Wednesday, February 4, 2009

Got Goodwill? Part 10: Time Warner in the Impairment Hall of Fame

Boom times generate cash. Cash generates mergers and acquisitions. Mergers and acquisitions generate goodwill.

Recent market crashes have caused companies and their auditors to look closely at the value of goodwill and intangibles.

Recent additions to the “Impairment Hall of Fame” (see earlier posts for previous additions):

Sprint Nextel $29 billion (in 2007)
Time Warner $25 billion
Regions Financial $6 billion
Alcatel $5 billion (Euro $3.91 billion)
BHP $3.36 billion
Supervalu $3.3 billion
Motorola $3.5 billion (including tax valuation charges)
Bank of America $2.3 billion
Sovereign Bancorp $1.6 billion
Marathon Oil $1.4 billion
United Rentals $1.1 billion
OfficeMax $1 billion
Sandisk $1 billion
Dow $978 million (restructuring, goodwill impairment and other matters)
Capital One $811 million
Colonial Bancorp $575 million
Citigroup $563 million
UPS $548 million
Nalco $544 million
GMAC $455 million
International Paper $438 million (possibly an additional $1.3 Billion)
Yahoo!$488 million
Synovus $463 million
Micron $463 million
Mylan $385 million
Cytec Industries $358 million
Zions Bancorp $350 million
Quantum $350 million
Chemtura $320 million
Applied Micro Circuits $264 million
The South Financial $237 million
Fairchild $203 million
Western Digital $200 million
Webster Financial $189 million
Comsys (up to) $175 million
Piper Jaffray $140 million
First State Bancorporation $127 million
Colonial Properties $116 million
Sara Lee $100 million
Central Pacific Financial $94 million
H.B. Fuller $86 million
Convergys $61 million
Diebold $46 million

Goodwill is an intangible asset that represents value in a combined post-merger company due to factors other than customers, brands, trade marks, technology and other intangible assets that accounting rules require companies to recognize. According to the Economist, goodwill and other intangibles recoded by S&P 500 companies totals $2.6 trillion, or 10% of their total assets.

Most investors consider goodwill impairment to be old news at the time it is announced. Share values are often not impacted by announcements of goodwill impairment. This is generally thought to be because either: a) markets have already priced impairment into share prices, or b) since share prices are ultimately a factor of the discounted value of future cash flows from operations, that impairments do not affect cash flows and accordingly do not impact share prices. Analysts ignore impairments and other unusual earnings line items when normalizing historical numbers to forecast future earnings. An exception to this is when investors are surprised by the impairment news—if the markets had no reason to believe that a company was underperforming and the bad news was not anticipated.

Time Warner’s market capitalization was about 60-70% of its book value—a sure sign of goodwill impairment. Its market capitalization was less than its total goodwill of over $40 billion—the goodwill on the financials was worth more than Time Warner as a whole.

Is this an acknowledgement by Time Warner that it previously overpaid for acquisitions?. Perhaps based on today’s depressed market they overpaid, but they didn’t buy in this market and might no have paid the same if they bought today. But acquisitions are always supported by due diligence and forward-looking valuations. Goodwill impairment calculations are backward-looking and hindsight is always 20/20.

Around 200 U.S. of the largest companies have market cap less than their goodwill and intangibles according to Bloomberg., which states that combined, these companies had goodwill and intangibles of over $808 billion. And about $400 billion of this is goodwill.

Watch for more impairments.


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