By Jonathan Weil and Bloomberg
Let the bleeding begin.
Yesterday's news that Time Warner will slash its asset values by $US25 billion ($35.4 billion) should be a wake-up call to investors: Huge writedowns do matter - and it's not just financial-services companies that need them.
Time Warner shares fell as much as 9% after the media conglomerate said it would record the massive charge to earnings to write down so-called goodwill and other intangible assets at its cable, publishing and Internet segments.
While the losses shouldn't have come as a surprise, some investors seem to have been caught off-guard anyway. As I wrote in a November 13 column, anybody looking at the plunge in Time Warner's stock-market value last year could see the company was placing much higher values on its assets than the market thought they were worth. Time Warner was just slow to catch up.
Asset writedowns of this sort - including markdowns to recognise lost value in brand names, franchise rights and other non-financial assets lacking physical substance - are important for a couple of reasons. They are forward-looking because they tell you management has concluded their company's future cash flows won't match previous estimates.
Such charges, or the lack thereof, also present a credibility test. If a company's executives won't admit to obvious problems, that's a sign the rest of their numbers also might be suspect.
Before yesterday's news, Time Warner had been trading for about a third less than its book value, or common shareholder equity. Its market capitalisation was even a few billion dollars less than the $US42.5 billion of goodwill on the company's September 30 balance sheet. In other words, the goodwill supposedly was worth more than Time Warner as a whole.
One reason that made no sense is that goodwill can't be sold by itself. Its just the bookkeeping entry one company records when it pays a premium price to buy another company. The writedowns are an acknowledgement by Time Warner that it previously overpaid for acquisitions.
Perhaps a different management team would have performed better. At least now the company's shareholder equity looks like it will roughly approximate the company's market cap.
There's a lot more where this came from. As of yesterday, Time Warner was among 196 US companies worth less than their intangible assets that were trading at a discount to book value, according to data compiled by Bloomberg.
Combined, these companies had about $US808 billion of intangibles on their books, more than half of which was goodwill. Their market values, by comparison, were about $US451 billion. (The figures exclude companies with market caps of $US100 million or less.)
As of September 30, Bank of America showed about $US112.1 billion of intangibles, including $US81.8 billion of goodwill. Its market cap is now just $US87.2 billion, or less than half the company's book value. Citigroup's balance sheet showed $US63.1 billion of intangibles, including $US39.7 billion of goodwill; by comparison, Citigroup's market cap is $US39 billion.
News Corp, owner of the Wall Street Journal and Fox News, had $US31.9 billion of intangibles on its latest balance sheet, including $US18.2 billion of goodwill. Its market cap is now $US24.3 billion.
Other companies on the list include telecommunications provider Sprint Nextel, medical-device maker Boston Scientific, stock-exchange operator NYSE Euronext, retailer Macys, newspaper publisher Gannett and money managers Legg Mason and Invesco.
There's only one way to restore investor confidence in corporate financial statements. That's to make sure they resume bearing some semblance to reality. Time Warner's warning should be just the start.
Bloomberg