But dig a little deeper and it seems as though the US is generating all the momentum, as the eurozone registered a double-digit decline in M&A volumes and a 70 per cent fall-away in deal value (in euro terms) of closed M&A transactions, according to analysis from financial advisory specialist Duff & Phelps. The UK broadly flatlined on the deal front through 2018, which represents progress of sorts, especially given the ‘B word’, although sterling-denominated assets are significantly more attractive to most foreign investors than they were on the day prior to the EU referendum – at least in terms of currency translations.
Historically low interest rates have been central to the increase in M&A activity in recent years, but it could be argued that it also reflects a modern corporate predilection for simply buying in growth.
The trouble is that the same analysis from Duff & Phelps also shows that goodwill impairments by companies in the STOXX Europe 600 index decreased from €28.4bn in 2016 to €18.5bn in 2017. That represents a decline of 35 per cent, marking it as the lowest level in aggregate goodwill impairment in Europe since the onset of the euro sovereign debt crisis.
The UK saw the largest decline in aggregate goodwill impairment, with FTSE 100 stocks registering an 89 per cent fall in 2017, although we shouldn’t automatically conflate the absence of write-downs with improved corporate performance. Indeed, changes in the way that companies account for goodwill have come in for scrutiny, with its value as an objective accounting measure increasingly brought into question. The fear is that since the traditional principle – which held that companies should amortise goodwill over a given number of years – was abandoned, the process has become too subjective. Bosses can now keep it on the balance sheet at their discretion, only writing it down if they (or specialist consultants) determine its value to have been impaired, or at the behest of auditors.
Impairing an asset effectively transfers its value (or the portion being written off) from the balance sheet to the profit-and-loss account – with resultant implications for net earnings and shareholders’ funds. The danger is that if director remuneration schemes are tied in to PE or NAV metrics, their terms could act as a disincentive to providing prudent asset appraisals, particularly if the asset in question represents the purchase price of a given business minus the fair market value of its tangible assets – goodwill presents a much trickier assignment.
The basis, under IAS36, is that goodwill mustn’t be held on the balance sheet if its carrying value is more than the amount that can be recovered from its use or sale. Straightforward enough on the face of it, but as the ‘knowledge economy’ has expanded, intangibles have grown as a proportion of corporate balance sheets – intellectual property versus bricks-and-mortar. The problem is that accounting models haven’t evolved sufficiently to measure the value of intangibles as effectively as they do tangible fixed assets.
For investors, this is an issue simply because intangibles have become the primary determinant of so many companies’ stock market valuations. This wouldn’t have been lost on both Berry Global (US:BERY) and Apollo Global Management in their tussle to gain control of packaging group RPC (RPC). That’s because RPC, a serial acquirer of businesses in the fragmented packaging marketplace, has chalked up goodwill amounting to £1.62bn, or 82 per cent of shareholders’ funds.
