The companies want their independent accountants and SEC regulators to approve the use of this accounting treatment in the deal.
"It was important to us that GeoCities would be poolable," said Diane Hunt, a Yahoo spokeswoman. "It was one of the important criteria [in doing the deal]."
But she noted the company does not expect there to be major issues in receiving approval to use the accounting method. Hunt said it is not known how long it will take regulators to review the issue, but the company expects the deal to close in the second quarter.
Under the pooling of interest method, Yahoo can use its stock to purchase GeoCities, recording the community site's assets at book value, rather than at the purchase price. This enables Yahoo to show a higher return on assets.
If Yahoo has to use a purchase accounting method, not only would the size of its assets swell and its return on assets shrink, but a sizable portion of the assets would be accounted for under "goodwill" as well. That goodwill would be written off against earnings.
Meanwhile, the SEC has been paying close attention to the issue lately and has in some cases disallowed its use. The Financial Accounting Standards Advisory Board, which sets accounting guidelines, would like to see the practice eliminated altogether.
Yahoo, according to its regulatory filing, is concerned with the increasing consolidation in the portal space and the areas where its competitors may gain an edge from these deals, according to its regulatory filing.
For example, the filing states: "The combination of Lycos with USA Networks and Ticketmaster Online-CitySearch will permit Lycos to access significant television resources for marketing and other purposes. In addition, Infoseek and the Walt Disney Company recently entered into an agreement whereby Disney gains a significant interest in Infoseek. The parties have introduced a portal and navigation service entitled Go.com, which is supported by Disney's substantial promotional and media resources."
Meanwhile, Yahoo notes that several large media companies, including both Time Warner and CBS, have announced they are contemplating Internet navigation services and are attempting to become "gateway" sites for Web users.
It was these concerns in part that drove Yahoo to do its deal with GeoCities.
The two companies met in mid-December to discuss ways they could work together in 1999, according to GeoCities' regulatory filing.
After more meetings, Yahoo executives contacted GeoCities executives on January 21 to inform them they had a preliminary interest in a possible acquisition of GeoCities.
No specific terms were proposed, but Yahoo said it wanted to sign a definitive agreement and announce the transaction simultaneously with GeoCities' fourth-quarter earnings release on January 28. The companies made the announcement that day.