The season of goodwill impairment  

Since 2016, the UK has dealt with ongoing Brexit negotiations, the impact of which is still reverberating through the UK and the rest of Europe. Combined with the lingering effects of the euro sovereign debt crisis, the last five-year period has been characterised by economic uncertainty within Europe.

Despite this, global economic and financial conditions improved markedly in 2017, with most countries around the world experiencing growth. The UK’s economic prospects, however, were (and continue to be) impacted by the uncertainty surrounding Brexit. So how did corporate M&A activity in the UK fare in 2017, in the wake of Brexit which rocked markets?

Markets tend to react negatively to periods of prolonged uncertainty, and M&A is no exception. To provide insight into the success (or otherwise) of M&A, our European Goodwill Impairment Study examined general goodwill impairment trends for companies within the STOXX® Europe 600. The study looks at 10 sectors including: consumer staples, financials and real estate, telecommunication services, information technology, materials, industrials, utilities, healthcare, consumer discretionary, and energy.

Global economic and financial conditions improved markedly in 2017, with most countries around the world experiencing growth

The report also took a closer look at companies in benchmark stock market indices across five countries, including the FTSE 100 in the UK. Tracking impairment is crucial to provide investors with transparency on the performance and success of prior acquisitions. An impairment of any amount can be an indication that acquisition synergies failed to materialise or that the company has undergone a significant negative event, which could be caused by internal performance or wider industry and/or economic issues – the latter of which has caused prolonged effects for some time.

We found that FTSE 100 goodwill impairment dropped 89% in 2017, with UK-listed STOXX® Europe 600 companies recording an 81% fall.  Whilst many expected Brexit to have an immediate economic impact, this study shows that we may now just be starting to see its broader effects. It looks like continued uncertainty around Brexit is adding pressure to goodwill impairment tests for those companies with more business exposure to the UK. Initial indicators for 2018 show that of the currently-reported 2018 top 15 goodwill impairment events, impairment recorded by UK companies is already almost double the total amount recorded in 2017. These early signs suggest that this could be the calm before the Brexit storm.

The UK is currently experiencing a slowdown in volumes and we expect that markets will continue to watch and wait, which may mean further disruption. We are only now starting to see the impact of Brexit, with 2018 M&A data showing a considerable drop. Deal value in the UK fell by 47% in 2018 compared with 2017 (in euro terms), while the number of deals decreased by 22% from the previous year. Whilst UK markets remain uncertain, the market still has strengths which could protect against further disruption. Many of the listed UK firms in the STOXX Europe 600 have a global presence, helping mitigate the impacts and risks associated with Brexit.

This multinational ‘shield’ could help create enough breathing space for companies to recover from ongoing economic changes. Therefore, when it comes to goodwill impairment, we’ll have to wait a little longer before we can really start to see the true impact, as there is a natural lag before companies report impairments on previously-recorded acquisitions.

Looking at the rest of Europe, from mid-2016 until the end of 2017, global economic and financial conditions improved markedly. The Eurozone exhibited its best economic year aided in part by the ECB’s quantitative easing policies.

In terms of M&A volume, European M&A activity softened in 2017, with the eurozone recording a 10% decline in deal volume and a 70% drop in deal value of closed M&A deals.  This data is based on closed transactions by European-based companies acquiring a greater than 50% interest in the target company. This is important, because only completed acquisitions of controlling interests give rise to goodwill being recorded on a buyer’s books. The combination of lower volumes and a strong economic environment has meant that total goodwill impairment recorded by European listed companies in the STOXX® Europe 600 declined by 35%, a reduction for a second consecutive year.

This guest article was written by Mike Weaver, Managing Director and the Head of Valuation Advisory in the EMEA region at Duff & Phelps