Predicting acquisition specific goodwill write-downs

Abstract

When managers anticipate synergy gains from an acquisition, they may pay more for target firm assets than their fair value, creating goodwill on an acquiring firm's balance sheet. If synergy is not subsequently realized and the fair value of goodwill falls below its book value, goodwill write-downs result from annual impairment tests. Managers and investors may be able to avoid value destroying acquisitions if goodwill write-downs can be predicted from information at acquisition completion. We use purchase price allocation information from SEC 10-K filings to evaluate goodwill write-downs of prior acquisitions. For a sample of 421 U.S. acquisitions with a subset of 49 that experienced deal-specific goodwill write-downs, we find that firms acquiring target firms with larger relative size are more likely to experience goodwill write-downs. However, this effect is mitigated when a target firm's value resides in identifiable intangible assets (e.g., brands and patents), suggesting acquirers may have private information about intangible asset combinations. Implications for management research and practice, as well as government policy are discussed.