CBS Facing Tribal Council On The Next Survivor: Goodwill Island

May 23rd, 2008 Davis Posted in SA, Media |

Jonathan Weill with Bloomberg news noticed that CBS’ market cap is currently lower than their book value. When a stock is trading under it’s book value, vulture value investors tend to start getting interested, but in CBS’ case this may have all the makings of a value trap.

The problem, most of the assets on CBS’ balance sheet are attributed to goodwill.

If the market is right, they are expecting CBS to write down about $6 billion in assets. This would mean that the disconnect between the balance sheet and the stock price may not last for very long. Worse yet, if they did have to do a write down, it would also mean that their financial performance hasn’t been strong enough to justify their own internal valuations. Lower earnings + massive multi-billion losses tends to = unhappy investors, hence the dismal stock performance.

“So, on paper, this single, pneumatic intangible supposedly is more valuable than the company as a whole. As they used to say on CBS’s old show “The Twilight Zone,” you are now traveling through another dimension. If CBS’s audits were an episode of “Survivor,” a bunch of that goodwill would have been voted off the island by now.

Goodwill is nothing more than a ledger entry, representing the premium that one company pays to buy another. Specifically, it’s the difference between the purchase price and the fair value of the acquired company’s net assets. The more you pay, the more goodwill you get. It can’t be sold by itself, either. Hence, the term’s synonym: air. CBS acquired the bulk of its goodwill through its 2000 purchase of — strangely enough — CBS.”

With CBS planning to purchase CNET, Weill notes that they’ll be adding even more goodwill to the balance sheet. While his article raises some tough questions for CBS, Weill does offer some help to CBS management by giving them a top 10 list of excuses that that they can use, for why they haven’t taken their medicine.

Top Ten CBS Excuses for Avoiding Big Writedowns:

1. Dave’s got a turnaround plan!

Weill’s article was written tongue in cheek, but he does raise some pretty serious questions for CBS investors. There are times when large goodwill is justified, but there are also a lot of companies who use this line item as a way to make their financial condition appear more healthy than it really is. Goodwill is a tricky asset to put a number on because it’s so intangible, but there does need to be a legitimate justification for keeping that value on the balance sheet. If the market is valuing the entire company at less than goodwill alone, then CBS needs to rethink how much that goodwill is really worth or provide an explanation for how they are valuing the asset.