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Behind Huge Goodwill Charges: Confessions That Mergers Fail Yet write-offs also allow firms to dress up books and look effective later.(A)(ECONOMY IN PERSPECTIVE)
Byline: NICK TURNER
When shareholders met in March to vote on Hewlett-Packard's plan to buy Compaq Computer, they grilled HP CEO Carly Fiorina.
One common gripe: the amount of goodwill in the deal. Many investors couldn't understand why HP paid so much of a premium for Compaq. Carl Davidson, a shareholder and HP employee, equated the goodwill to "hot air."
"Goodwill does not equal hot air," Fiorina retorted. The merger would bring $2.5 billion in cost savings, she said, and that isn't reflected in the value of Compaq's assets.
Maybe so. But the deal highlighted investors' growing unease with goodwill -- the difference between the price paid for a company and the fair value of its assets.
Goodwill is supposed to represent an acquired company's intangibles -- a strong brand name or customer contacts. But the logic of goodwill accounting is murky.
And the huge goodwill write-downs in recent months aren't making the issue clearer. Why can companies write off billions in assets and then look good later when their return on equity jumps?
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