When Goodwill Turns Nasty

EconMatters's picture

By EconMatters

More and more in fashion lately in the financial world is companies taking huge write-downs of some flopped acquisitions. Even the big-name players with tremendous resources to scrutinize the acquisition can't escape this fate.


Microsoft had to own up last July to a $6.2-billion write-off of the acquisition of aQuantive, a digital advertising company that Microsoft bought for $6.3 billion cash in 2007.  The size of the write-down is significant even for Microsoft.  For comparison purpose, Microsoft operating  operating profit in Dec. 2012 quarter was $7.8 billion.


Nevertheless, Microsoft can at least have some consolation as just four month later, shares of tech giant HP suffered a 11% plunge partly because of a massive $8.8 billion write-off at Autonomy, a British software company it acquired in 2011 for around $10 billion, due to 'serious' accounting issues.


This is not just limited to the typically high-flying tech sector either.  Last week, Caterpillar, the manufacturer of mining and construction equipment, also said it would need to write off $580 million in 4Q, 2012 goodwill related to a 2011 acquisition in China citing possible accounting fraud.

According to Bloomberg, goodwill, basically the amount paid over the book value of the target firm in an acquisition, in the S&P 500 companies have more than doubled on a per-share basis as companies have paid an increasingly higher takeover premium over the underlying asset value (i.e. goodwill) for the past decade.



Why do you think these companies supposedly with some of the best financial minds in the world at their disposal would overpay that much for another company?  A large part of it is that M&A is still one of the quicker and easier way to generate some positive buzz juicing up company stock.  Hungry for future top-line growth (which is usually tied to executive pay) in a lack-luster world economy, corporation executives are more inclined overlook certain "ambiguity."


Furthermore, increasing foreign acquisition in new/developing markets has also increased the risk of accounting discrepancy or min-interpretation more than most people have realized.  Of course, the unprecedented synchronized QEs from world's central banks have a big hand in over-valuation in almost all asset class as well.


It typically takes at least 2-3 years for companies to realize the full synergy, or discovering the dog, of an acquisition.  Bloomberg quoted Erin Lyons, a Citigroup Inc. credit strategist, that some 44 companies listed on U.S. exchanges are potential candidates for write-downs, and that three S&P 500 companies -- Frontier Communications Corp. (FTR), Nasdaq OMX Group Inc. and L-3 Communications Holdings Inc. (LLL) -- have more goodwill than market value.


So it looks like goodwill could turn nasty pretty soon for the U.S. companies, particularly the tech sector, which historically tends to have a bigger goodwill appetite than other industries.  


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Yossarian's picture

I hear that the sanctimonious tech people succumb to greed just like everyone else when the going gets tough- Zynga made an acquisition when they knew current quarter earnings were going to suck just so they could make up some acquisition synergy #'s and guide up, keeping the stock price elevated into the lock-up expiry.  Shady. 

WSP's picture

What amazes me about any discussion of "accounting" is the presumption that there is ANY integrity in accounting whatsover.  The fact is accounting fraud is the modis operandi in Amerikan business, and is encouraged not only by the most corrupt government in the history of mankind, but also by the so-called "standards" boards like FASB, itself a corrupt organization in the back pocket of the criminal, thug, central bankers.

The fact is government and business in Amerika have completely colluded to rob the masses and enslave them.  While that may be a simplification, it really does boil down to that, and any discussion about fairness, honesty, integrity, etc., is nothing more than propaganda to reinforce those lemmings who still believe that there is any integrity left in the corrupt hybrid communist/marxist system that has become Amerika.

disabledvet's picture

"double entry book keeping" is still the most honest form of book keeping ever invented. Just ask Larry Ebbers...in order to create the fiction that they were solvent "liabilities bacame assets." hence the fault lies not with accounting but with management. As far as goodwill be used to "juice the stock price" that's total bullshjt. The reason so many are "surprised" is that valuing a company is quite hard to do and most don't do so "in house" if they are smart.

WSP's picture

I didn't say "accounting" and the methods designed were the problem---the problem is a corrupt banking and government system that encourages lying, cheating, and stealing in order to juice markets higher and make things "go up"---growth at any cost.

As always, the problem is not the system---the problem is the people that run the system-----corruption, collusion, insider trading, fraud, and the refusal to prosecute anyone with any power.

The system is broken because those at the highest levels are evil, criminal, thugs.

Winston Churchill's picture

Current cost accounting goodwill should be banned.

Has its place in cases where the assets were valued 20+ years ago.,,otherwise

caveat emptor.

WSP's picture

"Accounting" in Amerika is whatever the criminal, thug, central bankers say it is.   I laugh whenever I see financial "analysis" by the so-called experts.  Some actually believe their drivel, but the reality is accounting is nothing more than digits on paper to be manipulated at will.

The only "accounting" there is is don't cross the criminals at the top that condone the criminality.  As long as you don't piss them off, you can cook the books all you want.

What is extremely laughable is our academic community, that self applauds itself on honesty and integrity, yet, REFUSES to teach our children the truth about our criminal, corrupt economic system that is run for and by the central bankers for the benefit of the elite.  Why do our criminal educational institutions, led by such thug organizations as Harvard, Princeton,Yale, and MIT not teach even the most basics of our criminal system---because they are PART OF THE CRIME SYNDICATE.    It makes me want to throw up when people speak of our higher educational institutions with ANY credibility or integrity whatsoever---they are all bought and paid for shills.  Well, that is not entirely true----many of the left wing professors are truly ignorant of our criminal economic system even though it isn't complicated to figure out.  What does that say about the people teaching our children?   Some are intellectually dishonest, while others have no intellect---no wonder Amerika is in such disrepair.

NotApplicable's picture

Worse still, the medical system is part and parcel of the criminal syndicate, and those who refuse to believe it have fallen for a "neo-false authority syndrome," where the true authorities are themselves wholly indoctrinated in false belief systems, never bothering to challenge the lies that support them.

I'm reading the book Wheat Belly right now, and I want to get a whole box of them in hardcover, just so I can smack all these stupid-ass health-destroyers d.b.a. "doctors" in the head with a copy while telling them to quit being so damn evil and start helping people FOR ONCE in their otherwise destructive lives.



moneybots's picture

"Why do you think these companies supposedly with some of the best financial minds in the world at their disposal would overpay that much for another company"


George Bush said that the American people knew better what to do with their money, so how coold this possibly be?



NEOSERF's picture

What comes into "fashion" every 4 years or so is that all the M&A crap that never worked starts to be written off in drips.  Suddenly, all companies realize THIS is the quarter to do it and all of them start getting out the door as there is such volume, media can't focus on one and everyone gets to keep their jobs.  Expect that quarter sometime this year..probably October.

Stuck on Zero's picture

Having been in the M&A business a few years back I got to see first-hand what the results were.  When the acquisition was completed the acquired company execs took huge bonuses.  So did the acquiring company.  When it all turned sour and billions were lost the acquiror would spin the company out and the execs would take huge bonuses.  We called this process "Murders and Inquisitions."


falak pema's picture

"Murders and Inquisitions."...Well said sir! 

When the financial world of today speaks and acts the same way as the Popes/Emperors of Renaissance; murders and inquisitions spawned with a new ideology called "reasons of state"; aka a central planned nation state economy equivalent, with conquistador gold/solver to compensate for our current day perpetual  fiat printer. 

Well, we have arab oil!

And the Nation State now morphs into Oligarchy world order! 

rsnoble's picture

I thought this was going to be tax receipts saying Apple dumped $576 million of  used clothes on Goodwill's doorstep.  

tip e. canoe's picture

goodwill could turn nasty pretty soon for the U.S. companies...including those companies that call themselves governments.

good on ya for exploring goodwill, the intangible of the intangibles.

q99x2's picture

Goodwill is Enron accounting.

Boris Alatovkrap's picture

Goodwill is European Union!

williambanzai7's picture

Friendly Advice on Grammar Matters: I don't know whether your grammar is lousy, English is your second language or you are just being sloppy.

In either event, it is having a substantial negative impact on the quality of your posts.

Bear in mind that I generally detest grammar nazism. But I have a hard time understanding the syntax of many of your sentences and I don't think words like "min-interpretation" are generally known.

A little bit of editorial clean up will make a big difference IMHO.


economics9698's picture

I would think ZH has a editor but I guess not.  I hate doing grammar checks.

Boris Alatovkrap's picture

What is grammar?! Grammar is for pussy!

Jack Sheet's picture

My friend, if you are really Russky then you must have much pussy with 6 cases (everything that moves is declined and a lot of things that don't) and at least 2 verbs for every English one, especially verbs of MOTION!

NotApplicable's picture

I'd say the rash of "overpaying" for M&A is the fact that so much of it is financed by IOUs masquarading as money. Even if you aren't relying upon leveraged debt, you're competing against those who do.

So yeah, it's merely another mal-investment bubble in capex, as put forth by Mises and Rothbard.

As for goodwill, well, here's the future.


"I'ma gonna pop some tags. Only got $20 in my pocket."