Microsoft Writes Off $6.2 Billion From aQuantive Acquisition

An anonymous reader writes "Microsoft had high hopes for aQuantive when it paid $6.3 billion to acquire the combo online marketing services vendor/advertising agency in 2007, evidently in response to Google's acquisition of DoubleClick. 'Microsoft is intensely committed to creating a thriving advertising business and to partnering closely with all key constituencies in this industry to help maximize the digital advertising opportunity for all,' declared CEO Steve Ballmer. Yesterday Microsoft wrote off $6.2 billion of its investment in aQuantive, as its online division continues to struggle. MS-watcher Mary Jo Foley points out this is one in a list of bad purchases from Microsoft. On the bright side, Microsoft managed to recover an estimated $500 million three years ago from the deal when it sold off the Razorfish ad agency (not sure why this amount wasn't subtracted from today's writedown)."

Comments

All these big companies write off everything!

[rehabdoll]

oblig: https://www.youtube.com/watch?v=rCZRqH7sRyA

Accounting terminology

[Compaqt]

Any accountant want to explain exactly what "wrote off" means?

Granted a unit might not be making as much profit as desired, but does this mean they gutted the whole thing, sold the desks, and gave the chairs to Steve Ballmer?

Re:Accounting terminology

[Baloroth]

As I understand it, it means that MS effectively says they now have $6.2 billion less in assets. When they bought aQuantive, they spent $6.3 billion, but got an asset that they valued at the same level, meaning their assets stayed more or less the same. Now they recognize that it isn't worth that, so they "write it off" (most of it anyways) in recognition of that fact.

Re:Accounting terminology

[alexander_686]

I have not read the article but

If you look at the annual reports you will find “book value of assets” which is the cost of the asset minus any depreciation.

Then take a look at MSFT’s “Goodwill”, which will be a subcatagory of book value. This is the difference between the book value of a company (ifor example aQuantive) being bought vs. the purchase price.

However, sometimes the asset you have purchased is not worth anything, It’s been burnt to the ground or some such thing. You can’t hold onto this defunct asset at book cost if there is a “permanent material” event . So one makes a accounting judgment and write down the asset to correct level.

Book and Goodwill are are “hard” numbers – in the sense that there is little accounting judgment involved. You can only write these down - Unlike financial institutions you can’t “mark to mark” these assets to a higher level during a bubble to generate fathom profits.

Which answers the OP question about Razorfish. An accountant had made an accounting judgment that Razorfish was dead. It affects the balance sheet (assets / debits), is reported to the shareholders but does not trigger any tax questions. This year they were able to find a little value. It affects the Income (Revenue / Expenses) and triggers taxes.

Re:Accounting terminology

[MightyMartian]

It is an accounting term. It means to essentially zero the value of an investment or debt; a credit to assets (reducing the company's worth) and a debit to some sort of expense account (thus reducing the company's net income). A good example is customer debts you may be carrying (Accounts Receivable). At some point, particularly if the debts are small, or attempts at collection have failed, you're not going to want to keep that asset on the books (seeing as you never actually were able to convert the customer debt into cash, and have been paying income tax on it), so you write it off as a bad debt (a credit to Accounts Receivable and a debit to Bad Debts Expense).

Now, obviously in the case of a very large corporation, where individual units may operate as autonomous or semi-autonomous interests in their own right, the accounting becomes much more complicated, but at the end of the day, a write off of an investment means to remove it from the books by reducing to zero whatever is left in the Balance Sheet.

Any physical assets like buildings, equipment and so forth, would be another set of accounting operations, depending on their value. Either they'll be sold off, disposed of or absorbed by the larger operating unit.

Re:Accounting terminology

[Fnkmaster]

When a company acquires another company, that acquisition becomes a part of the balance sheet of the acquirer. Essentially, the value of the assets they purchased are recorded as if they are worth what they paid for them.

Much of this value, especially with software companies, is carried in the form of "goodwill" on the balance sheet. This is the excess payment over and above the book value of the acquired company (i.e. the value of its assets). If a company gets bought out for $6.3 billion dollars and had $100M in book value assets recorded on their own balance sheet (computers, chairs, buildings, machinery, etc.), then the acquirer records $6.2B in goodwill on their balance sheet,

If the assets that were acquired generate fewer profits than expected, the company may have to record what's called a "goodwill impairment" - the stuff they bought has been demonstrated to be worth less than $6.2B, so they have to record a paper loss in their annual profit and loss statement, which comes out of the goodwill asset on their balance sheet. In theory, the accountants are supposed to look at the business unit every year to see if there is any impairment of value that would require the reporting of a loss associated with the goodwill impairment of that unit. In practice, these things often seem to just sit around for a few years then get pulled out of a hat when the CFO decides fuck it, we're losing money this year anyway, time to write off all that dumb shit we've been carrying on our books that we bought before the economy went kerplop.

Even worse the a goodwill impairment, the entirety of that goodwill can be written off, creating a paper loss equal to almost the amount they originally spent on the company. Which is apparently what happened here.

It's like Microsoft took $6.2B and lit it on fire. They just didn't realize it had all burned up until now, even though the actual cash was gone several years ago.

Re:Accounting terminology

[vlm]

Any accountant want to explain exactly what "wrote off" means?

As an experienced investor dude, not a licensed CPA, heres how writeoffs for purchased companies work. I'm taking a step back from the "what" answers to attempt to answer "why". As in why does it happen and why is it being posted today, as opposed to last week or next year.

The traditional way to do R+D was to pay cash up front in salaries and parts, and maybe something cool and profitable fell out, or maybe not. See Bell Labs, HP in the glory days, etc.

The modern way to do R+D is to let a startup do the real R+D on their own and get it started up, then the failed ideas die and the good ideas are bought for big money. Sometimes BIG companies are bought as "new wave R+D" instead of little startups. Maybe for as much as 6 billion bucks. The advantage for the big company is they invest later when its "more obvious" if a tech is any good, and if it bombs after purchase like this story, then the big corp gets to pick when to accept and post the losses, based on coordinating with other mysterious financial activities, etc. There is a certain limit to the BS allowed and eventually you have to report losses even if you don't want to. I have not been following MS enough to tell if this loss is being posted on their schedule or someone elses.

Re:Accounting terminology

[vlm]

No sense keeping losses on the books for no reason. For example, a 1% growth in a stock viewed before a writeoff vs after a writeoff is a much different picture (e.g., the 1% is a lot bigger gain before the writeoff than after)

I believe you have that backwards.

If you have a $200M balance sheet and earn $1M then your numbers look like 0.5% rate of return. Lets say the execs want to boost that rate of return (why is a whole nother topic). If the assets are really only worth maybe $100M then you write off the "fake" $100M and suddenly you're earning the same $1M on a $100M balance sheet which is double the previous rate, a stellar 1% rate of return.

There are other reasons to write off. Lets say you're a small company (obviously not MS) trying to get acquired. For ego reasons or whatever your balance sheet is a little inflated. BigCorp and you want to make a deal but they aren't paying the inflated balance sheet amount. So you write off to "correct" your net worth to something BigCorp is willing to pay.

Another strategy for writing off is that writing off $400M is not really more of a career or market issue than writing off $300M, its seen as a one time isolated "event" as long as you don't make a habit of it. So you write off more than its actually lost, so as to make every quarter for the next ten years look better than reality. Kick it down worse than it really is, let it float back up to reality slowly making it look like you're doing amazing management things rather than merely financial trickery. Usually you can see this strategy if they refuse to sell the "worthless" asset later... That becomes an interesting strategic issue because you might be brought up on criminal charges for false accounting if you sell the "worthless" asset next month for half price rather than zero, so the strategic issue is MS cannot get out of that business or sell the remains of the asset for ... awhile.

Another write off strategy (probably not in this case) is to make it a very non-traditional poison pill. Suddenly your balance sheet looks ickier, making you less of a takeover target (not an issue for MS). But nothing has really changed in business operations. So you're not gonna get financially raided, probably, if you write down your balance sheet to an icky level. Not relevant for MS, but a reasonable strategy in a non-monopoly industry thats undergoing merger-fever.

Re:Accounting terminology

[hairyfeet]

Bingo, they lost 6.2 BILLION on the deal. So can we ALL agree now that Forbes had it nailed when it called out Ballmer as being the worst CEO? i mean how many billions has he blown now on shit deals since he took over? 15 billion? 20? More? He makes the Pepsi guy at Apple look like Jobs for the love of pete!

Hopefully the abortion that is Win 8 will be the final nail in Ballmer's coffin and the board will force him to "pursue other interests" and bring back someone like Ozzie or Allchin to right the ship because they only have two cash cows, Windows and Office, and Ballmer is gonna take a steaming dump on one in Oct just so he can yet again try to rip off Apple and pretend people want a WinTab like an iPad. I mean look at this video folks which is a typical reaction to windows 8 from what I've watched here at the shop with a Win 8 CP set up for anybody who walks in to play with. its not intuitive, its not discoverable, hell it doesn't even follow cell phone conventions, instead acting like some sort of bad hybrid of Windows and some Smartphone.

I agree with Foley, this is just one of a loooong line of bad moves made since Ballmer became CEO. His "strategy" seems to be 1.-Buy or build a half assed product based on something Apple or Google already does better, 2.-Fail miserably. Yeah, great corporate direction you got there Steve, really setting the world on fire with THAT one.

Re:Accounting terminology

[drkstr1]

That was almost identicall to my mums experience. I'm no MSFT hater, but bad design is bad design. Had one of my designers presented something this unintuitive, I would have sent them out on their ass.

Re:Accounting terminology

[ryzvonusef]

I am an ACCA student, and I will try to explain this in simple, ELI5 terms.

*Disclaimer*; I am merely an ACCA *student*, NOT a professional qualified accountant, and especially not yours. Do NOT use my explanation as a basis for anything.

First to answer your question:

1-"Write off" means decreasing the value of an asset, and charging that decrease as an expense/loss to your profit.

2-The reason why aQuantive was worth more than number of the chairs it had for Steve to throw, is down to a magical term called "Goodwill"

----
Now the explanation (Warning, explanations maybe exceedingly simple and *not* strictly following accounting principles) :

1-To explain it, an asset is simply anything that helps you to earn revenue. ANYTHING. Not only the widget that your factory churns out by the millions, but also the chair you are sitting on at work, and the swipe to unlock patent your company has.

Assets often suffer a decrease in value, often due to things like wear and tear, but also, such accounting concepts as impairment (which is account-ese for "come down to earth"). So if its value decreases, you "write it off" and take "written-off" part away from your hard-earned profit as yet another darn expense.

2- How much do you think a company is worth? How do measure it anyway?

There are two-fold problems when valuing a company: How much each *individual* asset is worth, and how much are they worth, when put *together*.

For the first, it slightly simpler; call in the Valuer! He goes around valuing stuff, like how much would this creaky chair with a crack in the back left leg cost, if I were to tell the buyer it's an authentic "Thrown by Steve".

Problem comes for intangible stuff, like Google's search engine setup; now obviously it worth A LOT, since it earns them all the revenue they can fill up their caskets with, but...just how much, exactly?

If you can get a market value (Steve would buy it for *this* much, even if just to burn it up in spite) that's okay, other wise you get in a bit of a fix. But never despair, valuers are professionals, they can guesstimate pretty good.

But let's get to the other problem: How much is a company worth, *all* together? Basically, a company's worth is greater than the sum of its individual parts (you may have heard of this phrase before; ever heard of the word synergy?)

Basically, Microsoft's worth is not just the sum of Windows, Office, Hotmail, Xbox and Steve's authentic thrown chairs put together. Together, they earn A LOT more revenue, than if the code and the chairs were auctioned off. This extra bit is called Goodwill.

And since this "Goodwill" helps to earn that previously unexplainable extra revenue, it can now be categorised as an asset.

How do you measure this goodwill? Well, we call in the Valuer's big brother; Company Valuer. Again, using science and magic (everything from share price movement to dividend growth history to reading chicken entrails), he comes up with a value for this goodwill.

And all was well.

Or was it?
-----

So now back to our scenario:

Microsoft wanted to buy aQuantive and called in the valuers. They did their magic and came up with a value: This much for the chairs, this much for the uber-secret advertisement formula, this much for the goodwill that makes aQuantive tick. Total: around 6 billion.

Steve wrote a check for 6 billion and that was that.

Note however the the last two items in the list were most likely heavily guesstimated. And now it turns out, the valuers were BAD guessers. Very bad guesser. 6 billion worth of bad guessing.

aQuantive is not worth the 6 billion that was spent on it, since it's not earning revenue like it would have, were that 6 billion had been spent to buy more chairs for steve to thrown and sell off.

So it's value has decreased. And when an asset's value decreases, we write off that decrease as a expense/loss against our profit.

And now you know.

----

If there is anything I could explain further, or any misconception, please let me know.

Salute to Steve

[MikeMo]

:Hoist: "May Steve Ballmer be the CEO for as long as it takes!" /drinks hearty ale

A Reduction of Taxable Income

[eldavojohn]

I'm not an accountant but from the wikipedia page:

In income tax statements, it refers to a reduction of taxable income as recognition of certain expenses required to produce the income.

I'm guessing that on Microsoft's assets and liabilities balance sheets, they have finally realized (meaning evaluated currently) that the "investment" of $6.3 billion dollars is no longer worth more than a hundred thousand. So perhaps they knew this for a while but have now finally acknowledged it as an opportune time. Say they expect to bring in huge revenue this year and now this loss will counteract that. When you hear "it's a tax write off" it is usually referring to you reducing your taxes by counterbalancing your incoming revenue with a realized loss. Examples: You give a car away, you are paying off pure interest on your home, etc. In Microsoft's case, they made a bad investment and now their books are reflecting that. I'd imagine SEC regulates this kind of thing pretty tightly to stop manipulation of stocks and whatnot but I don't know those regulations.

Microsoft is like Ford Motor Company...

[__aavqan3009]

Sure, they invented a mass production method that brought automobiles to the masses, but they eventually spent most of their time doing the opposite of General Motors. Microsoft is playing the same game, countering everyone else in the tech field for no good reason.

Re:I've got a better deal

[drooling-dog]

Indeed. The numbers that these companies deal with are mind-boggling, and the valuations so seldom seem justifiable. Maybe part of it boils down to strategic panic, but the egos of everyone involved play a part, too, I think. None of these executives want to be messing around with smaller deals than their peers, even if they're on the paying end.

Re:I do (+ malware, botnets & more)

[Trashcan Romeo]

Doesn't your Time Cube take care of all that?

Re:I've got a better deal

[MickyTheIdiot]

It's arrogance as well. There guys continuously see themselves as the "smartest people in the room" and wanking each other off as Randian "productive people" and even a multi-million or billion dollar mistake can't budge that delusional behavior.

Re:Kill advertising!

[camperslo]

How would the potential customers know about those enterprise apps?

An advertising model that is effective sticks around, even if offensive in various ways. Part of the measure of effectiveness is the cost. Traditional non-net advertising is generally expensive to distribute.

You can avoid looking at ads and filter them, but using search engines to find things you'll buy is also part of the picture. Although largely free services like craigslist have eaten into classified ads, there doesn't seem to be any popular non-commercial alternative for search engines. Perhaps some would be willing to contribute code or operating costs to such an effort? I'm not sure how many would work very hard to produce that for free (to users). Alternatives to Facebook and other services would also need to be built, but even they they'd be data mined externally.

If MS has focused on what USERS wanted, not the paid-ad exploitation side of things, they might have been able to offer a search product that made their OSes or hardware significantly more appealing because it DIDN'T do nasty things to users. That, along with domains that banned external ads and scripts from sites, could make the net experience much different.

Wow, 6.2 Billion...

[NalosLayor]

Wow, 6.2 Billion. That's a damn big chunk of change to spend and get nothing to show for it. I'm pretty sure Elon Musk could build a permanent manned moon base for 6.2 billion, and Microsoft, apparently can't even sell an ad. Of course, this is emblematic of Microsoft's lost decade (the years since Bill became a philanthropist): Microsoft decides a field is going to be hot, buys a reasonable player, mangles it, and then six months later shuts it down as a "failure". They have become like a child with ADHD -- abandoning things as soon as the next shiny object passes into view. It's sad, because they seem to be unable to learn from their experiences.