PHOENIX - Depressed stock prices and the shaky economy have been the main reason for the decline in bank mergers and acquisitions in recent years, but bankers and consultants say some of the blame for the more recent drop can go to a change in accounting rules.
At a conference here this week on community bank M&A, bankers and industry watchers said that the new rules on the purchase method of accounting for acquisitions, and the 2001 banning of the pooling-of-interests method, have discouraged dealmaking.
Under the old rules, buyers could amortize goodwill quarterly. Now they have to do that whenever goodwill is found to impair earnings - they take the hits as charges to the bottom line.
One speaker said the change has had a "disastrous" effect on M&A in the industry. Others, though, say that the new rules have forced buyers to be much more disciplined - and sellers to work harder to make themselves more salable.
Harris H. Simmons is the president and chief executive officer of a $26.9 billion-asset company that had been on a buying spree in the West, Zions Bancorp of Salt Lake City. But it has eased up because of the weakened market and the new accounting rules.
"I don't see the slow period changing quickly - purchase accounting has got everybody more focused on the economics of deals," Mr. Simmons said at the conference, which was sponsored by Bank Director magazine.
Last year 215 bank and thrift merger or acquisition deals were announced - against an average of 497 a year from 1994 to 1998, according to Sheshunoff Information Services Inc. in Austin, Tex.
Jean-Luc Servat, managing director at the San Francisco office of Fox-Pitt, Kelton Inc., said the accounting-rules change has "eliminated 50%-70% of the legitimate bank deals that could have been done."
He said this is because under the new rules, certain intangible assets are considered less valuable than cash flow.
But the Financial Accounting Standards Board did not have banks in mind when it wrote the rules, he added - they were a response to the "abuses" of the technology industry that occurred when accounting for their acquisitions during the 1990s. Those companies trumped up the values of the intangible assets of the start-ups they were buying to conceal their lack of cash flow, Mr. Servat contended.
"But cash flows have never been an important element in the banking industry - the amount of capital has," he said. "Now it's going to be extremely difficult to get deals done going forward."
Others say the change is for the better.
Michael T. Mayes, a senior managing director at Advest Inc. in New York, said there were blatant excesses during the merger heyday of 1994 to 1998, when financial companies could hide an acquisition's true value by using the pooling method.
Many did those deals just to get bigger, and it turned out that many of them were not in the buyers' best interests, Mr. Mayes said.
Frank M. Conner, a partner in the Washington law firm of Alston & Bird LLP, agreed.
"The banking community had lost credibility, and now there's a restored credibility in the way people view transactions," Mr. Conner said. Now, he said, banks are managing their capital better to finance deals with more cash, and they are structuring deals more soundly - for example, more of them are immediately selling the acquired company's underperforming subsidiaries.
Charles I. Miller, managing director of Alex Sheshunoff Management Services LP in Austin, said the new accounting rules have made many banks far more disciplined in conducting due diligence. They are doing closer analysis of what the seller would add in products and services and are preparing better in provisioning for loan losses that might result from the purchase, he said.
Buyers are also demanding more from sellers, such as the disposition of excess capital, Mr. Miller said. "Acquirers are now saying to these banks, Make better use of your capital, and then we'll talk about making a deal."
