Houlihan Lokey, the international investment bank, published its fourth annual European Goodwill Impairment Study today. The study provides insight into acquisition and goodwill impairment trends by industry of the 600 largest companies in the STOXX Europe 600 Index.
Although profitability at the companies reviewed remained robust (even rising slightly in 2011), a question mark remains over whether they are addressing their balance sheet issues as aggressively as they should, given the prevailing uncertain economic climate in Europe. A key finding of the study is that companies´ balance sheets appear to be more compromised in 2011 than in the past four years (following the start of the financial crisis). Despite goodwill impairments reaching their highest level since 2007, companies´ market capitalisation to book value of equity (market-to-book) ratios have deteriorated almost across the board.
Additional Key Findings:
- More than one-third of the companies reviewed recorded a market value at or below book value in 2011 (this level is more than two times higher than that in 2007).
- The trend of maintaining lower market-to-book ratios spread to new industry sectors in 2011. Companies in the Automotive, Banks, Insurance, Financial Institutions Group (FIG) "´ Other, and Real Estate, Lodging & Leisure industries continued their downward trend from 2010. They were joined by companies in the Metals, Engineering, Construction & Building Products, and Transportation industries in 2011.
- More than 70% of total goodwill impairments in 2011 were booked by just two industries: Banks and Telecommunications, as Banks continued to grapple with ongoing regulatory and macroeconomic uncertainties and Telecommunications witnessed increasingly challenging trading conditions.
- Predictably, the Financial Institutions industry continues to show a high impairment risk factor.
"Market-to-book ratios have been declining year-on-year since 2009," said Dr. Marc Hayn, Managing Director, Financial Advisory Services, and co-author of the study. "How long can this trend last? Why are investor expectations becoming increasingly cautious, especially when compared to those of company management teams? Or could this developing trend indicate that management teams are being too ambitious in their outlook? Notwithstanding these issues, overall we expect further significant write-downs in 2012-2013."
"The Financial Services industry in particular continues to encounter a number of challenges," said E.W. (Sandy) Purcell, Senior Managing Director, Financial Advisory Services, and co-author of the study. "Although the Banks sector booked more goodwill write-downs in 2011 than in the previous year, banks are still trading below book value, which signals further headwinds for banks as investors are likely to scrutinize asset valuations in upcoming capital raises."
Methodology and Purpose of the Study:
The European Goodwill Impairment Study 2012-2013 analyses acquisition histories and goodwill impairment recorded by the 600 largest European companies included in the STOXX Europe 600 Index between 2007 and 2011. The study´s findings provide insight into goodwill impairment developments across 18 major industries, showing the extent to which goodwill impairments are being recognised across each industry and at a macro level, their corresponding impact on market-to-book ratios. It also provides executives with the ability to benchmark their companies against peers, as well as compare their industry against other industries´ results.
To access the full report, please click here.
Houlihan Lokey is an international investment bank with expertise in mergers and acquisitions, capital markets, financial restructuring, and valuation. The firm is ranked globally as the No. 1 restructuring advisor, the No. 1 M&A fairness opinion advisor over the past 10 years, and the No. 1 M&A advisor for U.S. transactions under $1 billion, according to Thomson Reuters. Houlihan Lokey has been advising clients for more than 40 years and now has 14 offices and over 850 employees in Europe, the United States and Asia. The firm serves over 1,000 clients each year, ranging from closely held companies to Global 500 corporations.
