Understanding the Non-linear Relationship between Goodwill and M & A
Is goodwill impairment a false alarm?
Understanding the Non-linear Relationship between Goodwill and M & A
Hong Taiguan | A false alarm?
商誉与并购的非线性关系 原创： 班妮 洪泰Family 1月8日，财政部会计准则委员会发布通知：“近日，企业会计准则动态第9期刊登了企业会计准则咨询委员会咨询委员针对会计准则咨询论坛中的‘商誉及其减值’议题文件的反馈意见观点摘编。
The opinions of these feedbacks are only the opinions of experts on the conference papers.
Relevant units and enterprises are requested to do a good job of accounting treatment of goodwill in accordance with the current requirements of China’s corporate accounting standards.
“The issue that goodwill may be amortized in recent days has caused a great response in the capital market. Many people are worried that the revision of accounting standards will have a significant impact on companies that have done a lot of mergers and acquisitions in the past and the future mergers and acquisitions of enterprises.
Let’s hear the opinions and suggestions of experts.
This article was written by Benny, Managing Director of Hongtai M & A Fund, and is shared with readers.
The goodwill to be amortized turned out to be an oolong. Internal expert discussions were misunderstood as policy implementation. The above-mentioned explanations of the Accounting Standards Committee have temporarily eliminated the current concerns of many entrepreneurs and capital market people.The discussion does not mean that it will not be implemented in the future.
In recent years, the sharp decline in the goodwill of listed companies caused by the A-share merger boom in recent years has long been criticized by industry insiders.
As a result, when many companies or investment institutions make mergers and acquisitions, they may think that a large amount of goodwill may be generated by the merger and acquisition, and they will think that this transaction cannot be done.
Many companies with high goodwill on their balance sheets are also regarded by the media or investment institutions as companies with high potential risks.
Is goodwill impairment, amortization of goodwill, and even goodwill itself really a beast of flood for corporate mergers and acquisitions?
The economic significance of goodwill refers to the capitalized value of goodwill that can bring excess profits to the business of the enterprise in the future and exceeds the normal profitability of identifiable assets.
The goodwill generated in mergers and acquisitions refers to the difference between the total purchase price and the fair value of the identifiable net assets of the enterprise.
Goodwill in English has a good name: goodwill.
However, in the historical practice of goodwill, it does not seem to be good. On the contrary, it has always caused various problems to enterprises.
The United States is the first country to regulate goodwill accounting. In 1944, the American Accounting Procedures Committee and the American Institute of Certified Public Accountants proposed the earliest accounting treatment specifications for goodwill accounting. Goodwill is classified as an intangible asset and requires amortization.
Since then, the accounting treatment of goodwill has undergone several major changes in history. Sometimes it is required that amortization is not allowed and only impairment is provided when necessary; sometimes it is determined that goodwill needs to be amortized within a certain period of time.
After entering the millennium, the US Financial Accounting Standards Board passed the rules for the impairment test of goodwill in business combinations. No impairment is not amortized, and goodwill impairment is not amortized. This is the practice adopted by most countries in the world.
However, some countries, such as the United Kingdom, have allowed amortization of goodwill in recent years.
This accounting method of impairment without amortization has untied many companies that have grown through mergers and acquisitions, so after several global mergers and acquisitions, the total goodwill of listed companies worldwide has reached US $ 8 trillion (Bloomberg2018Statistics in the third quarter of this year), and the cumulative impairment of the goodwill of the 500 companies with the highest market capitalization in the United States and Europe over the past ten years reached US $ 690 billion.
Goodwill is not just a headache for Chinese companies and capital markets.
The impulse to acquire is related to the economic prosperity. When the stock price goes up, companies all over the world like to splurge.
So some people think that high goodwill inevitably brings huge risks of goodwill impairment in the future, and M & A cannot bid.
This view makes some sense, because it seems that the higher the bid for a company’s acquisition, the greater the goodwill it generates.
However, high goodwill does not necessarily result in impairment of goodwill.
Look at companies with the largest amount of goodwill, such as AT & T ($ 143 billion), Anheuser-Busch InBev ($ 137 billion), General Electric ($ 80.2 billion), and even Buffett’s own company, Berkshire, who has blamed the goodwillHathaway, goodwill amounting to $ 81 billion (third quarter 2018 figures).
We cannot simply believe that these companies are high-risk companies with great risks in their financial statements based on the logic of A shares.
High goodwill does not necessarily correspond to a significant risk of goodwill impairment.
Its core lies in the management of goodwill and professional judgment of the purchase price.
Take British public relations media company WPP as an example. Historical data shows that WPP Group’s revenue in 2014 was 115.
2.8 billion pounds with total assets of 267.
￡ 5.3 billion, net worth 78.
2.7 billion pounds, with goodwill as high as 99.7.9 billion pounds, more than the company’s net assets, accounting for 37 of the company’s total assets.
The goodwill recognised for the year was only ￡ 17 million.
About the WPP Group’s merger and acquisition history in the past 30 years, the accumulated goodwill impairment is only less than 600 million pounds, and the overall goodwill ranking of nearly 10 billion pounds appears insignificant.
Therefore, the level of goodwill is not linearly related to the success of mergers and acquisitions.
A large proportion of the impairment of goodwill lies in the serious discrepancy between the price and the value. The actual value of the purchased target company is far lower than the price paid, and it is impossible to produce the expected synergy or high-speed growth in the future.
In the past, in the mergers and acquisitions of many A-share companies, the performance value of gambling terms was used instead of professional value judgment. Once the gambling can be accepted, the risk is considered to be controllable. In practice, a large number of companies that accept gambling have failed to integrate management after the acquisition and even have financial fraudTo whitewash performance and buy fake performance at high prices, it will inevitably be “hit back to its original shape” in the future.
The true culprit of goodwill impairment is unrealistic performance and unrealistic future growth predictions that lead to high estimates of assets.
If you think that high prices will inevitably lead to the impairment of goodwill in the future, you are unwilling to pay a premium for good companies, which leads to the “used car market effect” that economist George Akerlof calls, which is the so-called adverse selection:If buyers are unwilling to pay a high price in the market, the owners of good cars will not be able to sell them, and they would rather not sell them, while the owners of bad cars will still have the incentive to buy the car at a price higher than their own value through packaging., Which eventually led to no good cars in the used car market.
Is the price too high a bargain?
Facebook’s acquisition of Instagram may serve as a reference case.
In 2012, Facebook founder Zuckerberg officially announced the acquisition of Instagram for $ 1 billion in cash plus stock (final transaction price was 7.
$ 1.5 billion).
At the time, Instagram was a niche software with only about 30 million users, only 13 employees, and almost zero revenue.
When the acquisition was announced, many people generally believed that Xiaozha’s shot was too high and questioned whether Facebook was fueling another technology bubble.
Five years after the acquisition was completed, public opinion has been filled with praise: the high-priced acquisition of that year was successfully integrated by Facebook with a potential future trend, while Instagram was made a better social product.
Its users have exceeded 600 million people five years after the acquisition, and three quarters of these 600 million users live in countries and regions outside the United States. Instagram has become a veritable social giant in the world.
Many analysts believe that Facebook may generate more than billions of dollars in advertising revenue in the future.
This confirms what Buffett has repeatedly said at the same time: What you pay is the price, but the value you get.
If it weren’t for an irresistible price of $ 1 billion, Instagram would probably not be sold, and the industry landscape in the future might be another story.
In the short term, the acquisition of Instagram has no positive effect on Facebook’s financial performance and may even have a potential impact, but in the long term, the company’s position, influence and strength in the industry have improved significantly.
Looking at the history of world business, the development history of many great companies is a history of mergers and acquisitions.
As a means of epitaxial growth, M & A is an indispensable means for industry integration and improvement of enterprise production efficiency.
So how to avoid the meaningless acquisition impulse of some enterprises?
Can goodwill amortization solve related problems?
Otherwise, the accounting treatment of goodwill in various countries in history will not be repeated many times.
Along with the general trend of global mergers and acquisitions integration, on August 29, 2018, the International Accounting Guide stated that it will consider making major adjustments to the goodwill accounting method, that is, considering the amortization of goodwill.
However, if you are afraid to do mergers and acquisitions 青岛夜网 because you are worried about amortization of goodwill, you will make the mistake of investing in rats.
Really ambitious companies will not abandon the company’s development strategy because of the performance of short-term financial statements, nor will they be kidnapped by the capital market, and do speculative mergers and acquisitions without a professional judgment basis.
We believe that from the historical experience, the current goodwill impairment accounting treatment method has positive significance for promoting industry integration and enterprise development, but the improvement of the existing accounting treatment method may be worth exploring.
However, for companies and investors who want to make mergers and acquisitions, the rationality of a merger and acquisition price is not the level of goodwill, but the scientific calculation of its future growth space, the integration of operation improvement plans, and the execution of acquisition management.And so on, all of them rely on professional investment vision and ability.