When Goodwill Turns Nasty

By EconMatters

More and more in fashion lately in the financial world is companies taking huge write-downs of some flopped acquisitions. Even the big-name players with tremendous resources to scrutinize the acquisition can’t escape this fate.


Microsoft had to own up last July to a $6.2-billion write-off of the acquisition of aQuantive, a digital advertising company that Microsoft bought for $6.3 billion cash in 2007.  The size of the write-down is significant even for Microsoft.  For comparison purpose, Microsoft operating  operating profit in Dec. 2012 quarter was $7.8 billion.


Nevertheless, Microsoft can at least have some consolation as just four month later, shares of tech giant HP suffered a 11% plunge partly because of a massive $8.8 billion write-off at Autonomy, a British software company it acquired in 2011 for around $10 billion, due to ‘serious’ accounting issues.


This is not just limited to the typically high-flying tech sector either.  Last week, Caterpillar, the manufacturer of mining and construction equipment, also said it would need to write off $580 million in 4Q, 2012 goodwill related to a 2011 acquisition in China citing possible accounting fraud.

According to Bloomberg, goodwill, basically the amount paid over the book value of the target firm in an acquisition, in the S&P 500 companies have more than doubled on a per-share basis as companies have paid an increasingly higher takeover premium over the underlying asset value (i.e. goodwill) for the past decade.



Why do you think these companies supposedly with some of the best financial minds in the world at their disposal would overpay that much for another company?  A large part of it is that M&A is still one of the quicker and easier way to generate some positive buzz juicing up company stock.  Hungry for future top-line growth (which is usually tied to executive pay) in a lack-luster world economy, corporation executives are more inclined overlook certain “ambiguity.”


Furthermore, increasing foreign acquisition in new/developing markets has also increased the risk of accounting discrepancy or min-interpretation more than most people have realized.  Of course, the unprecedented synchronized QEs from world’s central banks have a big hand in over-valuation in almost all asset class as well.


It typically takes at least 2-3 years for companies to realize the full synergy, or discovering the dog, of an acquisition.  Bloomberg quoted Erin Lyons, a Citigroup Inc. credit strategist, that some 44 companies listed on U.S. exchanges are potential candidates for write-downs, and that three S&P 500 companies — Frontier Communications Corp. (FTR), Nasdaq OMX Group Inc. and L-3 Communications Holdings Inc. (LLL) — have more goodwill than market value.


So it looks like goodwill could turn nasty pretty soon for the U.S. companies, particularly the tech sector, which historically tends to have a bigger goodwill appetite than other industries.  


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The ABCs Of The Super Bowl: Ads, Betting, And Consumption

It’s that day again. Some will fast forward through the game and watch the commercials (Top 5 most viral Ads below); others will have a stadium-pal installed early and elasticated waist-bands; and many will win (or lose) a fortune based on any number of random permutations of path-wise dependent scoring. However, presented for your viewing pleasure, the only three infographics needed for today: Of Beer and Bathroom Breaks, Super Bowl Bingo (drinking game), and the History of Super Bowl Betting Lines. Go Niners…





Most Viral Super Bowl Ads Of All Time (via Bloomberg BusinessWeek):

1. “The Force” — Volkswagen, 56,012,882 views

The most shared ad of all time. The six-year-old actor in the spot, Max Page, had never seen a ‘Star Wars’ movie before filming the now-iconic commercial.


2. “Sexy & I Know It” — M&M’s, 22,267,015 views

This commercial introduced a new M&M character in the form of Ms. Brown, voiced by Vanessa Williams.


3. “The Dog Strikes Back” — Volkswagen, 16,452,106 views

Most reviews of the commercial cheered its healthy message, but questioned the inclusion of the tail segment connecting the dog with the Star Wars cantina.


4. “Imported From Detroit” — Chrysler, 15,835,360 views

Got a lot of flack for allegedly touting President Obama’s auto bailout (which, considering it was voiced by Clint Eastwood, is insane).


5. “Matthew’s Day Off” — Honda, 16,514,669 views

Teasers from the commercial led to rampant rumors that a sequel to “Ferris Bueller’s Day Off” was in production.

The Best And Worst Of Emerging Markets

We recently summarized the world’s developed markets in one simple table and there was much ‘redness’ to go around. The following table provides a similarly broad-based view of the world’s developing nations. Citi’s Early Warning System heat-map provides an at-a-glance perspective of the emerging market currencies at most (and least) risk based on 12 indicators of economic and financial stress. As currency wars migrate contagiously from developed money-printers to developing ‘growth engines’ the table below suggests Hungary and South Africa at most risk and China and Thailand least.

Click image for legible huge version…


and the trend…


and what is behind the EWS Signal…


Source: Citi

The Market Is Not the Economy

As everyone gets caught up in the euphoria of an ever rising S&P, remember that once upon a time, in a land far, far away, the economy was driven by goods produced and services provided instead of the amount of excess reserves banks can use to bid up market prices with.

Today however, the health of the economy seems to be lumped into the level of the S&P 500. Of course, with record deficits, and a record fed balance sheet, the message now is that everything is fixed – the economy is healed. This, as ZH readers can surmise, is complete nonsense. However, since we are ruled by a “new keynesian” elite, and they are supported by their media arms, well, they control that message.

One would think that the market levels would reflect the strength of its underlying components (at least to a degree). One of those components is the PMI. This index gives an indication of how the manufacturing segment of the economy is doing – you know, the segment that is actually producing goods.

The PMI has flatlined since about April 2012, and the level has been bouncing around 50 (a level of >50 indicates an expansion), with January 2013 ticking up to 53.1. During this time, the S&P has completely ignored the fact that our manufacturing segment is struggling, and has soared to new heights. This of course, is all that matters now, as the message is that as long as SPX, RUT, etc, are vertical, the economy must be healthy.



Carry on gentlemen, carry on.

Nigel Farage's UKIP On The Increasing European And Soviet Union Similarities

From Margaret Thatcher’s original (now extremely prescient) warning of the European Union’s structure creating “insecurity, unemployment, national resentment, and ethnic conflict” to Nigel Farage’s recent clarifications on the agonizing direction in which the unelected leadership of the Union are pulling Europe, this brief 3 minute clip draws some significantly eery similarities between the former Soviet Union and the current European Union. Every now and again, a step back to look for context in history is important – as while the Soviet Union was created by armed force, the European Union is being forced by political coercion and economic bullying. Perhaps Churchill summed up best how it should be, “We are with Europe, but not of it; we are linked but not combined; we are interested and associated but not absorbed.”

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