In the early 1990’s, it was considered as a compliment to say that a company has the prospect to become next Hewlett-Packard Company (NYSE:HPQ) but now it is not the same.
Today if a company is compared with Hewlett-Packard Company (NYSE:HPQ) that means its potentiality is going down. What comes to mind is the soiled picture of its credit default rating, unethical implementation of business practices and huge loss in accusation of Autonomy.
Consider Xerox Corporation (NYSE:XRX), which had a stock of $16 billion when the company acquired forty-one other companies by spending $9.1 billion. The company lost a lot, rather than gaining by this acquisition.
Its share price is now $6.79 with $8.6 billion market value which is equivalent to merely 71% of its book value.
To streamline the books of accounts a huge write-down is needed, which is called goodwill. It is an asset of intangible in nature and has no value in real market if sold. It only shows the name and fame of the company in the market. Xerox Corporation (NYSE:XRX) shows its goodwill at $9 billion in its balance sheet which shows the company is worth.
But in reality does it deserve that amount of goodwill?
Goodwill is an intangible asset and no one can value it. It is only on paper and nothing to do with business. According to some accountants it is termed as the difference between the real cost of acquisition and the price of its book value of accounts.
When asked about the huge write-down according to the company spokeswoman the share price is taken as a measure and the goodwill is valued. The goodwill assumption is taken into account the company’s cash flow, revenue growth and margin of profit.
The most part of goodwill for the Xerox Corporation (NYSE:XRX) comes from the acquisition of affiliated computer services in 2010. At that time, it showed a $5.1 billion as goodwill for that and its recent balance sheet also shows $2.9 billion goodwill in that context.
Hewlett-Packard Company (NYSE:HPQ) experienced an $8.8 billion decrease of goodwill value caused by the autonomy acquisition which includes $5 billion caused by the fraudulent activity of later by using non standard accounting implementation due to which Hewlett-Packard Company (NYSE:HPQ) suffered a decline of 12% in its share value in one day.
Out of $11 billion of the purchase price set for Autonomy by Hewlett-Packard Company (NYSE:HPQ) $6.9 billion was allocated to goodwill. Three months earlier $9.2 billion was written down by Hewlett-Packard Company (NYSE:HPQ) which was due to its 2008 buyout of another company Electronic Data Systems Corp.
Let’s have a comparison of the high goodwill value of the companies.
Credit Agricole SA (EPA:ACA) has projected goodwill of 16.9 billion EUROS for its stock of 14.6 billion EUROS.
Telecom Italia S.p.A. (BIT:TIT) shows their goodwill at 36.8 billion EUROS and market capitalization of 13.2 billion EUROS.
Italian automaker Fiat SpA (BIT:F), shows its goodwill as 10.4 billion EUROS which is over twice its market value and it trades for less than half of its book value.
NASDAQ OMX Group, Inc. (NASDAQ:NDAQ) which has a market cap of $4 billion shows its goodwill as $5.3 billion and trades at 78% of the book.
Goodwill writes down should be done by these big companies in order to maintain a proper and justified balance sheet as the goodwill is representing an incorrect picture of their credit standing.
The share price of Hewlett-Packard Company (NYSE:HPQ) was down by 0.92% to close at $12.87.
The share price of Xerox Corporation (NYSE:XRX) was down by 0.29% to close at $6.79.