Of the arcane accounting subjects, the treatment of goodwill and how it should be accounted for has been through more iterations than most, but on one subject most market observers are agreed. It can generally be ignored. Vodafone, for example, acquired vast amounts of goodwill when it bought Mannesmann in 2000 and at the last count the impairments totalled around £30 billion. An impairment charge in the billions and wiping out reported profits virtually every year in the past decade was casually ignored by most observers. An even worse case is AOL’s acquisition of Time Warner (‘the worst acquisition in history’) where the impairments to date total $102 billion out of a total transaction cost of $162 billion. But in both cases, the acquisitions were made via share-for-share exchanges, not using hard cash. So you could conclude that it was all highly valued paper taking out other highly valued paper, and the resulting accounting charges for goodwill impairment were just that, accounting.
But it’s hard to argue that goodwill impairments don’t matter when it’s hard cash that’s been used to make the acquisition. Which makes the $6 billion write-down announced yesterday by Microsoft all the more egregious. Yes, it’s a non-cash charge that will impact this year’s earnings, but the usual accompaniment of analyst and investor disinterest won’t be there this time. This one matters, and it’s an admission by the Microsoft management team that they’ve wasted billions of shareholders’ cash on a failed acquisition. It was, of course, the very same management team that acquired Skype (which in its brief history to date has never made a profit and on my understanding of its business model, such as it is, doesn’t look like doing so in my lifetime) for an even higher sum, $8.5 billion. Might be worth keeping an eye on the goodwill value in that one too.