Goodwill and intangibles don't even exist in the real world. If you tried to sell a company's Good Will for 10 dollars in a bankruptcy auction, people would be rolling on the floor laughing. However, they are evidently worth quite a bit to a few companies. Hundreds of billions of dollars, in fact.
Ever wonder how so many companies, especially banks, gained SO MUCH stockholder equity over the last 5 years, despite the fact that the economy hasn't really been doing all that well? We're talking about the real world, not the Bush Administration fantasy statistics that keep "proving" we aren't really in a recession and inflation is really under control? When the government leads the pack in accounting practices that would make Enron proud, could the wolves of Wall Street be far behind? Let's take a look at the balance sheets of the Dow Industrials.
Verizon only believes that it has $5.2 billion in goodwill. However,
it believes that its intangibles are worth $65.4 billion, and that
their value has increased by $10 BILLION dollars in the last THREE
MONTHS!!! No wonder the competition was making jokes about how
valuable that name is, in the TV ads. I didn't get the joke until I saw just
how much they think their name is worth. WOW! Unfortunately, the company has
total equity of $50.9 billion. That means that their name is worth
more than everything else that they own. It must be, since the fact is
that once you subtract it from the balance sheet, you can see that the
real value of the company is NEGATIVE $19.7 billion, up from negative
$10.6 billion just ...bet you can guess...3 months ago.
To AT&T, Good Will is worth a LOT. $71.5 BILLION dollars, in fact! And intangibles are worth another $65 BILLION! AT&T lists its net worth at $112 Billion dollars. In other words, if you subtract the things that don't really exist from its balance sheet, AT&T currently has NEGATIVE equity of $24.5 BILLION dollars. Compare that to total goodwill of just $1.6 billion in 2003. Back then, it had REAL equity of $36 billion. I would be REALLY careful about investing in this puppy. I would have thought that the previous assessment would have been about
a million times the actual value of the non-existent item, but I will
defer to the expertise of their highly-paid accountants.
Kraft has $30.5 BILLION in goodwill and $13.8 BILLION in
intangibles. It has total equity of $28 billion. If you subtract
everything that doesn't exist, you get a total REAL shareholder equity
of NEGATIVE $16.3 Billion.
Procter & Gamble is living up to the latter part of its name.
It has $$60 billion in good will and $34 billion in intangibles on its
books. Meanwhile, it just has $69.5 billion in shareholder equity. In
other words, if we don't count the stuff that doesn't exist, it has
NEGATIVE equity of $24.5 BILLION. It has been in the hole for a while,
though. It had real negative equity of over $5 billion 5 years ago.
GM,
on the other hand, only thinks that it has $1 BILLION in good will. It
REALLY needs a new accountant, especially since it only has $136 billion in real assets, but has $193 billion in liabilities. In other
words, it has a MASSIVE NEGATIVE equity. It owes $57 billion dollars
more than it owns. And most of the stuff that it owns isn't worth
nearly as much to anybody else as it is to GM. If it goes bankrupt,
every share holder will be wiped out and every vendor who sold them
anything and didn't get paid in cash is going to lose the vast majority
of their investment. Fortunately for GM, hope springs eternal. I keep
hearing about the government bailout. Unfortunately, that $25 billion
bailout is about like spitting in the ocean of red ink for this one.
GE believes it has accumulated $84.4 BILLION in good will, and has another $16 billion in intangibles. It claims that its shareholders' equity is $118.4 billion. Once you subtract the things that don't exist, it's only worth $18 billion.
To Bank of America, good will is worth $77.7 BILLION dollars! Intangibles are worth another $10 BILLION! Wow! Out of a total net worth of $162.7 billion dollars, $87.7 billion doesn't even exist in the real world! Somebody needs a reality check. BOA is worth $75 billion in the real world, IF the rest of its balance sheet isn't as faulty as its statement of net worth. 5 years ago, it claimed its good will was worth $11.5 billion and intangibles were worth another $3 billiion.
To J.P. Morgan, good will is worth $46 BILLION dollars. That looks like a lot, but it is really pretty conservative in an industry where it's not unusual for good will to be the most valuable asset in a bank's entire portfolio. Intangibles are worth another $6 BILLION. Out of a total net worth of $123 billion dollars, $52 billion doesn't exist. JPM is worth just $71 billion in the real world. Compare that to 5 years ago, when it thought it had accumulated only $8 billion in good will.
Citibank believes it has accumulated $41.2 BILLION dollars' worth of goodwill, and that its intangibles are worth another $22.7 BILLION dollars. Make believe assets account for nearly $64 billion out of a net worth of $113.6 billion in shareholder equity. In other words, over half of their net worth is about as tangible as Santa Claus, and worth about as much as his fabulous, but imaginary, toy factory.
Some other Dow Industrials: (All numbers in BILLIONS!)
3M: $6.7 out of $12.5
Alcoa: $5.2 out of $16.7
AMEX: NONE. Total equity: $12.3 billion
Boeing: $5.5 out of $8.6
Caterpillar: $2.4 out of $9.5
Chevron: $4.6 out of $82
Coca-Cola: $13 out of $23.2
Dupont: $4.9 out of $12.9
Exxon: NONE. Total equity: $124.8 billion
HP: $26.5 out of $38.5
Home Depot: $1.2 out of $18.6
Intel: $4.8 out of $40.4
IBM: $23 out of $28.3
Johnson & Johnson: $29.2 out of $46.4
McDonald's: $2.4 out of $14.6
Merck: $2 out of $20
Microsoft: $14 out of $36. It accumulated all of this goodwill but $4.7 billion in one year. Something smells fishy.
Pfizer: $41.6 out of $66.6
United Technologies: $19.5 out of $21
Wal-Mart: $16.4 out of $66.8
Walt Disney: $24.6 out of $32.8
Just 6 years ago, practically none of these companies padded their books with MASSIVE amounts of "Goodwill", in many cases so much of it that it calls the accuracy of their entire balance sheets into question. But today it has become common practice to just dump more and more losses into "goodwill" and let them fester, hoping that they will be long gone before the house of cards that they built in the name of fat bonuses, comes crashing down. And they will; this disaster is going to expose the soft underbelly of many companies whose investors thought were rock solid through and through.
I had thought that the Dow Industrials had been stacked with recession-proof titans. I feel like I have just received a slap in the face, which has awakened me to the reality that a dozen of these companies are barely surviving now; they can't survive a hard recession, and have a snowball's chance in hell of surviving a real Depression. The Dow could look much different 5 years from now, as several major brands either bite the dust or become part of another company. One company's $65 billion dollar name might be the only part of it that survives. I had been predicting a low of 7,000 for the Industrials. I have changed my mind. They may dip below 5,000 by this time next year. The number posted in the average may be meaningless to current calculations by 2011, because several of of those old, familiar names will be gone, to be replaced by the current darlings of Wall Street at the time.