Some of the world’s biggest companies are facing multibillion-dollar writedowns on recent acquisitions as a spate of deals ushers in a new era of economic uncertainty and higher interest rates.

With a third of the world economy forecast to be in recession this year, world leaders will meet this week in Davos, Switzerland, to discuss what the World Economic Forum has called a polycrisis as business leaders engage in a painful reckoning over building their empire.

The US media and healthcare companies are among those that have cut the value of business units in recent months and accountants warn that more cuts could be imminent as the season begins. annual reports.

Companies must assess the book value of intangible assets at least annually, using assumptions about future cash flows and comparisons with stock market valuations, which fell sharply in 2022.

With higher costs due to inflation and a weaker outlook for demand, many recently acquired companies may find it difficult to justify their valuations, even before accounting for higher interest rates, which further reduce the present value of assets. future cash flows.

“It’s quite a lethal combination,” said Jasmeet Singh Marwah, managing director of Stout, a valuation services firm. “For many companies. . . they made the acquisition and the performance has not been on par with what they expected or budgeted for.”

Goodwill impairment bar chart, calendar year 2022 ($tbn) showing the largest write-downs in the S&P 500

Global trading reached a record $5.7 trillion in 2021, but slowed sharply as 2022 progressed. According to Refinitiv, $1.4 trillion in transactions were agreed in the second half of last year compared to 2 .2 trillion dollars in the first, marking the biggest change from one six-month period to the next since records began in 1980.

The premium paid for an acquisition over the value of its net assets is called goodwill and is recorded on the acquirer’s balance sheet. Goodwill write-downs grew in size in the US last year, to the point that they were occasionally large enough to wipe out a company’s earnings in the quarter in which they were recorded.

The 10 largest write-downs of goodwill at S&P 500 companies in 2022 totaled $35.4 billion, according to data compiled by consultancy Kroll, compared with $6.1 billion in 2021.

In launching a bid to join Disney’s board of directors this week, investor nelson petz He highlighted the roughly $50 billion in goodwill on Disney’s balance sheet attributable to the Fox acquisition, which he predicted would have to be largely written off.

Business and political leaders in Davos for the WEF’s first winter meeting since before the coronavirus pandemic face a very different landscape from three years ago.

Prior to the meeting, the WEF’s annual risk report warned of a polycrisis as the rising cost of living and economic downturn combine with continued failures to tackle inequality and climate change.

Goodwill impairment bar chart, calendar year 2022 (€ billion) showing the highest write-downs on the Stoxx 600

Kristalina Georgieva, Managing Director of the IMF, who will be in Davos to present the latest economic outlook for the fund, foretold earlier this month that a third of the world economy will be in recession this year, including half of the EU.

The size of goodwill amortizations in Europe has not increased so far. The top 10 of the Stoxx 600 totaled €6.4bn last year, according to Kroll, up from €17bn in 2021.

European companies have later financial year-ends and less frequent reporting, said Carla Nunes, Kroll’s managing director, suggesting more goodwill impairments could occur in the spring.

Dan Langlois, a partner at KPMG, said recent acquisitions could be vulnerable to writedowns even if they are currently performing as planned.

“When you take into account cost inflation that might not have been anticipated, when you take into account higher interest rates, which raise the rate that you might use in a discounted cash flow analysis, and then you take into account some of the uncertainties associated with a possible recession. Those things in their entirety will influence fair value,” he said.

In October, Comcast reported a writedown of more than $8 billion of broadcaster Sky, which it acquired in 2018, citing challenging economic conditions in the UK and other European markets and plunging the media group into a quarterly loss of $ 4.6 billion.

Early last year, Teladoc Health, which acquired virtual care provider Livongo for $13.9 billion in 2020, posted two straight quarters of writedowns totaling close to $10 billion.

While companies are required to subtract goodwill amortizations from their earnings, many exclude them from the “adjusted” figures that stand out in earnings reports.

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 increases, which in turn increases the risk of defaulting on its debt covenants, he said. It can also favor future returns.

“Management will tell you it’s not cash, it’s one time, don’t worry about it. Don’t forget that when assets perform so well two years later, it’s because they suffered a giant deterioration.

Kroll’s Nunes added that goodwill impairments provide a read on the quality of a company’s dealings. “You can tell if you’re getting a return on your investment,” he said, “or if the buyer may be overpaying for these deals.”

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