New accounting rules have made it more difficult for investors to decide whether a merger is good or bad, and the problem won’t be an easy one to fix.
Most deals these days look far better on paper than they used to. The rules, adopted two years ago, changed the way companies treat acquisitions by eliminating the amortization of goodwill, the difference between the purchase price of an asset and its fair value.
Under the new rules, almost every acquisition shows a positive, or accretive, effect on earnings per share before the cost of restructuring, management consulting firm McKinsey & Co. said in a recent quarterly report.
This makes an acquisition’s impact on earnings per share, the simplest and most widespread method of assessing a deal, “completely unreliable as an indicator of value created,” McKinsey said.
For this complete story, please visit New Rules Make it Harder to Evaluate Mergers.
