VideoAlix Stuart, CFO.com | US
July 1, 2009
- Grammar Corrections
I think goodwill is essentially a fuzzy balancing number given the acquirer paying too much for the net assets of the acquirer."
The last word of my comment should read as "acquiree".
Also, later in my commentary I used the word acquirer's when "acquirers" should have been used.Posted by David Newman | Jul 6, 2009 5:54 PM ET
- Fuzzy Goodwill
The usual definition of goodwill is that it represents the excess of net expected future cash flows over the value of net asset value, given operational and strategic synergies, economies of scale and scope, or any other management buzzword.
I think goodwill is essentially a fuzzy balancing number given the acquirer paying too much for the net assets of the acquirer. The formal definition may be a perception by management when making acquisitions, but in reality, the purchase price could easily equal net assets (assuming a monopoly auction).
I think the difference of the purchase price and the net asset value arises from perceived or potential bidding wars amongst possible acquirer's rather than true economic substance.
Thus, competition for the net asset supply drives the purchase price up by increased demand. Thus, the fair market value may not represent the underlying use value of the net assets.
This is a serious problem in business valuations: the spread between fair market value purchase price and net asset use value.
The reason this is a problem is that goodwill impairments will arise more frequently and to a greater extent impacting net income. Yet, the cash flow effect has occurred in the past by the excessive purchase price. Thus, there is timing error between cash flow and net income related to the same transaction.Posted by David Newman | Jul 6, 2009 5:47 PM ET
- Goodwill
I read this article and immediately came to the same conclusion as Paul Genova below. Patrick Lavelle was basically defining Goodwill with his explanation ... fact is, if the companies were generating the profits, synergies and cash flows that were expected there would be no need to take a Goodwill impairment.
Posted by Michael Greiner | Jul 6, 2009 3:07 PM ET
- Recurring Nonrecurring "Items"
It is a rare company that can claim continuous success in its acquistions over the years. Timing has much to do with this outcome. Far more deals are done near market tops than bottoms as credit is plentiful. Putting tongue in cheek - or maybe not - deal activity may be the ultimate "odd lot" market indicator. At a very fundamental level, however, is the fact that cultural fit between companies forming one is so rarely addressed. Failure is the usual outcome. Thus, the continuous writeoffs we see across industries, through time. (The ultimate example is the recent joining of investment and commercial bankers. Their respective means of operations could not be more in conflict.) Outcomes: (1) debt leverage is increased and returns drop, (2) dividend payments are thereby lower than they otherwise could be, and dividend payouts are higher than they otherwise would be, (3)total return to owners are compromised by management, and (4) for investors and their representatives, writeoff history presents a very fertile field to plow.
Posted by Robert Boyd | Jul 6, 2009 7:19 AM ET
- Goodwill writeoffs vs Acquisition decisions
I disagree with Patrick Lavelle's comment that goodwill is not a factor when pursuing an acquisition. he states that Revenue, GP and net income along with synergy gains in overhead costs are the determining factors in making an acquisition. this is true. However, it is also true that forecasts of Revenue, GP and net income of the acquired company directly affect the calculation of the purchase price and future cash flows of the business, thereby creating the difference between the book value of the acquired tangible assets and the perceived value you are acquiring, the difference being goodwill and intangible assest. If goodwill is written off it does mean that managements decision to acquire a business was based on overstated revenue projections, net income and future cash flows. Goodwill is directly related to managements decisions to acquire a company. A writeoff indicates they expected more benefit that they achieved.
Posted by Paul Genova | Jul 4, 2009 12:43 PM ET
