Nasdaq OMX on Short List to Follow HP on Writedowns

Nasdaq OMX Group Inc. (NDAQ), WellPoint Inc. (WLP) and France Telecom SA (FTE) are among 21 large companies to face potential goodwill writedowns for underperforming acquisitions like the charge that sapped Hewlett-Packard Co.’s shares.

Those companies, along with Telecom Italia SpA (TIT), Lafarge SA (LG) and Cemex SAB, trade at less than book value and carry unusually large amounts of goodwill relative to market value, according to data compiled by Bloomberg. The companies have market capitalizations that are less than or only slightly higher than goodwill, which is recorded when the price paid for an acquisition exceeds the fair value.

Those criteria are the best predictor of a potential writedown, such as Hewlett-Packard’s $8.8 billion impairment charge last month, said Charles Mulford, an accounting professor at Georgia Institute of Technology in Atlanta. The subjective analysis companies use to determine whether goodwill value needs to be reduced leaves “a lot of sponginess” and makes writedowns difficult to forecast, he said.

“A low market cap relative to book value and relative to goodwill is a yellow light, it’s a warning sign,” he said in an interview. “It’s not enough to say, ‘Therefore they must write down goodwill.’ But that’s the most objective, visible, generally available indicator of a problem with goodwill.”

Nasdaq’s $5.29 billion of goodwill at the end of September, from acquisitions such as the Philadelphia Stock Exchange, the Boston Stock Exchange and OMX AB, is more than its $4.15 billion market value. Telecom Italia’s goodwill is almost triple its market capitalization.

Often Overlooked

Goodwill often goes unnoticed by investors and analysts because it reflects past acquisitions and because the writedowns are non-cash charges.

The effect on Hewlett-Packard shows why they may want to pay more attention: Its shares have slid 26 percent since Aug. 7, the day before the company said it would have a third- quarter goodwill charge of about $8 billion. And the biggest goodwill writedowns of the past decade -- including at Time Warner Inc. and Sprint Nextel Corp. (S) -- coincided with destruction of shareholders’ value.

A goodwill writedown “calls into question managers’ strategic plans and the way they went about executing those plans,” said Patrick Hopkins, an accounting professor at Indiana University in Bloomington and a member of a Financial Accounting Standards Board advisory council. “If you start to call into question that, then you’re starting to call into question management’s vision.”

Berkshire’s Ratio

A company’s goodwill isn’t by itself a sign of troubled acquisitions. Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), which has bought companies ranging from railroads to insurers, had $54.1 billion of goodwill as of Sept. 30. That’s less than one- fourth of the Omaha, Nebraska-based company’s $221.3 billion market capitalization.

France Telecom and Milan-based Telecom Italia may be facing writedowns after a decade of “lousy” acquisitions by the phone companies, Robin Bienenstock, a Sanford C. Bernstein analyst in London, said in an interview. Vodafone Group Plc (VOD), which is the world’s second-largest mobile-phone company, took a 5.9 billion- pound ($9.5 billion) charge on its Spanish and Italian businesses in November, and more may come, she said.

“As soon as their businesses started to slow down, rather than focus on improving returns in their existing business, these companies went out and paid very high prices for new business in other places,” Bienenstock said.

Simon Gordon, a spokesman for Newbury, U.K.-based Vodafone, declined to comment on any future writedown plans. Spokesmen at Telecom Italia and Paris-based France Telecom had no immediate comment.

Management Change

A management change can also lead to a goodwill writedown, as it did for Hewlett-Packard, because it’s easier for a new chief executive officer to recognize that a past acquisition didn’t work as planned, Hopkins said in an interview.

In Hewlett-Packard’s case, the Palo Alto, California-based company cited the purchase of software maker Autonomy Corp. in August 2011, a month before Meg Whitman became CEO.

WellPoint, the second-largest U.S. provider of health plans, may fit that pattern, Brian Wright, a Monness, Crespi, Hardt & Co. analyst in New York, said in an interview.

Angela Braly resigned under investor pressure in August as CEO of WellPoint, which plans to fill the post by March. WellPoint is trading at about 20 percent below book value, after the Indianapolis-based company made more than $11 billion of acquisitions since 2005.

‘Legacy Artifact’

“You have to revisit everything if you’re going to turn around an organization,” said Wright, who recommends buying WellPoint shares. He said that WellPoint’s acquisitions made sense even if it may have overpaid and that any goodwill writedown wouldn’t affect his valuation of the company.

The goodwill “is just a legacy artifact,” he said. “The assets are solid assets.”

Kristin Binns, a WellPoint spokeswoman, didn’t respond to telephone and e-mail messages seeking comment.

The Financial Accounting Standards Board eliminated amortization of goodwill in 2001, leaving it on a company’s books indefinitely unless it’s written down, said Don Walker, a senior managing director at FTI Consulting in Washington who worked 17 years at the U.S. Securities and Exchange Commission as a senior assistant chief accountant.

“In a lot of cases, people may pay more than fair value of the assets and liabilities that they take on because they have an expectation of positive future cash flows,” he said in an interview. “But sometimes those positive future cash flows don’t happen.”

Cement Acquisitions

A flurry of acquisitions among cement makers before a global construction recession increased goodwill at companies such as Paris-based Lafarge. After impairment charges of 160 million euros ($212 million) in this year’s second quarter and 285 million euros in 2011, the company still had 12.5 billion euros of goodwill as of Sept. 30. Lafarge has a market capitalization of 13.7 billion euros, and trades at 85 percent of its book value per share.

“Lafarge has a greater goodwill than its competitors because it grew more through acquisitions,” Phil Roseberg, a London-based analyst at Sanford C. Bernstein who rates its shares underperform, said in an interview. “Has this growth through acquisitions created value? The answer is no.”

Melanie Coviaux, a Lafarge spokeswoman, declined to comment.

Cemex, the largest cement maker in the Americas, and HeidelbergCement AG (HEI) both have goodwill that’s higher than stock- market value. Andreas Schaller, a HeidelbergCement spokesman, said the Heidelberg, Germany-based company has posted writedowns of 494 million euros since 2009 and will publish results of its annual goodwill review in March.

U.S. Unit

The U.S. construction market is improving, which argues against a need for goodwill impairment at Cemex’s unit in that country, Maher Al-Haffar, the Monterrey, Mexico-based company’s investor relations chief, said in an interview. At the end of the third quarter, the U.S. unit carried a majority of Cemex’s 142.7 billion pesos ($11.1 billion at that time) of goodwill.

At Nasdaq, the SEC in September requested information on goodwill calculations, according to company regulatory filings. Nasdaq cited a confidentiality clause to keep some of its answers from becoming public. Joseph Christinat, a spokesman for the New York-based company, declined to comment.

Predicting large goodwill writedowns is difficult because there’s no one equation to calculate whether a reduction in the value is needed, Hopkins said.

“It’s more an art than a science,” he said. “Accounting is notoriously late in delivering news.”

To contact the reporter on this story: Thomas Black in Dallas at tblack@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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