Corporations Write Down About $750 Billion of Goodwill in 2002
U.S. corporations may lower the value of acquired businesses by as much as $200 billion this year after AOL Time Warner Inc., AT&T; Corp. and other companies wrote down about $750 billion of goodwill in 2002.
An accounting rule that took effect in 2001 forced companies to review whether they overpaid for acquisitions. If so, some of the amount paid above the fair market value, or goodwill, must be written off.
Although last year’s write-downs reflect the plunging value of acquisitions made in the last decade, some companies may have gambled on a stock market and economic recovery to help revive businesses now worth a fraction of the purchase price. Stocks have fallen this year, raising the prospect that some corporations may have to face up to takeovers that cost too much.
“If the market deteriorates this year, they will have to take big write-offs, and analysts will be asking why they didn’t do it last year in the first place,” said Alfred King, vice chairman of Valuation Research Inc., a consultant that helps companies value their assets. “It’s a double whammy for the stock because investors will punish them for that.”
Some companies have said they will record big goodwill write-downs, but haven’t reported their results yet.
“We’re about 75% of the way through the process,” said Lehman Bros. Holdings Inc. accounting analyst Robert Willens, who anticipates $200 billion in write-downs this year.
Local telephone company Qwest Communications International Inc. in October forecast a write-down of as much as $30 billion.
Some analysts predicted last year that U.S. companies would write down as much as $1 trillion of goodwill in 2002. Instead, last year’s charges were an estimated $750 billion, a figure that’s about 10% more than Canada’s gross domestic product.
“There are some companies that didn’t want to admit they’d made mistakes, so they avoided or minimized write-offs,” King said. “Companies that took an aggressive posture in writing down assets last year are going to be glad they did.”
Lehman’s Willens said a new round of write-downs increases the risk of defaults for those companies with debt agreements requiring them to maintain certain net worth or debt-to-equity ratios, he said.
“This just confirms what people already knew: that the acquisitions that created the goodwill didn’t work,” Willens said. “But there’s a whole separate set of problems with this sort of collateral damage. That’s a real risk.”
AOL Time Warner, the world’s largest media company, is one of hundreds of corporations that made acquisitions with inflated shares during the late 1990s and 2000. Last year, the company recorded expenses of $99.7 billion to reflect the plunge in the value of goodwill. These costs gave AOL Time Warner an annual net loss of $98.7 billion, the biggest in corporate history. The write-off forced AOL Time Warner to renegotiate some of the terms of its bank loans because of the decline in the company’s net worth.
The accounting rule change was intended to make it easier to estimate a company’s underlying profitability. The old rules required corporations to record expenses each quarter for as long as 40 years to write off goodwill. The new rules eliminated these regular costs, but required managers to use “reasonable and supportive assumptions” in figuring out what an acquired asset is worth. That gave corporations some latitude in deciding when a goodwill write-off was warranted, analysts said.
