We’ve all heard about the asset write-downs for banks, but this week’s Economist had an interesting piece on asset (goodwill) write-downs for corporations (see Corporate Goodwill Write-downs). As explained by the Economist:

…non-financial firms…face a reckoning on “goodwill” amassed during the long merger wave that subsided last year.

When one firm buys another, the target’s goodwill—essentially the premium paid over its book value—is added to the combined entity’s balance-sheet.

As the economy deteriorates and more firms trade down towards (or even below) their book value, empire-builders are having to mark down the value of assets they splashed out on in rosier times…In this stormy environment, with auditors keener than ever to avoid being seen to go easy on clients, companies are being told to mark down assets if there is any doubt about their value.

My Comment: Just as in housing, the private equity/strategic acquisition wave was long (and bubbly) because it was fueled by cheap capital, and resulted in acquirers overpaying for targets. I discussed some of these overpayment issues in posts from mid-2007 (see Dumbfounded by the Data and Future of Corporate Performance). If firms overpay for acquisition targets – i.e., they pay more than the underlying fundamental + synergy value – the natural result is a write-down.

The Economist article continues:

The sanguine point out that this has no effect on cashflow, since such charges are non-cash items. Moreover, some investors take goodwill write-offs with a pinch of salt, preferring to look past such non-recurring costs and accept the higher “normalised” earnings numbers to which managers understandably cling.

My Comment: With this point I disagree. Sure, the write-down has no immediate cashflow implications. However, it implies that the firm undertook an ill-advised acquisition. Imagine the more solid cash position the firm could have been in had it not undertaken the acquisition. In this sense then, the firm has overpaid and squandered shareholder cash.

Alternatively, a write-down could be indicative of poor execution. It could be that there was the potential to extract synergies from the deal such that the acquisition price was not too high per se; however, the managers were not able to capture that value via the integration process (see Why M&A Deals Go Bad). In such a case managers destroy shareholder value after the purchase.

Whichever way you look at it, goodwill impairment of this sort suggests that managers were not doing right by shareholders when undertaking an acquisition, and that the firm would be better off not having made the acquisition in the first place. That ought not instill much confidence in a firm’s managers.

Yesterday, the Wall Street Journal reported that Fiat will take a stake in Chrysler (see Fiat Nears Stake in Chrysler). The WSJ is reporting that Fiat will receive a 35% stake in Chrysler, without having to commit any capital to the deal. Instead, Fiat has agreed to retool an existing Chrysler plant to be able to manufacture Fiat vehicles for sale in the U.S. In addition, Chrysler will receive engine, transmission, and small-car platform technology from Fiat.

Prima facie, the deal looks like it makes some sense – Fiat gets access to U.S. markets (a market it exited in failure years ago) without having to incur the investment of starting up an operation from scratch, and Chrysler gets better access to European markets (which it lost after its failed deal with Daimler). Moreover, Chrysler gets access to small-car, and fuel efficient engine technology while Fiat gains access to Chrysler’s Jeep and Minivan brands.

As a Chrysler creditor (a U.S. taxpayer), anything that increases the likelihood, even infinitesimally, of receiving a return on my investment makes me happy. The U.S. taxpayer (and by corollary, the U.S. government) should therefore be positively predisposed toward this deal, taking comfort in the fact that, at the very least, in exchange for a 35% ownership stake in Chrysler, Fiat should be commensurately responsible for 35% of the liabilities. This should come as welcome news, assuming Fiat can keep Chrysler viable long enough to repay the U.S. government.

So that’s my take on the deal from a U.S. taxpayer perspective, …although I am awaiting more details to be able to better evaluate the terms of the deal.

As an organizational scholar however, I can’t help but wonder if the deal improves either, or both, firms in the long run. As I have mentioned before, I am generally not a fan of deals that combine two weak firms. And this is exactly what you would have in this instance (see GM + Chrysler = Ugh! and Near an Agreement for background). For this reason, the ex ante probability of success is low.

While on the surface there seem to be some synergies, you are effectively wedding a firm that as little as two years ago seemed to be on the brink of extinction (Fiat) with one that is now on life support (Chrysler). Although Fiat has produced some interesting products over the past few years, it is still in too fragile a state to tackle another entry into the U.S. market (the most competitive auto market in the world). Moreover, Fiat is not prepared for what it is about to get into by acquiring a stake in Chrysler.

Personally, I can’t believe that signing up for 35% of the liabilities of Chrysler would not be enough to scare off Fiat, …or any other potential investor for that matter.

But who am I to object. Caveat Emptor.

I am currently in London, spending the month as a visiting scholar at the London Business School. Since I have been hanging around town, Adam Jones, author of the FT Management Blog, and Business Education Editor at the Financial Times, invited me in to do an interview about the economic downturn, and how it has been impacting applications to Business Schools, and the job prospects of Business School graduates. The interview is scheduled to be aired on January 26th, concurrent with the release of the 2009 FT Business School Rankings (I will post a link to the rankings and the video when they become available).

Adam and I had a nice discussion. We went over some of the points I raised in my post Crisis for MBA Grads Seeking Jobs, …and more.

Adam began by asking about Business School applications. We discussed the following:

• applications to full-time MBA programs are at an all-time high
• applications to Ph.D. programs are at an all-time high

Both of those effects are to be expected, as business school applications generally run counter-cyclically with the economy. However, I noted that for Business Schools that rely on corporate-sponsored programs (executive MBA, non-degree granting executive programs, and custom executive programs) for a good chunk of their revenue, this downturn will be especially difficult. The outlook for executive programs is particularly grim, as corporations rein in discretionary spending, and demand for such programs experience a sharp decline.

Adam then asked about the job prospects for Business School graduates. I answered:

• the job market has been challenging (to say the least) for graduates of the class of 2009
• as bad as it has been for the class of 2009, unfortunately things are shaping up to be worse (dare I say awful) for graduates from the class of 2010. While economic recovery seems likely sometime in late 2009/early 2010, layoffs continue for some time after recessions officially end. This is because those industries that start coming out of recession do not hire quickly enough to offset losses in the industries that continue to feel the effects of the recession. In addition, even when growth begins again, firms are reluctant to hire at first so as not to expand if there is a reversion to recession (i.e., a double-dip recession). Instead, they prefer to do more with less (asking existing workers to put in more hours, work overtime, etc.).
• the job prospects for 2011 graduates are uncertain, as I expect the post-recession recovery to be a slow one. To me, the immediate growth engine for the U.S. economy moving forward is unclear. I see some potential in alternative energy, nano-technology, and biotech (specifically, genome mapping and its associated applications). However, whether those industries will truly grow fast enough to bring robust growth back to the economy is uncertain. Moreover, although it is likely that the global economy will return to growth in 2011, there is a decent probability (at least in the U.S.) that the recovery will be a jobless one.

We also discussed several other topics. For example,

• Adam asked how finance students were faring given that there had been so many layoffs in the financial sector. To that I responded that my experiences have been that finance students, in particular, were becoming more flexible with respect to the kinds of positions they have been willing to consider. Many are now open to consulting, general management, accounting, and other fields. In addition, I shared some anecdotes about students of mine who had been looking for jobs in non-traditional markets – exploring opportunities in places like Dubai, Abu Dhabi, continental Europe, and Asia. At this point, many are willing to go just about anywhere for gainful employment.
• Adam also asked about the types of electives that students were considering in this environment. I mentioned that I had been noticing an increasing interest general management courses, and in general management as a major.

More to come…

Some funny stuff (hat tip Henry)…

In mid-August I predicted that “major” bankruptcies for 2008 would reach 225 (see Bankruptcies Revisited). Through October there had been 172 such bankruptcies, as reported by Bankrupctydata.com. That implied a pace of around 210 bankruptcies, well short of my prediction.

At the time however, I suggested that the filing pace was likely to quicken in November and December as the economy deteriorated at a more rapid clip. Sure enough, the final numbers bear out my prediction. According to Bankruptcydata.com, “major” filings reached 231 in 2008.

231 bankruptcies falls far short of the 289 “major” bankruptcies in 2000 and 383 in 2001 (the dotcom bust). However, I would not be surprised to see 2009 challenge the 383 mark from 2001. In fact, if we believe the predictions of my colleague Edward Altman, we should not be surprised to see the number of “major” bankruptcies exceed 400 (see NYU’s Altman Sees 2009 Default Rate Doubling). Obviously default is not the same thing as bankruptcy; however, they trend together.

Below you can find an updated list of what I see as the “noteworthy” bankruptcies of 2008 (as reported by Bankrupctydata.com). New additions since November appear in RED (please note that this is not an exhaustive list):

• AIG (insurance)****
• Agriprocessors, Inc. (food services)
• Aloha Airlines (airline)
• American Color Graphics (newspaper)
• Ascendia Brands (retail)
  
• ATA (airline)
• Bear Stearns (banking)****
• Bill Heard Enterprises (auto)
  
• Bluepoint RE (insurance)
  
• Blue Water Holdings (auto)
• Boscov’s (retail)
• Brooke Corporation (insurance)
  
• Buffets Holdings (restaurants)
• CDX Gas, LLC (energy)
• Chesapeake Corporation (packaging products)
  
• Ciena Capital (real estate)
• Circuit City (electronics retail)
  
• Comfort Co. (bedding)
• DBSI Inc. (real estate)
  
• Downey Financial (banking)
• Dreier LLP (legal services)
  
• Dynamic Leisure (travel)
• Eclipse Aviation (airplane manufacturer)
  
• Education Resource Institute (insurance)
• Empire Land (real estate)
• Eos Airlines (airline)
• Equity Media Holdings Corporation (media)
• EZ Lube, LLC (auto services)
  
• Fashion House Holdings (retail)
• Flying J (trucking and transportation services)
  
• Fortunoff (retail)
• Franklin Bank Corp. (banking)
  
• Friedman’s Jewelers (retail)
• Fred Leighton Holdings (retail)
• Fremont General (banking)
  
• Frontier Airlines (airline)
• Gainey Corporation (trucking)
  
• Gemini Air Cargo (air delivery/freight)
• GETRAG Transmission Manufacturing LLC (auto manufacturing)
  
• Goody’s (retail)
• Greatwide Logistics (trucking)
  
• Greektown Holdings (casino)
• Hawaiin Telecom Communications, Inc. (telecom)
  
• Hospital Partners of America (healthcare)
• HRP Myrtle Beach Holdings (entertainment)
  
• Indymac (banking)
• Integra Hospital Plano, LLC (healthcare)
• Integrity Bancshares, Inc. (banking)
  
• JHT Holdings (trucking/transportation)
• KB Toys, Inc. (retail)
• Key Plastics, LLC (auto manufacturer)
• Laketown Wharf (real estate)
• LandAmerica Financial Group (insurance)
  
• Land Resource, LLC (real estate)
  
• Landsource (real estate)
  
• Legends Gaming (casino)
• Lehman Brothers (banking)
• Lenox Group (tableware)
  
• Lillian Vernon (retail)
• Linens n’ Things (retail)
• Luminent Mortgage Capital (banking)
  
• Kimball Hill (real estate)
• Landsource Community Development (real estate)
• Matrix Development Corporation (real estate)
• Mervyn’s (retail)
• Mortgages Ltd. (banking)
• Motorcoach Industries International (transportation)
• MPC Corporation (computers)
  
• MPF Corp. (transportation)
• Mrs. Fields Famous Brands (food services)
• National Wholesale Liquidators, Inc. (retail)
• NetVersant Solutions (IT services)
  
• PFF Bancorp, Inc. (banking)
  
• Pierre Foods (food services)
• Pilgrim’s Pride Corporation (food services)
  
• Pope & Talbot, Inc. (pulp/wood products)
• PPI Holdings, Inc. (auto manufacturer)
  
• PRC LLC (business services consulting)
• Propext (textiles)
• Quebecor World (USA), Inc. (office services/printing)
• Red Envelope (retail)
• Rock Well Petroleum, Inc. (energy)
  
• Sharper Image (retail)
• Silverjet Airlines (airline)
• Sirva (moving services)
• Skybus (airline)
• STA Restaurants – Bennigan’s (restaurants)
  
• Steakhouse Partners (restaurants)
• Steve and Barry’s (retail)
• Storm Cat Energy Corporation (energy)
• SunCal Bickford Ranch, LLC (real estate)
  
• Syntax-Brillian – Olevia (electronics)
• Taro Properties (real estate)
• Tribune Company (media)
  
• Tropicana (casinos)
• Vail Plaza Development (real estate)
• Value City Department Stores (retail)
• VeraSun Energy (alternative energy)
  
• Vicorp (restaurants)
• Village Homes of Colorado, Inc. (real estate)
  
• Washington Mutual (banking)
  
• WCI (real estate)
• Whitehall Jewelers (jewelry)
• WHM Copper Mountain Investments (investment company)
  
• Wickes Furniture (retail)
• Woodside Group (real estate)
• WorldSpace, Inc. (satellite broadcasting)
  
• Ziff Davis (media)

In addition to “major” bankruptcies (e.g., those firms with assets greater than $50M) tracked by Bankruptcydata, the U.S. government tracks all bankruptcy filings by type (e.g., Chapter 7, Chapter 11, Chapter 13). You can find detailed bankruptcy statistics at the U.S. Courts website. For the twelve months ending June 2008, there had been 33,822 business filings versus 23,889 for the same period in 2007 (a 42% increase).

The chart above presents annual (calendar year) business bankruptcy filings from 1990-2007 (click on the picture for a larger image). Interestingly, the number of filings had been trending steadily downward from 1990 through 2006. In 2007 the numbers started to reverse course. I expect that trend to continue in 2008 and 2009, with total business bankruptcies reaching 45,000 in 2008 and 55,000 in 2009. I will update these data when the final 2008 numbers are released, which should be sometime in March.

Happy New Year! I hope 2009 brings you health, happiness, and prosperity, …accompanied by decreased volatility.

It’s been two weeks since I’ve updated my blog. I apologize for the absence. It has not been for a lack of desire or a dearth of newsworthy events. Rather, I have been traveling for the better part of the last few weeks – first on business, and then for pleasure.

My travels took me to Israel, where I attended the Israel Strategy Conference. The conference was fantastic! It was sponsored by a consortium of the top Israeli universities – Tel Aviv University, Technion University, and Hebrew University. It attracted top-notch strategy scholars from around the world who presented a bevy of interesting research papers. I’ll certainly look forward to attending the conference again in the years to come.

This was my first trip to Israel, though certainly not my last. I am ashamed to admit that I was not able to travel outside of Tel Aviv. Unfortunately, I was only able to stay for the duration of the conference before heading back home. I feel horribly about that as I very much would have liked to have visited Jerusalem, Nazareth, Bethlehem, and Caesarea (among others).

From Israel I traveled to New Hampshire to meet my family. They had been up there skiing while I was away. I feel very lucky to have been able to spend a few days skiing with them. And it’s especially exciting to watch my kids learn how to ski at a young age. At this rate they’re certain to become better skiers than I by next winter.

Anyhow, I am back now, and looking forward to posting on a more regular basis.