- Goodwill impairment for 2020 is on track to reach $143 billion based on an early assessment of more than 8,800 public companies by global advisory firm Duff & Phelps.
- The large drop in the value of intangible assets above fair value is driven by the pandemic, Duff & Phelps analysts said. By comparison, companies lost $71 billion in 2019, itself a high number.
- "The COVID-19 pandemic was the biggest challenge for U.S. companies, as the related economic recession is expected to be the most severe since World War II," analysts said in the report.
A drop of $143 billion would still be smaller than the impact of the 2008 financial crisis, when impairment reached $188 billion, the most recorded in recent years.
The federal government's response to the pandemic, which was faster and deeper than in 2008, likely softened the impact.
"Should the final 2020 aggregate goodwill impairment figures remain at a level lower than that in 2008, it will be partly a reflection of the unprecedented level of support provided by both the Federal Reserve (with swift implementation of liquidity-enhancing monetary policies) and the U.S. government (with large fiscal stimulus packages) in response to the COVID-19 crisis," the report said.
Much of the drop was driven by just 10 impairment events, resulting in $54 billion in lost value.
The report doesn't identify the events, but it cites energy as the hardest-hit industry, "a reflection of the collapse in global oil prices following the classification of COVID-19 as a pandemic."
Even prior to the pandemic, impairment was trending up.
"Trade tensions between the U.S. and its main trading partners (particularly China), combined with a Brexit impasse, created significant uncertainty among companies and global investors in late 2018 and early 2019," the report said.
In 2018, impairment totaled $78 billion and, in 2019, $71 billion.
A big part of the 2018 increase was the result of a single event, the $22.1 billion write-down by General Electric of its 2015 acquisition of French conglomerate Alstrom's power business.
"The industrial giant misjudged how profitable its 2015 acquisition ... would be," The Wall Street Journal reported.
The Securities and Exchange Commission opened an inquiry into the write-down because of its size.
A surge in mergers and acquisitions between 2015 and 2018 fueled the impairment jump in the two years before the pandemic, the report said.
"Some of that optimism in deal activity has fallen short of expectations," Carla Nunes, a managing director at Duff & Phelps, told CFO Dive in an email, "with many companies writing down goodwill of relatively recent deals. Others are simply struggling to adapt their products and services to emerging trends in buying patterns and to increased competition."
Nunes highlighted troubles by companies specializing in consumer staples. Impairment hit a record in 2019 for this business category following companies' difficulty in responding to changing consumer preferences.
"Established companies are wrestling with shifting consumer tastes and competition from new brands (some created in social media) and/or lower prices," she said.
In 2019, the 10 biggest impairment events totaled just under $40 billion in lost value. Proctor & Gamble had the biggest loss, $6.8 billion, much of which stemmed from its acquisition of Gillette in 2005.
"The impairment was largely driven by a significant appreciation of the U.S. dollar relative to a number of currencies, a drop in sales volume caused by changing grooming habits (primarily in developed markets) and an increasingly competitive market environment in the U.S. and elsewhere," the report said.