October 27, 2009 / 12:59 PM / in 8 years

Europe companies face big writedowns on M&A-report

* Study says many firms face goodwill impairment charges

* Book value of equity tops market cap for 1/5th Stoxx 600

* Ratios worst in autos, miners, banks, insurers, property

By Tom Freke and Quentin Webb

LONDON, Oct 27 (Reuters) - Major European companies may be forced into writedowns totalling hundreds of billions of euros as they recognise the fallout from a 1.8 trillion euro ($2.7 trillion) acquisition binge earlier this decade.

A report from investment bank Houlihan Lokey suggests boom-year mergers and acquisitions (M&A) destroyed value for many acquirers, who now face hefty goodwill impairment charges for their 2009 accounts. Houlihan found the book value of equity for a fifth of DJ Stoxx 600 companies significantly outstripped the stock-market valuation of those companis at the end of June.

“Companies cannot postpone their impairments for much longer -- the only question is how much they will have to book,” Marc Hayn of Houlihan Lokey told Reuters.

Hayn said despite the recent stock market boom, impairments may total hundreds of billions of euros.

The most at-risk sectors were autos, metals, property, banks, insurers and other financial institutions, where more than 40 percent of companies had a book value well above their market value. Yet companies in almost every sector will be affected, the only exception being healthcare, the report said.

However, companies may avoid charges if accountants judge the “value in use” of an asset is higher than the value at which it is held on a company’s books.

    Much will depend on how strict auditors decide to be when reviewing companies’ business plans for next year.

    “Auditors will press companies to take these impairments,” said Timothy Smith, a co-author of the report. “The financial crisis has made auditors more jumpy -- many are now keen to show their independence (from) companies.”

    From 2005 to March 2009, companies in the DJ Stoxx 600 spent 1.8 trillion euros on takeovers, Houlihan said, but took only 200 billion in goodwill impairment charges.

    After the last takeover boom, many companies took big writedowns on the value of assets. In 2006 Vodafone Plc (VOD.L) for instance recorded a 15 billion pound loss, due to a 24 billion writedown following the purchase of Germany’s Mannesmann in 2000.

    Many of the goodwill writedowns taken in the past year have been in the financial sector, with Royal Bank of Scotland (RBS.L) taking the largest single hit -- a 16 billion pound ($26.3 billion) writedown in February following its acquisition of ABN AMRO.

    Earlier this year Deutsche Telekom AG (DTEGn.DE) took a 1.8 billion euro writedown on its British unit T-Mobile, which it is seeking to merge with France Telecom SA’s FTE.PA Orange. [ID:nL8139973] (Editing by David Holmes) ($1=.6718 Euro) ($1=.6091 Pound)

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