Survey finds “goodwill” accounts for almost half of enterprise value in acquisitions
High percentage places companies at risk of impairment in turbulent times ZURICH/LONDON, 25 February 2009 - With the increasing importance placed by regulators on fair value measurements, it is interesting to note that clearly identified intangible assets, such as brands, represented on average just 23% of enterprise value, while 47% of enterprise value was ascribed to “goodwill” in recent corporate transactions surveyed for a report released today by leading professional services organization Ernst & Young.
The report, Acquisition accounting - What’s next for you? A survey of price purchase allocation practices, examined how the transaction values of 709 companies across 21 countries were allocated. With a high proportion ascribed to goodwill, many companies are placing a large percentage of enterprise value at risk of impairment under current volatile economic conditions.
Louis Siegrist, Transaction Advisory Services Leader at Ernst & Young Switzerland, says:
“The accounting consequences of these acquisitions need to be carefully considered by acquisitions teams. For each transaction, IFRS standards require companies to fair value the tangible and intangible assets acquired. Tangible and amortizable intangible asset values will depreciate as per their life expectancy, affecting future earnings.”
“In the current difficult economic conditions, the goodwill element becomes more susceptible to volatility and write-downs, which can have a significant impact on investor confidence and on the company’s financial health.”
Of the sectors that were identified, the consumer products sector had the highest average allocation of enterprise value to goodwill, with 65% attributed to it. The technology sector was next with 60% allocated to goodwill. Tangible assets represented only 9% of enterprise value in the consumer products sector.
Among the intangible assets actually recognized by the buyers, customer relationships and contracts were cited in 44% of deals surveyed. These assets are particularly important in the insurance and telecommunications industry, where transactions are often motivated by the purchase of a client portfolio. Brand (31% of transactions) and technology (20% of transactions) are the other most often identified intangible assets.
Revised accounting standards
Upcoming revised standards issued by the International Accounting Standards Board call for new areas to be measured at fair value and give rise to new challenges for the valuers.
Louis Siegrist concludes, “There is a danger the consequences, from an accounting perspective, of these changes will be overlooked until it is too late. One example is contingent consideration. As subsequent changes in contingent consideration will no longer effect goodwill, getting the fair value right at the date of acquisition is critical”.
About the report
This survey is based on information disclosed in 2007 annual reports and other public sources, such as OneSource or Mergermarket. The Ernst & Young Transaction Advisory Services teams that worked on this study did not have access to any confidential information.
Results are presented as percentages of enterprise value (calculated as the sum of net financial debt and the acquisition price).
Report «Acquisition accounting – What’s next for you?» (PDF, 759 kB)
Download News Release "Survey finds “goodwill” accounts for almost half of enterprise value in acquisitions" (PDF 87 kB)
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