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that several companies have in recent weeks announced large write-downs of goodwill, intangible assets, and other assets. Recent corporate announcements of multi-billion dollar goodwill and asset write-offs include Time Warner ($25 billion), ConocoPhillips ($35 billion), Regions Financial ($6 billion), and Royal Bank of Scotland ($33 billion4). One should expect to see more such announcements of asset write-offs in the coming weeks and months. Goodwill is particularly vulnerable to large write-offs. Because of the wave of mergers and acquisitions that started in the late 1990s, goodwill is now a large percentage of the total assets of many corporations, so goodwill write-offs, when they occur, can be signicant. In general, technology, media, energy, and consumer products companies tend to have large goodwill accounts due to industry consolidations and acquisition activities. For some technology companies, such as Cisco Systems, Inc., goodwill is the largest non-current asset on the balance sheet. According to a research report cited by The Economist, goodwill in corporate balance sheets totals about $2.6 trillion.5 A large portion of this goodwill undoubtedly resulted from mergers and acquisitions completed at the height of the stock market valuation in the 2004-2007 period. These transaction valuations have to be reassessed given the stock market decline and the recessions effect on projected cash ows. It is easy to see that the resulting goodwill write-off may add up to several hundreds of billions of dollars, rivaling in magnitude the initial wave of 2008 losses recognized from mortgage-related assets. If history is any guide, we may also see several lawsuits against companiesand their advisors following the asset impairment announcements related to the amount and the timing of these impairment charges as well as the alleged damages based on stock price declines. A late-2008 impairment announcement by CBS Corporation provides an illustration. During 2008, the stock price of CBS declined considerably, falling almost 50 percent by
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Lisa Isom Sherrye Henry Jr. Paul Heidt & Adam Manson Doug Twitchell Laurie Morrisey Lucretia Lyons Stephanie Crader Linda Mendenhall David Foster
Z. CHRISTOPHER MERCER, ASA, CFA
Mercer Capital Memphis, Tenn.
JOHN W. PORTER
Baker & Botts Houston, Texas
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april 2009
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About the author: Bala Dharan is a vice president in the nancial accounting and valuation group at CRA International, Inc., a global business, nancial and economic consulting
april 2009