With AOL Time Warner Inc's announcement that it will cut a record US$54 billion off the value of acquisitions now worth less than their purchase price, the stream of writedowns is swelling to a torrent.
European companies such as Vivendi Universal SA and Asian ones such as NTT DoCoMo Inc and Pacific Century Cyberworks Ltd in the first quarter wrote down more than US$60 billion of takeover value. More will come in the US as the likes of Gemstar-TV Guide International Inc gear up for new accounting rules that will force writedowns.
Slowing economic growth forced such CEOs as Vivendi's Jean-Marie Messier and AOL's Gerald Levin to rethink the earnings potential of US$5 trillion worth of purchases made during the takeover frenzy of 1999 and 2000. Now they must own up to overpaying by deflating their balance sheets of goodwill -- the difference between purchase price and book value.
"There's a black hole between what they paid and what is now the value," said Ian Hodges, who advises on more than ?30 billion (US$43 billion) in assets at Barclays Investment Management.
"Enough time has now elapsed since the start of the downturn to more clearly assess the value of these businesses."
In the US, Qwest Communications International Inc and AT&T Corp, with billions of goodwill dollars on their balance sheet, may be the next writedown candidates. In Europe, Vodafone Group Plc and Terra Networks SA may do the same, analysts said.
"All that goodwill ended up on the balance sheet in times of prosperity," said Walther Schapendonk, chief investment officer at Unilever's Dutch pension fund Progress, with about US$3 of assets under management. "Slowly the insight has arisen that these companies have been bought somewhat too expensively."
The danger to investors is that companies won't deliver the earnings growth predicted when they made their acquisitions.
Writedowns not only reduce reported profits, they show that companies overpaid in the first place.
"The intention of this is to write off real value," said Pontus Troberg, professor of accounting at the Helsinki School of Economics. "They're not going to get back their invested money. It's wasted money."
Still, investors don't always mind. In Europe, they shrugged off Vivendi's 15.7 billion-euro goodwill writedown on March 5, nudging shares in the world's second-biggest media company down less than a percent. Royal KPN NV shares fell 0.8 percent on March 18, when the Dutch phone company said its German wireless unit, E-Plus Mobilfunk GmbH was worth 13.7 billion euros less.
Shares of Japan's DoCoMo, the world's largest mobile-phone company, rose 4 percent after the Nihon Kezai newspaper said it will write down its investments outside Japan by half. The company will take ?1 trillion (US$7.54 billion) in charges to account for a decline in the value of investments such as AT&T Wireless Services Inc and Hutchison 3G UK Holdings Ltd, the paper said.
DoCoMo declined comment on the newspaper report. At a Tokyo news conference today, company officials said it plans to decide on the size of writedowns after the end of the fiscal year on Sunday.
"If it's not as bad as expected, there can be a positive reaction," said Jan Straatman, chief investment officer at Stichting Pensioenfonds ABP, the world's second-biggest pension fund with 150 billion euros under management.