Novice Investing - Goodwill Not So Good

Date: Monday 01st 2008f December 2008 05:39:14 PM

Goodwill Not So Good - 10/13/2005

By: Novice Investing Staff

There are reasons why we don't like companies with high amount of goodwill in its balance sheet. First, a little introduction about goodwill. Goodwill is obtained whenever an acquirer bought another company. The price offered above the company's net asset value is called goodwill. For example, company A has decided to buy company B for $ 100 Million. The net asset value of company B is $ 80 Million. The difference of $ 20 Million will go into goodwill section of the combined company.

So, why having high amount of goodwill is bad? For starter, high amount of goodwill indicates the possibility that a company might overpay for acquisition. Goodwill is the amount of invisible assets that an acquirer thought is worth paying for.

Furthermore, having a large amount of goodwill inflates the total value of your assets. If A has a total assets of $ 250 M and $ 20 M of it is goodwill, then it overstates its asset by 8%. Let's take a look at one company that has been mentioned here previously; Tribune Co. (TRB)

Tribune has a goodwill of $ 5.47 Billion on its balance sheet. Total asset is $ 14.17 Billion as of June 2005. In addition, there are 3.40 Billion of intangible assets on TRB's balance sheet. Do you see a disconnect here? 60% of Tribune's total asset is intangible. While we believe that Tribune owns a valuable brand of newspapers, it is not worth $ 8.87 Billion. It might be worth $ 3.40 Billion that TRB classifies as intangible assets. That still leaves $ 5.47 Billion of goodwill. Does this constitutes a waste asset? We don't have the answer.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Tribune Co. (TRB) or other securities.

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