Asset values at major technology companies worldwide are shrinking as executives across the industry implement cost-control actions that often involve significant cash payouts to former employees and also take billions in non-cash goodwill write downs in response to declining valuation on the equity market.
Most of the charges taken in recent quarters by technology businesses were mainly non-cash expenses, however, they reflect poorly on the concerned companies' asset base and further reinforce the notion that stocks in semiconductor and high-tech equipment vendors deserve the pounding they are taking on Wall Street.
Many semiconductor companies, for instance, entered the current market recession with substantial cash and short-term securities but as the downturn has deepened and as cash flow tightened or turned negative, the IC vendors are being forced to use more of their savings to fund regular operations even as they try to lighten expenses by cutting workforce or mothballing plants.
These reorganization actions, though designed to help slash expenses and reduce cash burn, most often involve initial huge payments to employees offered buyouts or laid off outright.
These payments often run into hundreds of millions in the case of businesses dealing with older employees who have been with the same employer for numerous years and are therefore entitled to bigger separation packages.
The result is that the total asset numbers on technology companies' balance sheets are looking increasingly lighter with cash and short-term securities falling from the highs reached at the beginning of 2008 before the industry began feeling the impact of the now more than one year old economic recession.
The greatest impact on balance sheets and the asset base at companies reviewed by EE Times, however, has come from goodwill and other impairment charges with cash drain coming in a close second.
Some executives argue goodwill valuation is not really important since it represents an intangible asset that is unlikely to impact a company's cash base. As a result, goodwill—the monetary value of which is subjective and difficult to compute—can be written down or even increased following acquisitions without any impact on a company's operations, they say.
That's only partially true. Goodwill, which accountants say represents the premium paid on intangible items such as brand equity or corporate reputation and is calculated as the difference between what a buyer pays for an acquisition and the actual value of the acquired company's asset, is often initially acquired at a huge monetary cost.
Writing down goodwill, therefore, following the closing of an acquisition is an indirect admission somebody's valuation for the acquired assets was inaccurate. In other words, the buyer overpaid and might have mismanaged shareholders' funds.