Goodwill Punting
Do you ever think about the act of stealing?
Not philosophically. This is no morality debate.
Actually physically taking something that doesn’t belong to you.
Would you ever do that?
Do you ever think about joining a band of thieves for a little midnight smash and grab?
What about handing a note to a bank teller with pantyhose over your face or maybe just picking someones pocket?
Of course not. Right? Why would you ever do that?
What if there is no way for you to get busted? What if there was no crime, no downside and your success would be the cause of celebration?
We are talking newspapers articles, magazines covers.
How does that all sound?
Would you do it then?
I only have one question for you:
Do you know what happens when someone overpays for something in a really big way?
Do you know what goodwill is? No, I'm not talking about the biblical feeling towards your neighbor.
Let’s start with a fundamental question - How do you properly value anything?
Tell me, what is Coca-Cola really worth? What about Rockefeller Center? The Mona Lisa? Get the idea. Let’s get to work.
First create a singular concept that glows red hot. A real super nova of an idea. One that if you stare directly in to could and will cause blindness.
You know how mosquitoes are drawn to the light only to get zapped.
Good. That’s the ideal.
Build a buzz so big and bright that it draws in its surroundings. Becoming all anyone thinks about, focuses on, covets.
The heat it gives off, those intangibles, cry out for someone big and important to call and not just say I want it, but I need it.
You push back. This asset is unique. It’s one of one. It’s paradigm shifting. It doesn’t belong as part of conglomerate.
They promise not to screw it up.
The dance continues, both side aware of the futility and eventuality.
Leading to the purchaser paying well north of the functional value. They are happy to. They want it all. The heat and light that is being radiated. The extra. They need it all.
They promise not to screw it up.
It might be expensive, it might be dilutive to earnings, it might not fit classical valuation frameworks. It does not matter.
Excuses will be had to justify the purchase. The acquiring board will claim it will help its market multiple. The purchase will allow access to new untapped markets with unlimited potential; millennials, internet of things, EMEA, whatever the buzzword of the day is.
All that excess, all the intangible heat and light created, that's goodwill ready to be accounted for, amortized over time and eventually written off.
What happens next?
After a period of time, you up and leave, fulfilling your commitment, taking your new-found money and going home.
Soon the supernova doesn’t glow as bright.
Maybe the buyer realizes his folly.
Maybe, he, a representative or three get fired.
Maybe you get offered his job.
You politely decline.
Knowing surely someone has to take the blame and that someone shan’t be you.
What about the money? Does anyone pay the money back?
This is where it gets good.
Whose money are we talking about?
You mean all the value paid for the transitive property. The transfer of the heat and light to the duller object.
Goodwill isn't real. It's just an accounting convention, a ledger entry, that can be reversed.
It once was real money, but not anymore. It's excess that vanished into someone’s pocket at a point in the past. As long as fraud wasn't involved, hopefully, you are wearing those pants.
If you can make a few billion dollars disappear off a balance sheet of a multi-national company, you deserve to be celebrated. You are better than Houdini.
When the rest of us ride the train home from a tedious job, fantasies about stealing a candy bar are quickly dashed. Instead, our focus returns to an article about a mega-merger that will breathe new life into a stogie corporation.
The joke is on us.
Next week we will be discussing the binomial method for option valuation. Please read pages 150-225 in the Brealey and Myers 10th edition textbook.
The students stood up and filed out of class wondering aloud - maybe there is some value in taking fundamentals of finance this semester.