Goodwill Hunting

For companies mulling write-offs, economic turmoil is a terrible thing to waste.

Unlike depreciable tangible and intangible assets, goodwill can reside forever on balance sheets with no amortization to cause a drag on earnings. A tough business climate with mounting impairment reminds managers that goodwill is expendable.

No wonder, then, that many companies have begun chipping away at goodwill. A $171 million write-off extinguished the remaining goodwill at Morris Publishing. Coping with less demand for its travel services, Orbitz Worldwide took a $297 million charge for impairment of goodwill and intangible assets. Griffon Corp., a diversified supplier of electronic information, specialty plastics, and garage doors, lopped off $13 million of goodwill in its garage-door business.

Goodwill write-offs have long been a card that companies can play in any number of situations, from compensating for losses to allowing a new CEO to start fresh, or fresher. But in playing the card solely as a response to declining stock prices, are companies being shrewd, or rash? “The big question is whether, and to what extent, market cap is a good proxy for underlying asset values,” says corporate tax expert Robert Willens.

Accounting rules leave room for interpretation. Most finance executives flatly reject market fluctuations as sufficient cause alone to jettison assets. “Is the share price reflecting the fundamentals? The answer is no,” says CFO Wayne R. Brownlee of Potash Inc., the world’s leading producer of the main ingredient in fertilizer. International Paper’s chief accounting officer, Fred Bleier, concurs. “It’s just hard to understand that if your share price decreases 20 percent in one day that really reflects some kind of decline in your economic value,” he says. “If you were in liquidation mode, it would be a valid approach. In an operating mode, where you have cycles, real fair value to an entity running its business is more related to expected cash generation than to the trading price today.”

But Wall Street tends to take the view that market value and fair value are synonymous. “Most analysts assume that they are equivalent,” says Willens, “with the result that market declines we’ve experienced should presage goodwill impairment and lead to massive goodwill write-downs.” And Bleier agrees that a plunging share price — International Paper fell from $30 a share in September to $11 in early December — does indicate a potential for impairment.

Far from preserving value, says Ray Ball, a finance professor at the University of Chicago’s Booth Graduate School of Business, suppressing write-offs can forestall recovery. Japanese regulators learned that lesson when their economy collapsed into recession nearly two decades ago. By allowing Japanese companies to retain investments on their books at cost even after the country’s stock market cratered, says Ball, regulators drained away any incentive to address overvalued assets. “Write-offs force CFOs to identify their valuable assets,” Ball insists. “Decisions that make books more consistent with economic reality accelerate recovery.”

Academics across the country tend to agree. “The recent trouble will result in a lot of firms reducing goodwill,” says Southern Methodist University professor Doug Hanna, who has studied so-called big-bath write-offs over three decades. “We have a period now when the entire market is expecting firms to report [poor] results,” he says. “It opens doors to get rid of a lot of bad things at once.”


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