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Item Purchase Method Pooling of Interests Method

The document discusses the differences between the pooling of interests and purchase accounting methods for mergers and acquisitions. The pooling of interests method allows assets to be valued at book value rather than market value, avoiding the creation of goodwill. This results in higher reported earnings, return on assets, and return on equity for the acquiring company under the pooling method. However, a study found that drug companies often spend less on research and development after mergers, threatening future drug development and profits. Acquisitions should fund innovation, rather than replace it, in order to create new blockbuster drugs that can offset lost revenue when older drugs lose patent protection.

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Cynthia Jayanti Sarosa Putera
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72 views

Item Purchase Method Pooling of Interests Method

The document discusses the differences between the pooling of interests and purchase accounting methods for mergers and acquisitions. The pooling of interests method allows assets to be valued at book value rather than market value, avoiding the creation of goodwill. This results in higher reported earnings, return on assets, and return on equity for the acquiring company under the pooling method. However, a study found that drug companies often spend less on research and development after mergers, threatening future drug development and profits. Acquisitions should fund innovation, rather than replace it, in order to create new blockbuster drugs that can offset lost revenue when older drugs lose patent protection.

Uploaded by

Cynthia Jayanti Sarosa Putera
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Item Book Value

PURCHASE METHOD

POOLING OF INTERESTS METHOD Typically lower than purchase method, as no goodwill asset is created. Typically higher than purchase method because income statements are combined retroactively.

Typically higher than pooling method. Typically lower than the pooling method because pre-acquisition income statements are not combined. Typically distorts growth perception of the acquiring company, as much of its sales growth can be attributed to the acquisition.

Earnings Trend

Sales Trend

Typically more accurate than the purchase method, as income statements are combined retroactively. Typically higher than the purchase method, as the income statement is combined for the entire reporting period, rather than as of the acquisition date.

Earnings Per Share ROA & ROE

Typically lower than the pooling method.

Typically lower.

Typically higher.

Pooling of interest: Under this accounting technique, the balance sheets of the two companies were simply added together. As a result, the total assets on Pfizers balance sheet after the acquisition increased by only $11 billion (the book value of Warner-Lamberts assets). One of the important differences between the two methods is that pooling of interests allows for assets to be evaluated by book value rather than market value. This allows them the option to work without adding in goodwill, an intangible value that a business earns through reputational factors like customer relationships and brand recognition.If the amount paid for a company is greater than fair market value, the difference is reflected as goodwill. Because goodwill must be written-off against future earnings, this makes the pooling-ofinterests method preferable. By avoiding goodwill write-downs, the pooling method would allow Pfizer to show higher profits in future years. In addition, return-on-asset and return-on-equity ratios would be calculated with a deflated denominator.

A study concluded that after a merger, drug companies actually spend less on research and development. Its shown by Pfizer arthritis drug trial that cancelled as part of the merger transition with wla. R&D is vital to drug companies like Pfizer. Company like Pfizer need a new, successfull drugs to offset the financial loss that occurs when the patents on their drugs expire Acqusition should fund innovation and not replace them. For example, to support Lipitor, Pfizer conducted [4] nearly 400 clinical trials covering 80,000 patients Therefore, acquisitions could help these companies in creating more blockbuster drugs, if executed well. Not spending another billion dollar on another WarnerLambert (sorry, Wyeth) does not guarantee shareholder value creation Now that Lipitor has lost its patent exclusivity, Pfizer should be worrying about the next Lipitor to offset the revenue loss. Pipeline is like phase development in its research and development.

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