Surf’s Up! Wave of M&A-related Writeoffs Seen

CHICAGO (Reuters) – If the fear stalking Wall Street has you nostalgic for the days of confident dealmaking, do not worry — a trip down memory lane is on its way.

Over the next few quarters, experts say investors are likely to get plenty of reminders of those headier, happier days as dozens of companies that participated in the greatest M&A wave in history revisit those deals with their auditors — and admit how much they overpaid.

It won’t be pretty.

“We’re going to see an avalanche of these things,” says James Cox, a corporate securities and accounting expert at the Duke University School of Law. “In the euphoria of the times they overpaid and they overpaid because money was cheap.”

With the credit markets frozen, asset prices falling and regulators pushing auditors to do their jobs, it’s time for executives to admit they made some “pretty damned dumb decisions,” Cox added.


The corporate confessions, in fact, have already begun as the downturn in stock prices compels companies to reassess deals inked when their shares were much higher.

Last Monday, Sirius XM Radio Inc (SIRI.O: Quote, Profile, Research, Stock Buzz) took a $4.8 billion writedown related to Sirius Satellite Radio’s acquisition of rival XM. The company blamed the writedown on the significant decline in its share price from February 2007, when the merger was first announced. At that time, Sirius traded at about $3.79, compared with 26 cents at the close on Friday.

In an SEC filing last week, Google Inc (GOOG.O: Quote, Profile, Research, Stock Buzz) said it believed its 2005 investment in Time Warner Inc’s (TWX.N: Quote, Profile, Research, Stock Buzz) AOL unit was impaired. And although it said it would continue to carry the $1 billion investment on its books at its original cost in hopes the situation might right itself, Google warned it might need to take a future charge that “could be material.”

And late last month, computer server maker Sun Microsystems Inc (JAVA.O: Quote, Profile, Research, Stock Buzz) took a $1.44 billion charge related to its 2005 acquisition of Storagetek for $4.1 billion, citing a “sustained decline in Sun’s market capitalization.”


Several factors, including accounting rules that require companies to test assets on their books for impairment, are driving the disclosures.

So to is the stepped-up oversight of accountants that resulted from the Enron and WorldCom corporate scandals.

The head of the Public Company Accounting Oversight Board, which was set up after the high-profile financial scandals earlier this decade, tells Reuters his staff is urging auditors to do their jobs extra diligently.

“Due to the spread of the crisis, we are monitoring the situation closely and encouraging auditors to be mindful of risks in all sectors, and plan their audits accordingly,” said Mark Olson, the chairman of the PCAOB.

The real trigger for the confessions is the selloff on Wall Street, which is forcing companies to confront past sins — or lose whatever credibility they have left with investors.

“You have a lot of companies out there now selling below book value, which isn’t a trigger in the accounting literature, but it’s a pretty good indication that there’s no confidence in the market that you’re going to get adequate returns on the investment you made,” says Jack Ciesielski, editor and publisher of The Analyst’s Accounting Observer, an advisory service.

“If they’re not taking charges, I think they’d lose some credibility in the market, especially if their competitors are in a similar position and are taking the charges.”


But this is Wall Street, so crafty calculation — and a little greed — is playing a role, too.

One of the things companies insist on as they book these impairment charges is that they are not real — because they involve taking down numbers on a balance sheet, not paying out cold hard cash.

But the truth is that the impairment charges usually represent dollars — either in the form of cash or the value of shares — that a company plunked down at some point to buy an asset. Indeed, goodwill is really just an accounting euphemism. It is the amount buyers pay above and beyond the value of the operating assets they purchased.

“Real money is involved. But it’s real money that was spent years ago,” says Ciesielski.

And real dollars are on the line going forward, too. These adjustments to their books make several key financial metrics touted by executives to justify their salaries and bonuses — including return on equity and return on assets — look better.

That’s why Cox at Duke considers the current wave of writedowns “opportunistic” — even the ones taken by big financial companies because of the toxic mortgages on their books. By writing assets down — in some cases to zero — the companies increase the likelihood of blowout earnings down the road because they have nothing that has gone sour to charge against those profits.

“Even these banks, at some point, are going to show some real improvement and the new executives are going to hit their numbers and there will be another home in the Hamptons,” Cox predicts.

“That’s the damned truth.”

By James B. Kelleher
(Editing by Andre Grenon)