Hearing on Pooling Accounting

Prepared Testimony of Mr. John Doerr
Kleiner, Perkins, Caufield & Byers

10:00 a.m., Thursday, March 2, 2000 - Dirksen 628

Good morning Chairman Gramm and members of the Committee. Thank you for the opportunity to testify today. I am John Doerr, a partner with the venture capital firm Kleiner Perkins Caufield & Byers (KPCB). I serve on the Board of Directors of 15 companies, including Amazon.com, Sun Microsystems, Excite@Home, Healtheon/WebMD, Intuit, Martha Stewart Living Omnimedia, Freemarkets and Handspring.

My partners and I are proud of the role that Kleiner Perkins companies have played in fostering innovation and fueling the unprecedented economic growth that our economy is currently experiencing. KPCB has helped to create 149 publicly traded companies, with another 80 on their way to similar success. We have raised over $1.5 billion in capital and have invested in companies whose total market value exceeds $650 billion, creating over 200,000 jobs and generating close to $100 billion in revenues.

These success stories include Sun Microsystems, Amazon.com and America Online. For every venture-backed company that goes public and thrives, however, there are many that fail. There also exists an important middle ground: a venture-backed company that may not be a good candidate for an initial public offering or one that is already public may be a strong candidate for a business combination. Netscape and Cerent are good examples of companies which are fundamentally better able to compete as part of another entity where 1 + 1 = 3.

Business combinations have been an important vehicle to accelerate the success of KPCB=s portfolio companies. The aggregate value of Kleiner Perkins-backed companies that have engaged in business combinations exceeds $80 billion in today's dollars. Roughly 60 percent of these transactions used the pooling method of accounting.

KPCB's experience with business combinations mirrors the venture capital industry experience as a whole. According to new statistics released by the National Venture Capital Association and Venture Economics, 271 venture-backed companies went public, raising $23.6 billion in 1999. While venture-backed IPOs reached record levels in 1999, venture-backed business combinations soared even further, raising over $36 billion. Business combinations clearly play a critical and increasingly significant role as a possible exit strategy for venture investments. And, if the IPO market begins to lag, the ability to strategically merge becomes that much more important..Withoutimportant. Without pooling, many of these mergers could not have taken place due to the negative effects of goodwill amortization on earnings. The elimination of pooling will constrain companies from engaging in business combinations that make sense.

At the heart of the pooling debate is the recognition and treatment of intangible assets which are fundamental to high-growth companies. The New Economy is based on the microchip, the PC, the Internet and genomics. Its new economics are dramatically different from old economics. It is fundamentally based on intangible assets, such as worker talent and innovation, instead of physical assets. The New Economy is driven by network effects, Joy=s Law, and Moore=s Law. How we identify and value intangibles in this new environment is an important issue; and we should have a better understanding of how to address that issue before eliminating elements of a system that works.

The technology industries are fueling the U.S. economy's unprecedented economic growth. The efficiency of our capital markets, technological innovation and the entrepreneurial drive of our workforce are the envy of the world. I would like to pause to ask a question B how far into this new economy and Internet revolution are we? 10%? 20%? 30%? I am quite certain that if I polled my colleagues in industry, finance, and research, they would say no more than 10%. Are we willing to risk hindering this explosion in innovation by eliminating opportunities for companies to combine their efforts to make an even larger impact? Ira Magaziner=s report on the Internet Economy asked us to adhere to the Hippocratic oath B do no harm. It is imperative that we do not create barriers which will constrain the remaining 90% of innovation that lies ahead.

I will concede that we in the technology industries should have turned our attention to this issue sooner. The importance of these issues was raised several years ago by then-SEC Commissioner Steve Wallman. Other forward-thinkers have more recently focused attention on these issues. Although the technology industries should have engaged in this debate earlier, it should not be too late to get it right.

I suggest a 24-month moratorium on the issuance of new rules for business combinations to ensure that we do get this right. During this transition period, I believe the FASB should consider implementing an alternative that improves purchase accounting with the goal of ultimately developing better rules for all business combinations. Alternatives to the FASB's proposal were suggested at the recent hearings in San Francisco and New York. I hope that the FASB will seriously consider these alternatives while working with the business community and others to develop a sound and reasonable approach to the treatment of intangibles. The approach should reflect the dynamics of the New Economy and should be implemented before decisions are made about the fate of pooling.

As many of you know, Securities and Exchange Commission Chairman Arthur Levitt has asked Jeffrey Garten, Dean of the Yale School of Management, to assemble a team of leaders from the business community, academia and the accounting profession to consider how our current business reporting framework can more effectively capture the historic changes that are taking place in our economy. I am pleased to be a member of the Garten Commission and I am committed to working with the FASB to address the intangibles issue. Efforts such as this will deliver both transitional and permanent solutions that enable a well thought out, prepared evolution to improved accounting methods and systems.

The people that FASB is concerned about are our investors and other capital providers. We should ensure that they have the best information possible about knowledge-based companies. There is a need to determine whether and how to identify and value intangible assets like technological know-how and employee talent. It is imperative, however, that this information be consistent and reliable -- not arbitrary or left to interpretation.

Technology companies concede that there are issues associated with the treatment of intangibles. Today=s purchase accounting method, however, is not the answer. It does not solve the intangible asset issues, adequately represent corporate performance, or reflect the value of a successful business combination.

I am not here to ask Congress to make accounting rules or to ask FASB to make economic policy. Only that we work together to undertake a thoughtful, fundamental review of the treatment of intangible assets that does not derail innovation and economic growth.

Under Chairman Jenkins' leadership, the Board has raised some important issues that require attention. I believe there is a process in place that can address these complex issues -- through the Garten Commission's review of the financial reporting model. In the near term, these efforts will allow a well thought out model to be developed that will improve the current system.

We have a lot of work to do together and we in the technology community look forward to participating in that dialogue. Only then can we make sound decisions about the future of pooling and the appropriate treatment of intangible assets without threatening our economy's tremendous growth and the value of financial statements to investors.

Thank you for the opportunity to testify today. I welcome your questions.

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