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'Goodwill' dole outs hurt tech asset value

Posted: 24 Feb 2009 ?? ?Print Version ?Bookmark and Share

Keywords:goodwill payment? firm asset value? semiconductor industry?

Asset values at top technology companies worldwide are shrinking as executives implement cost-control actions that often involve significant cash payouts to former employees and also take billions in non-cash goodwill write downs in response to declining valuation on the equity market.

Most of the charges taken in recent quarters by technology businesses were mainly non-cash expenses, however, they reflect poorly on the concerned companies' asset base and further reinforce the notion that stocks in semiconductor and high-tech equipment vendors deserve the pounding they are taking on Wall Street.

Many semiconductor companies, for instance, entered the current market recession with substantial cash and short-term securities but as the downturn has deepened and as cash flow tightened or turned negative, the IC vendors are being forced to use more of their savings to fund regular operations even as they try to lighten expenses by cutting workforce or mothballing plants.

These reorganization actions, though designed to help slash expenses and reduce cash burn, most often involve initial huge payments to employees offered buyouts or laid off outright.

These payments often run into hundreds of millions in the case of businesses dealing with older employees who have been with the same employer for numerous years and are therefore entitled to bigger separation packages.

The result is that the total asset numbers on technology companies' balance sheets are looking increasingly lighter with cash and short-term securities falling from the highs reached at the beginning of 2008 before the industry began feeling the impact of the now more than one year old economic recession.

The greatest impact on balance sheets and the asset base at companies reviewed by EE Times, however, has come from goodwill and other impairment charges with cash drain coming in a close second.

Bad side of goodwill
Some executives argue goodwill valuation is not really important since it represents an intangible asset that is unlikely to impact a company's cash base. As a result, goodwillthe monetary value of which is subjective and difficult to computecan be written down or even increased following acquisitions without any impact on a company's operations, they say.

That's only partially true. Goodwill, which accountants say represents the premium paid on intangible items such as brand equity or corporate reputation and is calculated as the difference between what a buyer pays for an acquisition and the actual value of the acquired company's asset, is often initially acquired at a huge monetary cost.

Writing down goodwill, therefore, following the closing of an acquisition is an indirect admission somebody's valuation for the acquired assets was inaccurate. In other words, the buyer overpaid and might have mismanaged shareholders' funds.

Recent downward revaluation of goodwill on corporate balance sheets has been staggering.

Freescale Semiconductor Inc., for instance, wrote off enough of the goodwill on its balance sheet over the last year to see its total asset base shrink by more than half to $6.7 billion at the end of 2008 from $15.1 billion in 2007.

In Q4, the company reported it had to drop the value of the goodwill on its balance sheet by several billions because of valuation concerns.

"Given the ongoing impact from weakening conditions affecting its businesses, and the lower market capitalizations of its peer group, the company recorded non-cash impairment charges for intangible assets and goodwill totaling $3.6 billion in the fourth quarter of 2008," Freescale said in a statement.

Freescale is not alone. European rival NXP B.V. is slated to report Q4 results on March 6, but there are already signs newly appointed CEO Richard Clemmer will steer the company into another round of reorganization that could severely erode its asset base.

In Q3, for example, NXP reported $706 million in "impairment goodwill and other intangibles." The company's total assets fell 39 percent in Q3 08, to $8.1 billion, from $13.3 billion in the comparable 2007 quarter.

Asset value decline
OEMs have been as equally impacted. Total assets at Motorola Inc. tumbled in 2008 to $27.9 billion from $34.8 billion in 2007 following continuing problems in its mobile handset business and also due to reorganization actions being taken by the company.

In a statement announcing its Q4 results, Motorola said substantially all of the charges that resulted in its posting a $3.6 billion net loss for the period were "non-cash and primarily relate to the impairment of goodwill and an increase in deferred tax asset valuation reserves."

Sometimes the asset value declines reported by tech companies in recent months were not purely due to goodwill but were also a result of other balance sheet changes, including sharp reduction in cash and short-term investments as equity portfolios crash on Wall Street.

In the case of Intel Corp., for instance, cash and short-term investments fell in 2008 to $8.7 billion from $12.8 billion in 2007, helping to pull down the company's total asset to $50.7 billion from $55.6 billion in the prior year.

Other companies completely bucked the trend. Cisco Systems Inc., for example did not write down goodwill or take a major impairment charge in its latest quarter. In fact, the company added to the goodwill on its balance sheet, building this up to $12.6 billion in the fiscal 2009 Q2 ended Jan. 26, from $12.4 billion.

Cisco's total assets increased strongly to $61.4 billion in the recently ended quarter from $55.3 billion in the quarter ended Jan. 26.

Still, Cisco's latest numbers indicate the company is carrying a hefty load in goodwill, representing a non-cash intangible asset it may one day be forced to write down considerably if value depreciation continues at the current pace.

-Bolaji Ojo
EE Times

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