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.
Shares of companies that spent freely on takeovers, such as Vodafone Group, Europe's largest mobile-phone services company, already plunged in the past two years as investors became wary they overpaid. Vodafone, which spent more than US$200 billion since 1999, has lost 64 percent of its value from 24 months ago.
Weeding out the balance sheet has been prompted in part by changes in the bankruptcy of US energy trader Enron Corp, the largest ever in the US.
"Following what happened to Enron, people are more focused on real valuations and goodwill is a doubtful dubious asset," said David Chapman, who helps manage US$700 million at Towry Law Asia Ltd in Hong Kong. "People are just very, very worried about the situation at the moment, so some companies are responding with a more realistic look at things."
NO-LIMITS PARTNERSHIP: ‘The bottom line’ is that if the US were to have a conflict with China or Russia it would likely open up a second front with the other, a US senator said Beijing and Moscow could cooperate in a conflict over Taiwan, the top US intelligence chief told the US Senate this week. “We see China and Russia, for the first time, exercising together in relation to Taiwan and recognizing that this is a place where China definitely wants Russia to be working with them, and we see no reason why they wouldn’t,” US Director of National Intelligence Avril Haines told a US Senate Committee on Armed Services hearing on Thursday. US Senator Mike Rounds asked Haines about such a potential scenario. He also asked US Defense Intelligence Agency Director Lieutenant General Jeffrey Kruse
INSPIRING: Taiwan has been a model in the Asia-Pacific region with its democratic transition, free and fair elections and open society, the vice president-elect said Taiwan can play a leadership role in the Asia-Pacific region, vice president-elect Hsiao Bi-khim (蕭美琴) told a forum in Taipei yesterday, highlighting the nation’s resilience in the face of geopolitical challenges. “Not only can Taiwan help, but Taiwan can lead ... not only can Taiwan play a leadership role, but Taiwan’s leadership is important to the world,” Hsiao told the annual forum hosted by the Center for Asia-Pacific Resilience and Innovation think tank. Hsiao thanked Taiwan’s international friends for their long-term support, citing the example of US President Joe Biden last month signing into law a bill to provide aid to Taiwan,
China’s intrusive and territorial claims in the Indo-Pacific region are “illegal, coercive, aggressive and deceptive,” new US Indo-Pacific Commander Admiral Samuel Paparo said on Friday, adding that he would continue working with allies and partners to keep the area free and open. Paparo made the remarks at a change-of-command ceremony at Joint Base Pearl Harbor-Hickam in Hawaii, where he took over the command from Admiral John Aquilino. “Our world faces a complex problem set in the troubling actions of the People’s Republic of China [PRC] and its rapid buildup of forces. We must be ready to answer the PRC’s increasingly intrusive and
STATE OF THE NATION: The legislature should invite the president to deliver an address every year, the TPP said, adding that Lai should also have to answer legislators’ questions The Chinese Nationalist Party (KMT) yesterday proposed inviting president-elect William Lai (賴清德) to make a historic first state of the nation address at the legislature following his inauguration on May 20. Lai is expected to face many domestic and international challenges, and should clarify his intended policies with the public’s representatives, KMT caucus secretary-general Hung Meng-kai (洪孟楷) said when making the proposal at a meeting of the legislature’s Procedure Committee. The committee voted to add the item to the agenda for Friday, along with another similar proposal put forward by the Taiwan People’s Party (TPP). The invitation is in line with Article 15-2