DealLawyers.com Blog

This Bloomberg article says that the current M&A boom may leave lots of companies with a very bad hangover in the form of big goodwill impairment charges.  According to the article, the fundamental problem is that buyers are simply paying too much for deals:

In the past two years, takeover targets have sold for a median of 11x EBITDA — essentially 11 years of profit — whereas the multiple was only about 7-9x in the years leading up to the recent merger frenzy. Transactions are getting ever-bigger and more expensive, pushing total goodwill to $6.9 trillion for the companies on which Bloomberg holds data. Corporate America accounts for more than half that amount.

Goodwill now accounts for more than 1/3rd of net assets at S&P 500 companies, & has risen by 2/3rds since 2007.  People sometimes shrug-off goodwill impairments, since they represent non-cash charges, but the article points out that these write-downs have real consequences for the companies and investors involved:

Some folks argue that goodwill impairments don’t really matter because no cash leaves the business and they’re inherently backward-looking. We disagree. These types of charges signal that cash flows won’t be as strong as a company once hoped. While shareholders may see this stuff coming, they’re caught off-guard sometimes. In addition, impairments deplete shareholder equity, which makes lenders and bondholders nervous. Companies that financed takeovers with lots debt are particularly exposed.

– John Jenkins