Beware Goodwill

The name of my firm is Christine Meder’s Accounting Advisory Services. My company differentiates itself by focusing on high net worth individuals, their businesses and their investments with an expertise in accounting matters and practice.

The purpose of this blog is to share how the analysis of company accounting practices can play a meaningful role in the financial performance of a company owner looking to grow his or her business through acquisitions or in the returns of client equity portfolios. The blog will focus on specific company examples and provide general commentary on financial markets as appropriate.

Moving client equity holdings out of harm’s way when accounting practices dictate is one way I and my firm add value. An example is avoiding investments in companies looking to boost earnings and revenues through acquisitions where substantial goodwill is recorded on the balance sheet. On August 26, 2008 the acquisitive Mark Hurd, then CEO of Hewlett Packard, acquired technology services company Electronic Data Systems (EDS) for $13.9 billion adding nearly $11 billion in goodwill to its balance sheet due to the acquisition. It was a 50 percent increase at the time. I told clients to sell HP shares if they had them and to avoid the stock, a component of the Dow Jones Industrial Average. The stock closed that day at $46.86. Hurd and successor Leo Apotheker added acquisitions of Palm Inc., 3Par Inc. and ArcSight Inc. further boosting goodwill by $4.85 billion. When August, 2011 began, HP shares had already fallen to $35. Then on August 18th, HP and Apotheker announced yet another acquisition this time paying $10.2 billion for Autonomy; a 64% premium to its market price and 24 times its trailing earnings. The transaction resulted in another $6.9 billion in goodwill and investors finally said enough and sold shares down to as low as $22.75 the very next trading session. The move is credited with ultimately costing Apotheker his job just a month later as he was replaced with Meg Whitman on September 23, 2011.

When HP reported its Q312 earnings on August 8, 2012, it recorded an $8.0 billion write-down for goodwill against its 2008 purchase of EDS. This was followed by an additional write-down of $8.8 billion against its recent Autonomy acquisition when HP’s Q412 & FY12 financials were released in November, 2012. Full-year GAAP loss per share was $6.41 and non-GAAP diluted EPS was $4.05. Note that non-GAAP earnings information excludes after tax costs of $20.7 billion, or $10.46 per diluted share, related to the impairment of goodwill and other purchased intangible assets during the year. Credit Ms. Whitman for slashing goodwill to better reflect the ‘true carrying value’ for these enterprises. A write-down is an admission that resources were misused and demonstrates initial poor judgment on the part of the executives and board. Unfortunately for HP shareholders, a fairer representation of the company resulted in a decline in HP shares below $12 after the earnings report. While HP shares have since rallied to $24.81 as the Dow posts new records, it remains a company that has severely underperformed the market averages. There remains however $35.6 billion in goodwill on the company’s books as FY13 begins. Could more goodwill write-downs be in HP’s future?

Goodwill is defined as the price paid in excess of the acquired firm’s total assets and is recorded as an indefinite asset account on the balance sheet. To calculate it, simply subtract the total asset amount from the purchase price. Debit Goodwill for the excess paid, debit the acquired asset accounts for their actual value, and credit Cash or Equity for the amount of the purchase. Goodwill is neither depreciated nor amortized; instead, it is annually tested for impairment. If the goodwill account needs to be impaired, an adjusting entry is needed in the general journal. To record the entry, debit Loss on Impairment and credit Goodwill for the necessary amount.

Advertisements

About Christine Meder
Leveraging my insights and professional experience of 25 years in the accounting profession, I and my firm Christine Meder's Accounting Advisory Services provide our high net worth clients expert advice on their business activities and investments. In addition to performing traditional accounting functions in a confidential manner, I pride myself in giving clients a competitive edge whether it be in running their businesses or managing their investment portfolio. My studies leading up to completion of the EMBA program at the University of Nevada, Reno this August provide me with latest skills and techniques utilized across a broad spectrum of business functions. This breadth of education is complemented with experience as an accountant in the construction, mining, real estate and technology fields during my career. If you are looking for a trusted adviser or consultant in addition to someone you can rely on to properly keep your books, please contact me.

2 Responses to Beware Goodwill

  1. Goodwill is ultimately a perceived value. It sounds like the true fair value of the goodwill lies with the investors who are (or are not) willing to pay for it.

    • True… the value of goodwill is in the eye of the beholder. Value investors toss it out as the first step in their fundamental analysis of a company. I like considering company’s like HPQ that ultimately bite the bullet and write-off their goodwill by taking a large GAAP loss which usually presents a good buying opportunity. The decks are then cleared for better earnings and higher stock prices as HPQ’s rally has shown.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Habif, Arogeti & Wynne, LLP

Certified Public Accountants and Business Advisors

Small Private Equity Firms and Funds (SPEFFs)

Financial Reporting Discussions, Advice and Resources for Small Private Equity Firms and Funds (SPEFFs)

The SBS Group Blog

SBS Group's home for Microsoft Dynamics 365, ERP and CRM, Business Intelligence, Office Productivity and Cloud news, tips, tricks and more!

GordonCPA's Blog

Established in 1954, Gordon Advisors, P.C., is one of Michigan’s leading public accounting and business consulting firms.

Taxlady23 From My Office to Yours

Helping you create a positive and productive professional life...

Grumpy Old Accountants

An accountants insights on financial markets & corporate earnings...

The Survival Place Blog

Surviving The World As We Know It

Accounting & Bookkeeping Solutions

Accounting and Bookkeeping Services in Brisbane and Gold Coast

the ELLIOTT WAVE lives on

OEW: an Objective approach to the Elliott Wave Theory

Stock Pickr Blog

Maneuvering the Stock Market 1 Pick at a Time

Christine Meder's Accounting Advisory Services

Financial markets commentary with Accounting and Earnings emphasis

%d bloggers like this: