Companies are taking billions of dollars in losses as they write down the value of assets known as good will — the amount they overpaid for a business compared with the sum of its parts. As the economy sinks lower and businesses struggle, that good will is going bad.
The losses from these write-downs have already been in the tens of billions of dollars, and analysts say they are likely to continue as companies reassess the value of old deals in the light of faltering stock markets, declines in real estate and weak corporate revenues.
Goodwill is:
Goodwill is an accounting term used to reflect the portion of the book value of a business entity not directly attributable to its assets and liabilities; it normally arises only in case of an acquisition. It reflects the ability of the entity to make a higher profit than would be derived from selling the tangible assets. Goodwill is considered an intangible asset.
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* Goodwill = Purchase Price – Fair Market Value of Net Assets
* Fair Market Value of Net Assets = Net Tangible Assets + Write-up of Net Assets
* Net Tangible Assets = Assets – Target's Existing Goodwill – Liabilities
In other words, Goodwill is the amount a company paid beyond the target's tangible book value. Some companies are worth the premium. For example, if you were going to purchase Coke a premium is guaranteed. But it's also really easy to pay too much for an asset when times are good. And that is exactly what happened:
Before it was scooped up in a merger with Wells Fargo last year, the Wachovia Corporation cut the value of its good will by $18.7 billion, largely from its purchase of the troubled mortgage lender Golden West Financial and other acquisitions that took on water as housing markets sank and the economy hurtled lower.
Macy’s took a good-will charge of $5.4 billion in 2008. In February 2008, the cellular carrier Sprint Nextel wrote down $30 billion from Sprint’s purchase of Nextel.
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If nothing else, the decline in the value of good will shows that corporations across the spectrum spent far too much during the merger mania of the last decade, analysts said. As the markets roared higher, companies looked at their rising share prices like lottery money, and deployed their stock to go on a buying binge, eager to show shareholders growth and expanding sources of revenue.
If the mergers were lavish wedding ceremonies, the slumping value of the good will has been the rocky marriages that followed.
