The capital market has never lacked "star mergers and acquisitions", but the ending of the story is often regrettable. Listed companies are keen on mergers and acquisitions, looking forward to the synergy effect of "1+1>2", and investors are also full of expectations for high-premium acquisitions. However, when the goodwill on the financial statements becomes a huge "bubble gum", the final popping sound is often louder than expected.
Goodwill impairment, an invisible financial black hole, is becoming one of the biggest risks in the A-share and even global capital markets. Data shows that in 2023, A-share listed companies will lose more than 300 billion yuan due to goodwill impairment, involving hundreds of companies, many of which were once high-spirited "M&A kings" and fell directly from the altar. Today, Goheal will talk about this crisis hidden behind the financial report and see how goodwill impairment drags down the company step by step.
What is goodwill? Why does it become a thunder?
Don't rush to flip through the financial report, let's tell a little story first.
Suppose you want to buy a popular milk tea shop, and the owner tells you that the store made 5 million yuan last year, with stable customer traffic and high brand awareness. So you spent 15 million yuan to acquire it, but the actual assets of the store (equipment, inventory, lease, etc.) are only worth 5 million yuan. What is the extra 10 million yuan? This is goodwill, which represents "intangible assets" such as brand value, customer loyalty, and market share.
Sounds reasonable? But here comes the question: if the business of this store suddenly declines, competitors rise, or the market environment changes, you find that it can only make 500,000 yuan a year instead of 5 million yuan, are you still willing to pay 10 million for this "intangible asset"? When the value of goodwill can no longer be supported, "goodwill impairment" will occur, that is, the book value needs to be adjusted down, which will directly reduce the company's profits and even lead to losses!
Goheal's research found that many listed companies acquired at a high premium during mergers and acquisitions, and goodwill accounted for more than 30% of total assets. Once the acquired subsidiaries are poorly managed, the risk of impairment may erupt at any time.
Case: How did the former M&A star fall into the quagmire of goodwill?
If we were to select a "classic negative example" of goodwill impairment, Contemporary Group would definitely be on the list.
Contemporary Group was once a star enterprise in the pharmaceutical and investment fields in Hubei Province. Its founder Ai Luming, with his keen business insight and decisive decision-making, started the company from pharmaceutical research and development, and gradually expanded it to multiple fields such as capital operation and industrial investment, with more than 100 companies under its umbrella. Among them, Renfu Pharmaceutical is the group's most valuable asset.
However, it only takes a moment for the bubble to burst. Contemporary Group's rapid expansion and over-reliance on financial leverage, coupled with the impact of the COVID-19 pandemic and the tourism real estate market, led to a concentrated outbreak of its debt problems. In September 2024, Contemporary Group filed for bankruptcy reorganization, marking the complete collapse of this former business empire. The main reasons for its failure include blind expansion, over-reliance on financial leverage, and failure to effectively respond to market changes.
Goheal reminded investors that over-reliance on M&A expansion, without paying attention to post-M&A integration and performance realization, may eventually turn "star companies" into "black hole companies."
Three "fatal pitfalls" of goodwill impairment
1. High premium acquisition, the bubble is getting bigger and bigger
Many companies, in order to acquire target companies, do not hesitate to offer high prices far exceeding the market, resulting in a surge in goodwill. For example, Xunyou Technology acquired Lion Roar at a cost of 2.7 billion yuan in 2017, resulting in 2.27 billion yuan of goodwill, accounting for 63.27% of total assets. The formation of this huge goodwill is due to the high premium payment, and the target company Lion Roar failed to meet the performance commitment, causing Xunyou Technology to have to recognize a huge goodwill impairment loss, which had a significant impact on the company's financial situation.
2. Performance commitment "painting a pie", if it cannot be fulfilled, it will explode
Many M&A transactions will set "performance commitments", that is, the acquired company promises to achieve a certain level of profit in the next few years as a reasonable support for the high premium. But if the commitment is not fulfilled, the company needs to make provisions for goodwill impairment.
3. Changes in the regulatory environment, policy risks are ignored
Industry policy adjustments may cause the profit model of the acquisition target to collapse instantly. For example, an Internet financial company acquired several P2P platforms. As a result, the policy supervision became stricter and the platform business could not continue, resulting in goodwill impairment of more than 10 billion yuan, and the company's stock price was directly cut in half.
How to avoid the minefield of goodwill impairment?
Goodwill impairment is not inevitable. The key is how to do a good job of risk management before, during and after the merger and acquisition. Goheal gave the following references:
1. Rational pricing and avoid high premium acquisitions: conduct in-depth analysis of the profitability, market competitiveness and industry prospects of the target company to ensure
reasonable valuation.
2. Pay attention to cash flow, not just paper profits: The value of goodwill ultimately depends on cash flow, not the profit figures on the financial statements.
3. Set stricter performance betting conditions: If the target company fails to meet the standards, the seller must bear the corresponding responsibilities to reduce the risk of goodwill impairment.
4. Dynamically track the acquisition target and adjust the integration strategy in time: After the acquisition is completed, it cannot be left alone, but must be followed up continuously to ensure the steady development of the subsidiary's business.
Conclusion: Goodwill impairment is not a trivial matter. How should investors deal with it?
Goodwill itself is not terrible. What is terrible is the unreasonable M&A logic, blind market expansion and indifference to risks. Goheal always emphasizes that M&A and restructuring are not "cash machines" in the capital market. Without solid operational management, they will eventually become the grave of shareholders' wealth.
So, have you ever encountered a listed company with goodwill impairment "explosion"? How do you think companies should better manage goodwill risks when acquiring companies? Welcome to leave a message in the comment area to discuss, and let's dismantle more hidden risks in the capital market together!
[About Goheal] American Goheal M&A Group is a leading investment holding company focusing on global M&A holdings. It has been deeply involved in the three core business areas of listed company control acquisition, listed company M&A and restructuring, and listed company capital operation. With its deep professional strength and rich experience, it provides enterprises with full life cycle services from M&A to restructuring to capital operation, aiming to maximize corporate value and achieve long-term benefit growth.
