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Business trends

Japan Inc.'s goodwill climbs to record 29tn yen

Acquisition binge poses risk of eventual write-downs

SoftBank Group CEO Masayoshi Son has driven the company's acquisition spree.

TOKYO -- With many Japanese companies pursuing growth by acquiring other businesses, the intangible assets known as goodwill are also on the rise.

Goodwill recorded on the balance sheet of some 3,600 listed companies in Japan totaled 29.2 trillion yen ($258 billion) at the end of 2016 -- up 20% from a year earlier -- according to a Nikkei Inc. data compilation. The figure almost matches the just over 30 trillion yen in aggregate net profit projected for these companies in fiscal 2016.

Goodwill is calculated by subtracting the net assets of an acquired business from the purchase price. The result is supposed to reflect the brand value of the acquired company. So the higher the acquisition price relative to net assets, the greater the goodwill.

Purchase prices are often driven up by competing bids as well as growth prospects. In addition, stocks around the world are higher with support from monetary easing in key economies -- further raising the price of acquisitions.

Companies booking goodwill of more than 100 billion yen in 2016 increased by nine to 61. SoftBank Group, which has bought such major companies as U.S. mobile carrier Sprint and British chip designer ARM Holdings, had the largest amount, or 4.8 trillion yen. Japan Tobacco and Nippon Telegraph and Telephone, both urgently cultivating overseas presences via acquisitions, also had goodwill of more than 1 trillion yen.

Rising goodwill indicates that companies have shifted gears and are aggressively pursuing growth. As long as earnings of acquired businesses grow, there is no problem. But if their earnings shrink, the risk of future losses arises.

Toshiba, for instance, had to book a major write-down on inflated goodwill when the costs of building nuclear power plants shot higher than expected for a U.S. business bought by Toshiba's American subsidiary, Westinghouse Electric. Toshiba thus incurred a net loss of 499.9 billion yen in the April-December period.

Rakuten wrote off 21.4 billion yen of goodwill from a U.S. video streaming unit in 2016, and its net profit declined for a second straight year.

Japanese accounting standards require fixed-amount amortization of goodwill each year, but International Financial Reporting Standards and U.S. procedures do not. More Japanese companies that are making large acquisitions -- such as Renesas Electronics -- are switching to IFRS and U.S. rules to minimize the profit squeeze from the periodic amortization of goodwill.

But this means the companies are shouldering the risk of sizable write-downs down the line, if acquired business' earnings slide significantly. "Companies rushing to mergers and acquisitions to diversify businesses must watch out for sudden losses," said Hideyuki Ishiguro of Daiwa Securities.

(Nikkei)

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