Houlihan Lokey Launches Third Annual European Goodwill Impairment Study

Goodwill Impairment Write-Downs Are at Lowest Levels in Five Years—Is this Expected to Change in 2011?

FRANKFURT, Germany & LONDON--(BUSINESS WIRE)-- Houlihan Lokey, an international investment bank, has launched its annual European Goodwill Impairment Study for 2011-2012. The study shows that while the economic outlook across Europe remains distinctly uncertain, many companies have been reporting increasing profits, while others are still struggling with the repercussions of the financial crisis, yet their goodwill impairment levels remain surprisingly low. Of particular note is the fact that booked goodwill impairments for 2010 are at their lowest levels in five years.

Does this indicate a longer term change in goodwill impairment reporting practices? If so, how should it be viewed by those in the industries affected? Is the practice of maintaining market values below book values now considered acceptable to investors and other stakeholders in these industries? If this is not considered a long-term development, then how long is it anticipated to last, given the increasingly uncertain business environment that prevails across the region?

Houlihan Lokey’s European Goodwill Impairment Study 2011-2012 provides insight into goodwill impairment developments by industry and the issues that are contributing toward current goodwill impairment reporting practices.

Key findings:

• STOXX Europe 600 Index companies spent a total of Euro 1.9 trillion on acquisitions (based on the purchase price paid during 2006 to 2010), which equals approximately 25% of their market capitalisation as of December 2010.
• While a total of Euro 187 billion was booked as goodwill impairment during the period 2006 to 2010, only Euro 14 billion was booked in 2010—the lowest we have ever observed.
• In 2010, approximately 22% of the 600 companies analysed still showed a high impairment risk (versus 24% in 2009). This is in contrast to the pre-crisis year of 2006 when only 7% of companies showed such an impairment risk.
• Almost 60% of the goodwill impairment in 2010 was booked by just three industries: Banks, Energy, and Telecommunications. The latter two industries have faced their own specific challenges, resulting in high goodwill impairments.
• As evidenced in Houlihan Lokey’s two preceding studies, five industries continue to show less than optimal impairment risk ratios, which were those closely connected to the financial crisis: Automotive, Banks, Insurance, Financial Institutions – Other, and Real Estate, Lodging and Leisure. The impairment risk for Banks worsened over the past year, which appears to indicate that maintaining market values below book values may now be considered acceptable.

Dr. Marc Hayn, Managing Director and co-author of the study, said, “Based on the total amount of goodwill impairments made in 2010, it could be concluded that most European corporates believe the impact of the recent financial crisis is now properly reflected in their accounts. However, around 22% of companies reviewed still show a book value of equity close to or above their market capitalisation, which now seems to be an acceptable practice to them. But do investors agree? Would companies with higher impairment risks be viewed as an acceptable investment prospect to them? With this precedent now established, goodwill impairment tests could become more contentious.”

Sandy Purcell, Senior Managing Director and co-author of the study, added, “It’s interesting to note that impairments are at their lowest level in five years despite an overall downward movement in market capitalisation levels. It’s also apparent that the issue of whether or not to make goodwill write-downs is closely connected to the individual decisions of the chief executives, and these executives are not keen on communicating goodwill impairments during a time of increasing uncertainty, even if their market capitalisation is also in decline. This will present a growing challenge for them to manage in the longer term.”

Methodology and purpose of the study:

The European Goodwill Impairment Study2011-2012 analyses acquisition histories and goodwill impairment recorded by the 600 largest European companies listed on the STOXX Europe 600 Index between 2006 and 2010. The study’s findings provide insight into goodwill impairment developments across 18 major industries, and show the extent to which goodwill impairments are being recognised across each industry. It also provides executives with the ability to benchmark their companies against peers, as well as compare their industry against other industries’ results.

To access the full report, please click here

About Houlihan Lokey

Houlihan Lokey is an international investment bank with expertise in mergers and acquisitions, capital markets, financial restructuring, and valuation. The firm is ranked globally as the No. 1 M&A fairness opinion advisor over the past 10 years, the No. 1 restructuring advisor, and the No. 1 M&A advisor for U.S. transactions under $1 billion, according to Thomson Reuters. Houlihan Lokey has 14 offices and more than 800 employees in Europe, the United States and Asia. The firm serves more than 1,000 clients each year, ranging from closely held companies to Global 500 corporations.

Houlihan Lokey
Dr. Marc Hayn, +49 69 256 246 128
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orAndrea Hewitt, +44 207 747 2744
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orMike Utley, +1 310 789 5765
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Source: Houlihan Lokey