction, as used by Wells, the acquiring company amortizes goodwill - the part of the purchase price in excess of book value. This reduces reported earnings per share, but Wells has argued with some success that the real figure to watch is cash earnings.
Another benefit of a purchase is that there are no restriction on buybacks.
Mr. Brown and others are predicting a new wave of purchase transactions as banks emulate Wells' strategy.
But some are not so sure. "That theory is overblown," said one accountant, who requested anonymity. "In theory, the market should be able to treat a purchase or pooling the same way, but the market looks at reported earnings."
He added that the SEC has asked the Financial Accounting Standards Board to review its 1972 definition of poolings, and to draft something more workable.