Bubble trouble learn 4 good2/25/2023 So, for example, when Kraft Heinz was bought by private equity, they had to put a value on all the brands of the Velveeta Cheese and, and, and tomato ketchup that were being that were being acquired. And typically goodwill is most often seen when you have one company acquiring another. You would normally expect that value to degrade over time, but there have been some fantastic examples of brands that had to write down their value because tastes changed. It's about the value of something intangible over time. But let's not get caught up too much in the details. Richard Kramer: Well, you could have a lot of inputs to that. Will Page: Is there a survey that's done to determine that, or. Richard Kramer: So it is indeed the auditors in conjunction with the management team that would say, for example, how many customers bought your product last year and did they buy it because of the brand, or did they buy it because you produced it at a very low price? Who is it exactly that decides how warm and how fuzzy that goodwill is? Is it the management team or some independent auditors? Now you described warm and fuzzy as a feeling of goodwill. Will Page: So I love that description, Richard. This is the value of our customer relationships," or this is the value of that intangible asset of the warm and fuzzy and feeling that we have about our company that makes us believe there's some intangible value to it, not something we can package up and sell as a commodity in the market. It's very hard to value.īut goodwill itself depends on the judgment the management alongside their auditors to say, "This is the value of our brand. Companies will have level three assets on their books which are those defined as things where they lack observable inputs, for example, a stake in a private company. But instead it's things that require discretion to see and value in financial terms. It's not hard goods or stuff that you can sell. So it's defined in a, a negative sense by what it's not. But at the most basic level, goodwill is what's called an intangible asset. Richard Kramer: So there's a lot to unpack there. What is goodwill? Where do you see it in your accounts? And how is it calculated? So I'm, I'm interested in tackling this one first. There seems to be a lot of discretion applied to goodwill. You know, it's discretion that's applied. We discussed on our podcast about the SAC, the subscriber acquisition cost. How good is goodwill? How bad is goodwill? How ugly is goodwill? And I gotta say, this show's been helpful for me personally because I understand there's market imperfections. This week we get to the good, the bad and the ugly of something called goodwill, how it's supposed to be used and how it can often be abused in creating bubble trouble. And this week we're gonna get back to basics, back to those foundations that we've been building all along, where we get to grips with some of the fuzzy terms and tangible concepts that too easily pass us by when we're following markets, picking stocks or reading about mergers and acquisitions. Will Page: Welcome back to Bubble Trouble where we reveal some inconvenient truths about how those financial markets really work. This week we get to the good, the bad and the ugly of goodwill, how it's supposed to be used and how it can often be abused in bubble trouble. Today we go back to basics where we get to grips with some of those fuzzy terms and intangible concepts that too easily pass you by when following markets, picking stocks or reading about acquisitions. Richard Kramer: Welcome to the Bubble Trouble, conversations between the economist and author Will Page and me, independent analyst Richard Kramer, where we lay out some inconvenient truths about how financial markets really work.
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