Some of the world’s biggest companies are facing multibillion-dollar delays in recent acquisitions as a wave of deal-making gives way to a new era of economic uncertainty and high interest rates.
With a third of the global economy forecast to be in recession this year, world leaders will gather in Davos, Switzerland this week to discuss what the World Economic Forum has called a “polycrisis” as business leaders take a painful reckoning of their empires. building
US media and healthcare companies are among those that have cut the cost of business units in the past few months, and accountants warn that more cuts may be imminent as the annual reporting season gets under way.
Companies are required to estimate the carrying value of intangible assets at least once a year, using assumptions about future cash flows and comparisons with market valuations of securities that have fallen sharply in 2022.
With higher costs due to inflation and a weaker demand outlook, many recently acquired businesses may struggle to justify their valuations even before higher interest rates apply, further reducing the present value of future cash flows.
“It’s a pretty deadly combination,” said Jasmeet Singh Marwah, managing director of valuation services firm Stout. “For many businesses. . . they did the acquisition and the performance didn’t match their expectations or budget.”
Global dealmaking reached a record $5.7 trillion in 2021, but has slowed sharply as progress progresses in 2022. According to Refinitiv, $1.4 trillion in deals were agreed in the second half of last year, compared to $2.2 trillion in the first, the biggest six-month swing since records began in 1980.
The premium paid for the acquisition over its net asset value is called goodwill and is recorded on the acquirer’s balance sheet. Last year, goodwill balances in the US swelled to the point where they were sometimes large enough to wipe out a company’s profits in the quarter in which they were recorded.
The 10 largest goodwill balances at S&P 500 companies totaled $35.4 billion in 2022, compared with $6.1 billion in 2021, according to data compiled by consulting firm Kroll.
Launching a bid to join Disney’s board this week, investor Nelson Peltz highlighted the roughly $50 billion in goodwill on Disney’s balance sheet attributed to the Fox acquisition, which he predicts will be largely written off.
Business and political leaders in Davos for the first WEF winter meeting before the coronavirus pandemic face a very different landscape than three years ago.
Ahead of the meeting, the WEF’s annual risk report warned of a “polycrisis” as rising living costs and economic recession combine with continued failures to tackle inequality and climate change.
International Monetary Fund Managing Director Kristalina Georgieva, who will be in Davos to present the fund’s latest economic outlook, predicted earlier this month that a third of the global economy will enter recession this year, including half of the EU.
Goodwill balances in Europe have not yet increased. The 10 largest in the Stoxx 600 accounted for 6.4 billion euros last year, down from 17 billion euros in 2021, according to Kroll.
European companies have later fiscal year-ends and report less frequently, said Kroll CEO Carla Nunes, suggesting more goodwill impairments could occur in the spring.
KPMG partner Dan Langlois said recent acquisitions could be vulnerable to balances, even if they are currently performing according to plan.
“When you take into account cost inflation that maybe wasn’t anticipated, when you take into account higher interest rates that raise the interest rate, you can use discounted cash flow analysis, and then take into account some of the uncertainty associated with the potential with the recession. , those things will generally affect the real value,” he said.
In October, Comcast reported a more than $8 billion write-off on broadcaster Sky, which it acquired in 2018, citing tough economic conditions in the U.K. and other European markets and a quarterly loss of $4.6 billion for the media group.
Early last year, Teladoc Health, which acquired virtual care provider Livongo for $13.9 billion in 2020, posted two consecutive quarters of enrollments totaling nearly $10 billion.
Although companies are required to deduct goodwill balances from their earnings, many exclude them from the “adjusted” numbers they highlight on their income statements.
That doesn’t mean investors should ignore them, said David Zion, founder of Zion Research.
When a company reduces the value of its assets, its debt-to-equity ratio rises, which in turn increases the risk of defaulting on its debt covenants, he said. It may also favor future returns.
“Management will tell you it’s cashless, it’s one-off, don’t worry about it. Don’t forget that when the return on assets is so good after two years, it’s because they’ve taken a huge write-down.”
Kroll’s Nunes added that the goodwill impairment reflects the quality of the company’s deals. “You can tell if you’re getting your investment back,” he said, “or the buyer might be overpaying for this business.”
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