Is Pooling Really Necessary?

Abstract The combining of business enterprises has probably gone on almost as long as business entities have existed. In the United States, one can distinguish three distinct merger movements since the emergence of the modern corporation. The first movement occurred around the beginning of this century, highlighted by the formation of the first billion-dollar American enterprise, the United States Steel Corporation, in 1901. Unusual economic growth and the lack of substantial antitrust restrictions permitted the creation of huge companies during this early period. The second wave of mergers came in the 1920's; however, these combinations affected the business community to a lesser degree than those earlier in the twentieth century. The third period of mergers began after World War II and has continued up to the present. This merger momentum has been sustained by the desires of management to obtain the benefits of diversification, the tax-free status of certain mergers, and the apparent economies of large-scale operation. The best method of handling business combinations would be, (1) to treat all combination transactions as purchases, except mergers between companies of like size. (2) To write off goodwill against retained earnings immediately. (3) To show revenue and expense as though the purchase were made at the beginning of the year. The preacquisition earnings of the purchased company should be deducted at the bottom of the consolidated income statement.