Stock Slide Makes Pooling Better Deal

As share prices sag, bankers are changing the way they account for mergers in order to resurrect their companies' stock buyback programs.

Since Sept. 17, BB&T Corp., Colonial BancGroup, and Carolina First Corp. have announced they are changing the accounting method for their pending mergers to "purchase" from "pooling." All three also plan to buy back their stock.

By changing the accounting for their merger deals, these companies will be able to buy back stock from their shareholders and, presumably, provide a floor for their stock prices.

"You can assume a number of companies are considering doing this right now and will make announcements over the next few weeks," said Stephens Inc. banking analyst Eric Rothmann.

Colonial BancGroup of Montgomery, Ala., said Sept. 25 that it would change to purchase accounting for its deal for Texas Bank and Trust of Dallas and would buy back up to 1.3% of its stock.

Since the deal was announced Aug. 6, Colonial's share price has fallen 21.5%, to $12.375 as of midday Thursday. The Standard & Poor's bank index is also off 21.5% during the same period.

The change in accounting for the pending Texas Bank and Trust deal will be "substantially neutral" to Colonial's balance sheet, said chief financial officer W. Flake Oakley 4th.

If the company had used purchase accounting at the share prices when the deal was announced, it would have paid the same price but the premium paid over Texas Bank and Trust's net worth would have been subtracted from Colonial's reported earnings.

But the premium has fallen in tandem with Colonial's share price, and Mr. Oakley hinted that the company might approach future acquisitions with purchase accounting in mind.

Analysts consider that especially true if stock prices for acquiring banks remain at current levels.

When share prices fall, companies often seek to soften the landing by buying back their stock. By reducing the amount of stock outstanding, companies can boost their earnings per share.

But of late bank merger plans have been directly at odds with stock buyback programs. According to Sheshunoff Information Services, 70% of all bank mergers announced in 1998 have been accounted for as poolings, and the Securities and Exchange Commission prohibits companies that pool from repurchasing their shares for several months after a merger closes.

So now banks are adjusting the accounting on their mergers to buy back their shares.

For example, BB&T Corp., whose shares have fallen 17.4% since July 30, said on Sept. 17 that it would switch to purchase accounting from pooling for its merger deal with investment bank Scott & Stringfellow Financial Inc. and would repurchase 3.8 million shares, or 1.3% of its stock.

"Obviously the price you're trading at makes a difference" in making such decisions, said Scott E. Reed, chief financial officer at BB&T Corp., Winston-Salem, N.C.

He added that his company made the switch to keep its leverage ratio- equity divided by assets-at 7% to 8%.

While analysts expect more merger accounting changes to be announced, they expect most to be confined to the smaller deals.

That's because when companies use purchase accounting, the price paid over the seller's net worth must be classified as goodwill and subtracted from earnings over several years. Though bankers insist there is no difference to shareholders how a merger is accounted for, many companies try to minimize goodwill.

Deal volume for poolings is a mammoth $233 billion this year, compared with only $6.4 billion of deals being accounted for as purchases, according to Sheshunoff Information Services.

In poolings, the balance sheets of the two companies are combined-or pooled-and because the historic costs of assets are not revalued, no goodwill is involved.

Carolina First Corp., Greenville, S.C., said Monday that it too would switch to purchase accounting for its pending acquisition of First National Bank of Pickens County.

Carolina First, its stock price off 27.9% from its May peak, said it would buy back 1.4 million shares, or 7.7% of its stock.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER