European companies may be forced to write down a record $214 billion after overpaying for takeovers this decade, saddling investors with more losses after the worst year for stocks since 1937.
Alcatel-Lucent and Telecom Italia SpA are among 28 companies in the Dow Jones Stoxx 600 Index whose market value dropped below their so-called goodwill, the balance sheet item that reflects the premium paid in a takeover, according to data compiled by Bloomberg. While goodwill goes mostly unnoticed during bull markets, accounting regulators require that it be deducted from earnings when falling stock prices show that acquired businesses are worth less.
Credit Suisse Asset Management, Banque Martin Maurel and Neuflize OBC Asset Management, which manage a combined $633 billion, are avoiding companies that may book losses from buyouts. They say earnings and equity prices will decline to reflect assets shrunken by accounting charges. Writedowns may also limit some companies’ borrowing, reducing their ability to grow.
“It is going to be a feature of the stock market in the first six months of the year,” said Bob Parker, vice chairman of Credit Suisse Asset Management in London, which oversees about $600 billion. “If something valued at X is now less than X, the company’s share-price movement should reflect that. Companies under pressure will stay under pressure.”
Takeovers in Europe totaled $6.4 trillion this decade, led by the $100 billion purchase of Dutch bank ABN Amro Holding NV by a group led by Royal Bank of Scotland Group Plc in 2007, according to data compiled by Bloomberg. Companies paid $1.4 trillion more than so-called book value, or assets minus liabilities, the data show.
The Stoxx 600 added 5.57, or 3.1 percent, to 188.06 in London today.
When markets are rising, goodwill holds its value. That’s not the case now. The global recession and $1.05 trillion in bank losses around the world dragged the Stoxx 600 down 46 percent in 2008, the worst year since data began in 1987, while the S&P 500 slumped 38 percent, the steepest drop in 71 years. Now, companies must cut the value of goodwill to reflect the decline in stocks.
Those in Europe face the largest reductions, according to JPMorgan Chase & Co. analysts in London. Writedowns will increase everywhere this quarter because of rules adopted in 2005 that require executives to bring their estimates of goodwill in line with market prices on an annual basis. Under previous accounting rules, writing down the value of acquired assets could be spread out over decades.
Stoxx 600 companies may cut goodwill by $214 billion this year, according to a Jan. 8 report by JPMorgan. That would exceed the record $93 billion in 2002, when European companies slashed the value of mobile-phone licenses, the New York-based bank’s study showed.
Alcatel-Lucent, the world’s largest supplier of fixed-line communication networks, may need to eliminate all of its 6.61 billion euros in goodwill, according to data compiled by Bloomberg. The company posted losses of more than $6 billion since Alcatel SA bought Lucent Technologies Inc. in November 2006, a period in which its market value dropped to $4.5 billion from $35.5 billion.
“We’re in our quiet period and aren’t commenting on financial details,” said Regine Coqueran, a spokeswoman for the Paris-based company. Alcatel-Lucent reports 2008 results Feb. 4.
Royal Bank of Scotland, whose goodwill exceeded its market value by the most of any company in the Stoxx 600, said Jan. 19 that it may write down past acquisitions by as much as $28 billion, while the government stepped up a bailout in an action that left it with as much as 70 percent of the lender. The Edinburgh-based company plunged 67 percent in London trading that day.
“It’s a catastrophe for share prices,” said Jerome Forneris, a manager at Banque Martin Maurel in Marseille, France, which oversees $10 billion. “Considering the financial crisis we’ve had, we’ll see writedowns. We can have bad surprises.”
The Stoxx 600 companies with buyout premiums that exceeded their market value at the end of 2008 had total goodwill of 145 billion euros ($187 billion), according to data compiled by Bloomberg. That’s 56 billion euros more than their combined market capitalization.
Telecom Italia, the biggest telephone operator in Italy, has the largest deficit after goodwill jumped to more than 44 billion euros following the buyout of a domestic mobile-phone unit in 2005. The Milan-based company, which reports earnings on Feb. 27, had a market value of 20.1 billion euros at the end of 2008. A company spokeswoman who asked to remain unidentified declined to comment.
Grupo Ferrovial SA, the Madrid-based builder that in 2006 bought part of the operator of U.K. airports including London’s Heathrow, dropped 73 percent since the end of 2006. Ferrovial paid 3.81 billion euros for an equity stake now worth about 2 billion euros, according to Credit Suisse Group AG.
Ferrovial, which reports quarterly earnings at the end of February, declined to comment. Its reported goodwill of 6.33 billion euros is more than double its market value of 2.75 billion euros at the end of 2008.
Guillaume Duchesne at Fortis Private Banking says writedowns may pave the way for a rebound because investors will have more confidence in the accuracy of corporate financial statements. Writedowns in 2002 from mobile-phone companies including BT Group Plc and Telefonica SA preceded a four-year rally starting in March 2003.
“It’s very negative in the short term, but at least it cleans things up,” said Duchesne, a Geneva-based equity strategist at Fortis, which oversees about $117 billion. “We don’t have visibility, so it’s essential to eliminate shadowy areas.”
Writedowns may increase borrowing costs for companies with fewer assets to pledge as collateral. Nortel Networks Corp., the Brampton, Ontario-based network equipment maker that sought bankruptcy protection this month, had its credit rating cut by Moody’s Investors Service twice in the two months after announcing a $19.2 billion quarterly loss related to goodwill in June 2001.
Charges also raise concern about the ability of companies to get returns on their investments, said Emmanuel Soupre, a fund manager at Neuflize OBC in Paris, which oversees $23 billion.
“It’s like when you buy an apartment,” Soupre said. “If the apartment costs nothing when you sell it, then it’s not worth it. What you pay as goodwill you have to be sure to recover at the end. That’s the problem.”
The following list ranks the 28 companies in the Stoxx 600 whose latest reported goodwill exceeded their market capitalization at the end of 2008. All values are in local currency and companies are ranked by goodwill deficits.
Company Name Market Cap: Dec. 30 Latest Goodwill TELECOM ITALIA SA 20,142,523,400.00 44,110,000,128.00 LAFARGE SA 8,452,148,400.00 14,190,000,128.00 FRESENIUS SE-PRE 6,269,942,400.00 10,184,999,936.00 FERROVIAL 2,746,382,800.00 6,325,000,192.00 ALCATEL-LUCENT 3,516,056,400.00 6,609,999,872.00 THOMSON REUTERS 15,645,387,500.00 18,683,000,832.00 BANCO POPOLARE SC 3,170,385,700.00 5,454,708,224.00 CREDIT AGRICOLE SA 17,899,793,000.00 19,359,000,576.00 WPP Plc 4,965,014,100.00 6,422,899,712.00 EURAZEO 1,769,480,800.00 3,179,343,872.00 ACCIONA SA 5,655,950,200.00 7,037,000,192.00 WENDEL 1,781,466,600.00 2,816,100,096.00 CASINO GUICHARD 5,624,205,600.00 6,481,999,872.00 TUI AG 2,021,270,800.00 2,854,500,096.00 LOGICA PLC 1,070,900,900.00 1,735,400,064.00 DSG INTERNATIONA 310,177,400.00 920,099,968.00 ATOS ORIGIN SA 1,236,439,100.00 1,818,899,968.00 INFORMA Plc 1,020,285,200.00 1,573,529,984.00 PPR 5,910,136,200.00 6,334,200,320.00 GEOPHYSIQUE 1,581,338,400.00 2,000,999,936.00 LOTTOMATICA SPA 2,678,298,300.00 3,046,034,944.00 VALEO SA 809,477,400.00 1,098,000,000.00 ITV Plc 1,584,820,300.00 1,843,000,064.00 ENTERPRISE INNS 333,945,100.00 417,000,000.00 HOME RETAIL GROUP Plc 1,847,021,700.00 1,922,699,904.00 SANOMA OYJ 1,497,682,700.00 1,567,600,000.00 AEGIS GROUP 863,306,800.00 921,900,032.00 TULLETT PREBON Plc 307,360,100.00 355,900,000.00