A recent article from McKinsey & Company examined investor reaction to news of a goodwill impairment. Through analysis of excess returns in the three days before and after announcement, McKinsey found that investors often respond positively, or neutrally, when companies announce a goodwill write-down. Why wouldn’t investors react more negatively? The authors suggest that when investors already understand that an acquisition has been underperforming, the impairment charge may be perceived as an event that communicates acknowledgment on the part of management as well as an opportunity to charge course.
The article goes on to encourage companies to be candid with investors about the nature of the impairment and the company’s plans to address the situation and move forward. Further, the article suggests that “[e]xecutives should also record as much of the impairment or restructuring charges as possible in a single announcement” as a lot of bad news at one time may be easier for investors to digest (and forgive) than a dribble of bad news over a longer period of time.
While we understand the practical reasoning behind the notion of taking all of your medicine at one time, we believe the amount of impairment should be consistent with the facts and circumstances (including market participant assumptions) extant at the measurement date – no less, no more. The logic and mechanics of testing goodwill for impairment might still be debated in some circles, but the accounting and compliance requirements have firmed up in recent years. For evidence of this, look no further than the recent updates (here and here) to ASC Topic 350 – Intangibles – Goodwill and Other as well as the AICPA’s recently published Accounting and Valuation Guide, Testing Goodwill for Impairment.
At the end of the day, the McKinsey findings are generally consistent with what we observe as we assist companies with the goodwill impairment testing process. We’re heartened to now have additional evidence that, by-and-large, the public markets tend to have a mature reaction to news of goodwill impairment.
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