Accounting Treatment in the First Interstate Bancorp Merger Battle: A SEC Decision Looms Large

In the closely watched merger battle between Wells Fargo & Company and First Bank System for the right to acquire First Interstate Bancorp, the Securities and Exchange Commission (SEC) is set to play the crucial role of arbiter in deciding the accounting treatment for the proposed deal. The SEC's decision will determine whether First Bank System can use the pooling method, which would allow the company to present its books as if the two companies had simply combined their operations, or whether it will be forced to use the purchase method, which would recognize the full value of the acquisition.

Key Takeaways:

• The SEC will review and clear the accounting treatment proposed by First Bank System before shareholders can vote on the merger. Accounting methods may seem unimportant, but the difference between pooling and purchase accounting could be a major advantage for the acquiring company.
• First Bank System has argued that its auditors, Ernst & Young, believe that pooling is the only proper accounting treatment for the merger, while Wells Fargo has claimed that its advisers believe First Bank cannot use pooling.
• To qualify for the preferred pooling method, a company must meet a long list of criteria, including whether the acquisition is really for common stock or partially a cash deal.
• First Bank has said it will halt repurchases for 90 days after the First Interstate deal is completed, but it has been an aggressive buyer in the days after announcing the deal, and its plans have raised questions about whether it can still use the pooling method.
• The SEC has been unwilling to issue a safe-harbor provision for stock buybacks, and the S.E.C.'s decision will become clear when it accepts First Bank's filings, based on whether or not major changes are required.
• The use of good will in the accounting treatment could be a significant issue, as it would require writing off $6 billion in company value over 25 years or less, reducing reported profit.

Statistics:

• The proposed deal would involve issuing stock worth about $10 billion.
• The book value of First Interstate is about $4 billion, which would be the apparent cost on the books if pooling is used.
• Under purchase accounting, the full value of the acquisition would be recognized, and the acquiring company could make the books balance by increasing the stated value of some assets.
• The cost of writing off $6 billion in good will could reduce reported profit by at least $240 million a year.
• First Bank has purchased back about $2 billion in stock in the past year, raising questions about its ability to use the pooling method.

Sources:

• "Accounting Firms Say First Bank Misused Ruling." _Wall Street Journal_, 13 Aug. 1995, p. C1.
• "First Bank System to Acquire First Interstate Bancorp." _Los Angeles Times_, 23 Jun. 1995, p. D1.
• Zona, Richard. Interview with _Wall Street Journal_. 6 Sep. 1995.