Analysts expect more companies to write off goodwill as interest rates rise:
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Overpriced Acquisitions Under Scrutiny
Sun Feb 27,10:08 AM ET Business - Reuters
By Arindam Nag
NEW YORK (Reuters) - It's confession time for U.S. companies that overpaid for past acquisitions.
It amounts to admitting they shelled out too much for assets that no longer deliver as much growth as they once did and booked billions of dollars in writedowns for assets ranging from radio stations to drugs.
And accounting experts say to expect more.
Entertainment company Viacom Inc. (NYSE:VIAB - news) bit the bullet this week, with an $18 billion "goodwill impairment" charge pushing it into an almost matching quarterly loss.
Pharmaceuticals company Alpharma Inc. (NYSE:ALO - news) also warned this week it will take a "goodwill impairment" charge after finding the book value for its generic drug business was higher than it should be.
Clear Channel Communications Inc. (NYSE:CCU - news), the largest U.S. radio chain, on Friday reported a quarterly net loss after a $5 billion charge to write down the value of its radio licenses.
"Such a sizable writedown of intangibles is an admission by management that former acquisitions may have been bad decisions. The good news is that the market soon forgives and forgets one-time charges, but only if wiser M&A decisions are made in the future," said Mark Krickovich, managing partner of Intangible Asset Valuations LLC, an appraisal company.
RISING RATES TO TAKE A TOLL
Experts say more companies are likely to take a hit on their intangibles this year. New accounting standards require corporations to do an annual "impairment test" to see if they can justify the value of their intangible assets, based on existing and future business fundamentals.
With interest rates rising, the test often results in reducing some assets' carrying value because it discounts future income from them.,/b>
"If interest rates are going up, the discounted value is going to go down significantly. So all things being the same, asset values will go down and we will have more write-offs," said Howard Silverblatt, equity market analyst of rating agency Standard & Poor's.
Silverblatt estimates well over $750 billion of goodwill resides on the balance sheets of the top 500 U.S. corporations. For some, goodwill is a significant part of total assets.
According to S&P, Allied Waste Industries Inc., (NYSE:AW - news) for instance, has over $8 billion of goodwill, more than 60 percent of its total assets, on its books. Industrial technology and tool company Danaher Corp. (NYSE:DHR - news) has $4 billion of goodwill, nearly 47 percent of total assets, and Caremark RX Inc. (NYSE:CMX - news) has nearly $7 billion of this intangible, about 60 percent of total assets.
TOUGH CALL
It is difficult to predict how much goodwill will be written off since it depends on to what extent executives are willing to admit that their businesses face dim prospects.
"There are certainly some serious questions on the value of much of this goodwill," said Rebecca McEnally, a senior director of Capital Markets Policy at the CFA Institute, which certifies chartered financial analysts.
Most of the value embedded in these intangible assets dates back to the "go go" 1990s when Wall Street did big deals.
In today's economy, many industries no longer justify those acquisition prices.
One post-1990s deal that hasn't lived up to its promise is computer and printer maker Hewlett-Packard Co.'s (NYSE:HPQ - news) acquisition of Compaq. HP has over $15 billion of goodwill on its balance sheet, much of it due to Compaq, analysts say.
"The message is simple: You have not delivered on your promises to investors, so you have unjustified goodwill," said Mark Sirower of PricewaterhouseCoopers, where he heads a team of mergers acquisition consultants.
A goodwill writedown is merely a matter of coming clean with shareholders, he said.
Sirower's theory raises questions about a few recent high-priced deals, such as Symantec Corp.'s (Nasdaq:SYMC - news) yet-to-be-consummated acquisition of rival Veritas Software Corp.(Nasdaq:VRTS - news). The deal valued Veritas in December 2004 at $30.78 a share. On Friday, it closed at $23.91.
"Investors are already telling them that they have to do it," Sirower said, referring to a goodwill writedown. |
