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

[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

[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]

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.

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.