Sun preannounced preliminary results of their first quarter. Not a pretty sight…I’ll leave it at that. Sun also announced impairment to Goodwill of $1.8B, out of a $3.2B total Goodwill balance. Goodwill is essentially the difference between an acquisition price of a company and the tangible assets (i.e. cash, securities, equipment, etc) of the acquired company. Think of Goodwill as the price premium for an acquisition.
Many reports have suggested that the $1.8B Goodwill impairment is related to the StorageTek acquisition. But read this from Sun:
“Based on a combination of factors, including the current economic environment, Sun’s operating results, and a sustained decline in Sun’s market valuation, the Company has concluded that it is likely that the fair value of one or more of its reporting units has been reduced below its carrying value. As a result, Sun is currently conducting an interim goodwill impairment analysis to determine the required amount of the non-cash impairment charge, if any. As of September 28, 2008, prior to the impact of this potential non-cash impairment charge, Sun’s total goodwill balance was $3.2 billion of which $1.8 billion relates to reporting units that may be impaired.”
Nothing in the official text indicates that StorageTek is, or is the only culprit. Some have mentioned MySQL’s $1B purchase in passing. So I did some exploring to see if any of the $1.8B impairment could be related to the MySQL acquisition:
Preliminary Purchase Price Allocation from StorageTek acquisition (from Sun’s SEC filing):
|Goodwill||$ 1,754 USD Millions|
|Other intangible assets||1,122|
|Tangible assets acquired and liabilities assumed:|
|Cash and marketable debt securities||1,204|
|Other current assets||505|
|Accounts payable and accrued liabilities||(539 )|
|Other liabilities||(347 )|
|In-process research and development||49|
|Total purchase price||$ 4,082|
Preliminary Purchase Price Allocation from MySQL acquisition (from Sun’s SEC filing):
|Goodwill||$ 723 USD Millions|
|Other intangible assets:|
|Tangible assets acquired and net liabilities assumed||(12 )|
|In-process research and development (IPRD)||22|
I’m not an accountant, (although I did ace Accounting I & II in my MBA…which my mom is very proud of :-), but if Sun is impairing $1.8B in goodwill, the StorageTek-related goodwill could be the major driver. To answer the question posed by the title of this post, it seems the answer is no, MySQL does not have a (major) role to play in Sun’s Goodwill impairment announcement earlier this week. But, the fact is we’ll never truly know unless Sun tells us/its investors the details.
Why would a company take an impairment charge? Goodwill is an asset. A key financial measure is return on assets (ROA), defined as Net Income divided by total assets. An easy way to improve ROA, with consistent Net Income, is to reduce assets. A great time to do so is in a market like we’re seeing today. Companies do this, so please don’t think I’m singling out Sun. Remember when eBay took $1.4B off it’s books related to the Skype acquisition?