AOL investor Fred Grant was surprised and disappointed by the January 10, 2000 announcement of the AOL Time Warner merger. He had been fortunate enough to buy AOL at $40 in October 1999, just prior to the stock's rapid rise to $95 in mid-December. Although just days prior to the merger announcement the stock had settled to $73, by February 2, 2000, it had suffered another decline--to $57 per share. Although many observers spoke in glowing terms of the enormous synergies between Time Warner's premier content, advertising, and cable distribution channels and AOL's Internet brand, marketing savvy, and subscriber base, analysts predicted that growth for the merged company would be in the 15%-20% range, one-half of what Grant expected for his AOL holdings. Analysts also warned of the management and execution risks associated with the enormous and unprecedented combination of Internet and traditional media businesses. Finally, Grant was concerned about the implications of AOL Time Warner's use of the purchase rather than pooling method to account for the deal. Why wouldn't the company use pooling accounting, as had other companies for large stock deals such as NationsBank-BankAmerica and Travelers-Citicorp? Would goodwill's dampening effect on earnings hurt the market valuation of the new company? As Grant watched his AOL stock slide in the days following the merger announcement, he wondered whether he should sell his shares or, as some analysts suggested, use these new lows as a buying opportunity.
In August 1998, Kerry King, president and CEO of Ultratech Corp., looked with great interest at the changes that were occurring in the technology industry. Ultratech Corp. had an opportunity to enter into a strategic merger transaction that would make the combined company the undisputed leader in its market segment. The transaction, a multi-billion dollar deal, made a lot of sense to Kerry, his board of directors, and Ultratech's outside financial advisors, with one caveat. As a result of a technical accounting issue, pooling accounting was not available for the merger. Under purchase accounting, Kerry was advised that significant amounts of goodwill would be created and amortized over future fiscal years, effectively "destroying" the combined company's reported earnings. The challenge confronting Kerry was whether to consummate the merger and risk the earnings "damage" or to let an otherwise perfect opportunity pass. Kerry's decision could profoundly impact the future of his company and the fiber optic telecommunications industry as a whole.
Dennis R. Beresford, Chairman of the FASB, reflects on the AT&T and NCR merger and AT&T's desire to qualify the transaction for pooling of interest treatment, an accounting method allowing companies to record assets acquired in business combinations at historical cost rather than at fair value required by purchase accounting.
Costs relating to companies' impact on the environment are increasing at a dramatic rate. Thus, managing, measuring, and reporting of these costs has become an important issue for managers. Accounting for environmental responsibilities is one of the largest and most challenging issues facing accountants today. This case provides an example of how one company is reacting to the increased pressures for environmental responsibility and how environmental responsibilities affect management accounting, financial reporting, and management control.
First National Bank Corp., a major regional bank in the Northeast, must decide how large a provision for credit losses to accrue in its 1990 financial statements. The recession in New England has caused serious problems in its loan portfolio.