Trading AOLTW stock on the NYSE floor
Sound like an awful lot of money to give to charity? In Wall Street's euphemism-speak, goodwill is more like getting taken to the cleaners. "Goodwill" is the term for the premium one company pays to acquire another, over and above the acquired company's book value. Such overpayment is intentional, whether to beat out fellow suitors or woo the shareholders of the bride, and technically it's an asset (albeit an intangible one), the assumption being that all that extra dough was buying something.
Now "goodwill impairment" — that's when that extra millions (or billions) in the purchase price turns out to have wasted, when it becomes apparent that the value of the merged company not only isn't more than the original buyer thought it was worth, but a whole lot less. Such losses in actual value used to be quietly swept under the rug, amortized away over the course of as much as 40 years.
But this year the rules have changed. The Financial Accounting Standards Board (yes, there actually standards in accounting) has decreed this year that companies must test their goodwill assets for "impairment" annually — and when they find some, they've got to fess up. And while AOL Time Warner's number may be the biggest (just topping JDS Uniphase's write-down last year of just over $50 billion), the media giant (and corporate overlord of this writer) isn't standing alone. A recent Bear Stearns study anticipates that some 500 companies are candidates for write-downs this year, with perhaps a dozen in the billion-dollar club.
Why so many? Call it a bunch of drunken sailors nursing a hangover. When AOL and Time Warner first decided to merge, the dot-com love affair was raging and the stock of the combined companies was worth $290 billion, mostly thanks to the price of AOL. By the time the stock-swap deal closed a year later, the bubble had burst, AOL was back on earth, and even though AOL had technically been the acquirer (thanks to that high stock price), the new AOL Time Warner suddenly had a relative lemon on its hands.
The new rule was originally going to require companies to post such losses as a relevant part of its continuing operations — which is hard to argue with when the asset is in the company's name — but businesses successfully lobbied to have the losses classified under "cumulative effects of changes in accounting principles." And now, even though they've got the rest of the year to do it, many companies are looking to get it out of the way while their excuse — the rule change — is still fresh in investors' minds.
And so Qwest Communications, which acquired the former U.S. West in 2000 only to find a year later that Qwest itself was the overvalued asset, recently predicted a second-quarter goodwill write-down of $20 billion to $30 billion. Blockbuster on Wednesday logged its own loss of $1.82 billion. And the parade is just beginning — future candidates include WorldCom, which lists $50 billion in potentially-impaired goodwill but is only worth $42.7 billion in the market, and AT&T, still sporting $24.8 billion of goodwill from its hostile takeover of MediaOne in 1999. (Notice a lot of tech and telecom companies?)
Investors generally ignore the bad news, either because they'd seen it coming — AOL Time Warner telegraphed its loss weeks ago — and because nearly every survivor of the tech bust has a few embarrassing purchases to own up to. Besides, AOL Time Warner's shares are down 41 percent this year alone, thanks to investors doing their own writing-down of AOL's value (with most analysts pegging it at about $1 a share on top of Time Warner's assets). So the $54 billion loss — and the total $1 trillion in goodwill-impairment writedowns that some analysts expect to hit Wall Street this year — is merely an acknowledgement of what investors have already figured out.
Still, a mistake is a mistake, and some analysts insist that while such write-downs are paper losses, it would be a mistake to ignore them completely — particularly if the company's stock hasn't already taken the appropriate hit. And even if it has, a company that runs around overpaying for assets that don't perform — even if it's only overpaying because investors were fooled too — is one to keep a jaundiced eye on.
Remember, the fall of Enron started with a one-time write-down. And there's not a lot of goodwill left at that company any more.