Money Store is one of the oldest, largest, and most famous of nonbank lenders. So why did First Union Corp. value the company at zero on its books?
First Union disclosed this week that it would make a $2.2 billion "accounting adjustment" in connection with the purchase. First Union paid about $2.1 billion for the lender in a deal that closed June 30.
The controversial maneuver allows First Union to spread the entire cost of the deal over 25 years. Without the 100% writedown, First Union would have to recognize the bulk of the cost much quicker, depressing earnings.
Some analysts are blasting the move as misleading accounting aimed at easing the sting of a high price tag.
"It's just ridiculous," said Steven Eisman, analyst with CIBC Oppenheimer, New York. "They bought a company for billions, then wrote off the whole thing using an accounting gimmick to boost their earnings."
First Union staunchly defends the accounting. It says the real value of the Money Store is in its brand name and the opportunities the unit presents for cross-selling-intangible assets that do not belong on a balance sheet. The value, First Union officials say, won't be realized until the future, when the cross-selling kicks in.
A bank usually puts the equity of a purchase on its books immediately after a deal closes, and any premium above equity is paid over time.
First Union's complete writedown, though highly unusual, is fully allowed under the Financial Accounting Standards Board's current rules, analysts say.
Banks making acquisitions will use "whatever accounting principles affect earnings most positively," said Gerard Cassidy of Tucker Anthony, who refers to such actions as "managing the numbers."
"I view it as more favorable," Mr. Cassidy said. "You are being more conservative. However you can raise the question, 'Boy, you did pay a big premium to get into the business.'"
Some say it's high time financial regulators step in.
"The Securities and Exchange Commission and the accounting firms should be watching this," said Tom Facciola, analyst with Lehman Brothers, who dismissed First Union's move as "nonsense."
A spokeswoman for the Financial Accounting Standards Board said that writing off the entire purchase price of a transaction was "unusual" but could not comment specifically on First Union's activities.
FASB has been reviewing what type of accounting should be used for a business combination since August 1996, the spokeswoman said, but the review is still in the "very preliminary stages."
An SEC spokesman could not be reached for comment.
When First Union announced its deal in April, Money Store had a book value of about $650 million. First Union made more than a dozen adjustments when closing the deal-including decreasing the value of securitized loan pools and ridding Money Store of high-cost debt-to reach the $2.2 billion figure, said Robert Atwood, First Union's chief financial officer.
"We got a good deal," he said. "This is actually worth a lot more to us than we paid for it."
The purchase will add at least 4 cents a share to First Union's 1998 earnings, and 8 cents a share to its 1999 earnings, the bank said.
Investors aren't flinching. First Union closed Thursday at a 52-week high of $65.6875.
First Union's actions are "outrageous," said Richard X. Bove, an analyst with Raymond James. However, he lamented, bank investors won't care. First Union, he said, is making a "conscious decision to ignore book value and focus on earnings."
"Logically it makes no sense, but anyone that pays attention to fundamentals in this market is going to get their head handed to them," Mr. Bove said. "I think it's amazing that banks get away with this, but they do."