A New York Times article today (Losses in Good-Will Values Dog Bank Deals) attributes the massive write-downs occurring at banks these days to overvalued good will and the overpayment for companies during the “merger mania” of the last decade. The following part caught my attention:
Companies are taking billions of dollars in losses as they write down the value of assets known as good will - the amount they overpaid for a business compared with the sum of its parts. As the economy sinks lower and businesses struggle, that good will is going bad.
The article caused this remark from a friend of mine who works for a top investment bank in NY:
” . . . this is not good for the IP market. Indicates there was a bubble that is going to slowly deflate going forward… [but] IP assets still lie at the top of the ” Investing Hierarchy of needs’”
The correlation between the accurate accounting of goodwill and the market for intellectual property is an ambiguous one. While goodwill could, and has been known to, include intellectual property, the relationship is not completely reciprocal: the IP market (excluding trademarks) doesn’t exactly include good will. This becomes more apparent when we consider the trend in adding IP assets to the balance sheet, including them in the “sum of the parts” of a company, and not in the “overpaid” portion of a merger or acquisition price.
The article continues with some astonishing figures, however:
Banks wrote down more than $25 billion in good will in 2008, up sharply from $790 million a year earlier, according to data compiled by Frank Schiraldi of Sandler O’Neill & Partners. By the end of the year, banks still had $291 billion worth of good will on their books. An incomplete tally of write-downs from the first quarter showed that banks had taken a $3.5 billion hit to good-will values.
I’m willing to agree that many companies, and especially banks, overpaid for many of the assets purchased in the last decade, but recently that part of the figure attributable to “goodwill” has been decreasingly correlated with intellectual property . . .