After the Mergers, the Pain of Goodwill - Barron's

1 de 3

http://online.barrons.com/articles/after-the-mergers-the-pain-of-goodwill...

BARRON'S

News, Quotes, Companies, Videos

Log In

HOME

MAGAZINE

DAILY

INVESTING IDEAS

TOP ADVISORS

MARKET DATA

SEARCH

Subscribe

PAID ADVISOR

DIRECTORY

TECHNOLOGY TRADER

Huge acquisitions by Avago, Facebook, and Microsoft can come back to haunt them with big charges to earnings.
Email

Print

1 Comments

Order Reprints

By TIERNAN RAY
Updated July 3, 2015 12:46 a.m. ET

Its well known by now that the market for technology mergers is running wild with
megadeals. A month ago, chip maker Avago Technologies (ticker: AVGO) announced
the biggest-ever tech deal, saying it will purchase competitor Broadcom (BRCM) for $37
billion.
Similar eye-popping price tags, and the billions used to finance them, are just part of the
story. Even more striking is the phantom value, known as goodwill and intangibles, that
is being piled up.
These phantom assets have ballooned to tens of billions for leading companies such as
Facebook (FB), Microsoft (MSFT), Cisco Systems (CSCO), and Oracle (ORCL) in
recent years, as they have sought to buy assets with seemingly huge potential, but
whose actual value at present is far lower than the purchase price.
The upshot is that investors should be particularly cautious about the actual value they
see in the companies mentioned, and the price of their shares.
Stocks dont trade on goodwill and intangibles, but when megadeals go wrong, theres a
direct hit to a companys earnings and balance sheet, and the intangibles get revalued
downward, a lot.
HERES HOW IT WORKS: When a company buys another for a price above the
current value of the targets assets, the disparity is recorded on the balance sheet as
goodwill and intangibles. Intangibles are amortized over the course of years, as a cost
of operations.
Goodwill, which can be something as nebulous as an imagined future revenue stream,
is checked each year to see if that imagined potential is still as valuable, or if it has lost
value, which, in the latter case, results in a hit to earnings and a reduction of a
companys assets.

Most Popular
Fans of Facebook and Netflix, but
Wary of Apple
Stocks Fall 1.2% on Worries About
Greece
Last Week
The Peltz Prescription
Byron Wien on Only Way to Make
Serious Money
SEE FULL LIST

Latest Market Videos

Mario Gabelli: 4
New Stock Picks

Greece Votes:
What Happens If It
Leaves Eurozone?

How to Build a
Rare Book
Collection

We dont yet know the size of the goodwill pile Avago has gotten itself into, as the deal
has yet to close, and the same for other megamergers like Intel (INTC) buying Altera
(ALTR), and NXP Semiconductors (NXPI) buying Freescale Semiconductor (FSL).
But Microsoft is a great example of a ticking intangibles time bomb. The companys
goodwill has ballooned to $21.7 billion from $12.4 billion five years ago, the result of the
$9.4 billion purchase in 2014 of the phone business of Nokia (NOK). As a result of that
deal, almost $10 billion was added to Microsofts goodwill and intangibles balance.
Microsoft has taken some heavy charges in the past. In 2012, it found that the 2007
acquisition of advertising network operator aQuantive wasnt going to pay off as
expected. Microsoft took a $6.2 billion charge, a direct reduction to its operating
income, to pare the value of the goodwill on the books.
Sometimes, those losses are the canary in the coal mine: Things are seriously going
wrong with the business. The massive aQuantive charge, for example, came after the
search-advertising and display-ad business failed to live up to expectations that year.
O

5/07/2015 6:38 p. m.

After the Mergers, the Pain of Goodwill - Barron's

2 de 3

http://online.barrons.com/articles/after-the-mergers-the-pain-of-goodwill...

week, the company said it would divest its display-ad business to AOL.
The Nokia business may be next. In its most recent quarterly report, the fiscal third
quarter ended in March, Microsoft said that the unit didnt meet its sales goals.
Microsoft said its beginning its budgeting process for the new fiscal year, and it
declared the Nokia assets to be at an elevated risk of impairment.
The writing is on the wall: This will be another multibillion charge for Microsoft. Less
certain, but a distinct possibility, is that Microsoft may have to reconsider whether it
really wants to fight a losing battle in mobile devices against the overwhelming might of
Apple (AAPL) and Google (GOOGL).
Maybe that will be seen as a failure for the new era of CEO Satya Nadella, or maybe
investors will breathe a sigh of relief. But it certainly wont be pretty.
ANOTHER GREAT EXAMPLE is Facebook. A year ago, it said it would buy messaging
service WhatsApp for $19 billion, a price that made this column wince, given that
WhatsApp had almost no revenue. Most of the price, $15 billion, was recorded as
goodwill.
No one knows what that goodwill really representsFacebook has never laid out the
exact logic of the purchase, in dollars and cents. Presumably, CEO Mark Zuckerberg
and team envision turning the free service into a source of either advertising revenue or
services revenue. But Facebook did not respond to our request for an explanation.
Facebook is a good company, and one with a bright future. The mysterious acquisition
probably wont dent that future. But just like Microsoft in 2012and, probably, again this
yearFacebook may make new headlines with a similarly awesome hit to earnings
when it finally admits some substantial chunk of the deal was a fantasy.

TIERNAN RAY can be reached at tiernan.ray@barrons.com, http://blogs.barrons.com

/techtraderdaily or www.twitter.com/barronstechblog
Email

Print

1 Comments

Order Reprints

Latest in Technology Trader

Apple Music Is the Underdog in Streaming
Fitbit Looks Healthy, but Its Value May Be as M&A Fodder
Apple Investors: Keep An i on That Watch
Higher Def TVs May Mark Streamings Turning Point

5/07/2015 6:38 p. m.

After the Mergers, the Pain of Goodwill - Barron's

3 de 3

http://online.barrons.com/articles/after-the-mergers-the-pain-of-goodwill...

Big Chip Mergers Signal Top for Tech

Add a Comment
All comments will display your real name. Include hometown for possible inclusion in Barron's magazine. Please
comply with guidelines.
Read Comments
Want to participate in the discussion?

Already a subscriber? Log In for complete access.

CLEAR

POST

Return to Top

Customer Service

Create an Account

About Barrons.com

Also From Barron's

Tools & Services

Customer Center

Subscribe to Barron's

Advertising

Conferences

Mobile Site

Contact Us

Magazine Subscribers:
Activate Your Digital Access

Masthead

Reprints

Email Newsletters

Privacy Policy

Classifieds

Barron's on iPad/iPhone

Cookie Policy

College Program

Barron's on Android

Data Policy

Find a Broker

Portfolio

Copyright Policy

Barron's in Japanese

Video

Live Help

Subscriber Agreement
& Terms of Use
Your Ad Choices
Community Guidelines

Annual Reports
StockGrader
Barron's 400
Economic Calendar
Stock & Mutual Fund Listings
Commodities, Options
& Annuities Listings
Fund Prospectuses

Copyright 2015 Dow Jones & Company, Inc. All Rights Reserved.

5/07/2015 6:38 p. m.