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Will SEC's Hunt for Excessive Takeover Charges Snare Compaq?



$9 billion takeover of

Digital Equipment

was the largest ever in the computer industry, but some skeptics have wondered whether the deal would've been done if Compaq hadn't been able to write off $3.2 billion of so-called "in-process" technology.

Hard to say, but what's clear is that the


has put charges for anything "in-process" on the front burner. In-process technology or research and development refers to projects not yet completed when a takeover occurs. Several smaller deals, including those by



, for its purchase of


, and



, for its acquisition of an

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unit, have come under scrutiny as the SEC takes a closer look at accounting rules.

But the most visible case, so far, involved

America Online


, which agreed to reduce the size of an R&D charge it had planned to write off related to its acquisitions of


. Originally AOL had hoped to write off a large chunk of the $287 million purchase price. After talks with the SEC, that charge was subsequently reduced to around $60 million, according to a statement by AOL on Monday.

A day later,



disclosed in an SEC filing that it would cut its expected write-off for in-process R&D by more than half to $3 billion on its $40 billion acquisition of


. It cited "new guidance" from the SEC, specifically referring to a letter written by SEC Chief Accountant Lynn Turner to the

American Institute of CPAs

. In that letter, Turner laid out eight "practice issues and questions" that the SEC believes the AICPA should consider as it develops guidance related to in-process R&D. "Of paramount importance," Turner wrote, "is the responsibility of the company and its independent accountant to evaluate the reasonableness of the results of whatever methodology is applied."

Which brings us to Compaq.

Frankly, it's difficult to tell from its SEC disclosures whether the Digital write-off conflicts with any of the SEC's concerns. A spokesman says the company hired an outside appraiser "to come in and assign value to the assets and establish the amounts of what the write-off would be for in-process R&D. Our auditor,

Price Waterhouse

, reviewed it as well. And we worked closely with the SEC, which reviewed


issue for a month. We did as good a job as we could to make sure it was accurate."

And it very well may be, just as the prior review by the SEC may have been enough. But the Digital deal was completed in June; Turner's letter, detailing the SEC's new war on excessive charges, wasn't written until Sept. 9. The SEC's staff, as a rule, doesn't re-review financial statements, though it depends on the thoroughness of the earlier review and just what was reviewed.

Don't ya think Worldcom, with a $40 billion deal at stake, thought it had been pre-blessed by the SEC as well? Perhaps it didn't want to risk getting caught by the SEC's division of corporation finance, which randomly selects companies for review during the year. "If the financial statements we review show amounts assigned to purchased R&D that appear implausible, we will challenge that accounting," says Robert Bayless, chief accountant of the division of corporation finance at the SEC.

If the net ever falls on Compaq, it won't be able to say it wasn't warned.

Herb Greenberg writes daily for

. In keeping with the editorial policy of


, he does not own or short individual stocks. He also does not invest in hedge funds or any other private investment partnership. He welcomes your feedback at Greenberg also writes the monthly "Against the Grain" column for