Goodwill Accounting and Wasteful M&A

Goodwill Accounting and Wasteful M&A

I read with much interest a recent FT article on how the existing system lacks prudence and encourages wasteful M&A.

The gist of the piece was around how the FASB has and is struggling to come to terms with the now $3.5tn that exists on US balance sheets as goodwill, particularly as the report says, ‘it’s not really an asset, being both unsaleable and almost certainly worthless in a liquidation. Nor does it have anything useful to say about the current valuation of a company’.

The piece, and subsequent commentary, goes on to talk about where there is heightened emotion in M&A, there are higher amounts of goodwill priced in and that it represents little more than the conjectural profits that an acquiring manager hopes to realise through the acquisition.

It’s this last line that prompts the killer question: how much value do you have to create post-deal to pay for all that goodwill? Should this surely be a question which boards should be asking in their role as M&A moderators and should there be a follow-on question that is ‘how are you going to create said value, when, by whom and at what cost?’. There may be an argument that goodwill is a costless item but achieving value is not.

It is this secondary question that many a deal maker will be afraid to be asked pre-deal in case the answer is that by linking future economic value to post-deal activities, said activities may not justify it. Even if this question is asked, if it is not answered correctly then the pressure on the acquiring manager to deliver will mount.

So, until the rules on goodwill recognition better suit investors what’s to be done?

Where excessive value is to be created, it is clear that post-deal change activities (integration) have to be more than simple change of control. It must answer four key questions:

  1. What are your net measurable objectives and benefits for this deal, and do they justify the price paid?
  2. How and when will your business need to change to support realisation?
  3. What is your plan and who will be accountable for delivering it?
  4. Is your business and its leadership ready?

It must be efficient, culturally mindful, well communicated, have change management at its heart and be delivered by professionals who are able to motivate the correct leadership behaviours to realise synergies.

Goodwill is more than just a balance sheet question and how many more impairment cases will it take such as Carillion, GE or Glencore for boards to insist on a fully thought through post-deal change plan as part of the deal business case.