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When goodwill exceeds market cap, watch out

Yellow Media CEO Marc Tellier prior to the company's quarterly results meeting in Montreal, May 6, 2010. Yellow Media tops a Capital IQ list of Canadian companies whose goodwill exceeds their market capitalization.

Graham Hughes/The Canadian Press

What are we looking for?

Canadian companies whose goodwill exceeds their market capitalization, suggesting non-cash losses are in their future.

A Wall Street Journal article earlier this month highlighted major U.S. companies that are carrying large amounts of goodwill on the asset side of their balance sheets.

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A company creates goodwill when it makes an acquisition and pays more than the stated value of the tangible assets – such as cash, manufacturing plants and equipment – it gets in the deal. The "good" part of "goodwill" takes its name from the more warm and fuzzy value it may also acquire, like good customer and employee relationships.

If the company ultimately realizes it overpaid in the deal, it needs to write down its goodwill balance, creating multimillion- or multibillion-dollar losses. Goodwill "impairments," as they are called, have driven some of the largest losses in corporate history, including AOL Time Warner's $98.7-billion (U.S.) 2002 net loss.

When the company's goodwill is larger than the market capitalization investors are assigning to the entire company, it's a red flag that goodwill may have to be written down. (The Wall Street Journal noted that Hewlett-Packard and Boston Scientific were in this category at the end of 2011, and both subsequently did writeoffs.)

How we did it

We used Standard & Poor's Capital IQ database to run our screen. We started with the more than 1,500 companies listed on the Toronto Stock Exchange and asked for those whose goodwill amounts on their most recent balance sheets exceeded their market capitalizations.

What we found

There were 15 companies whose goodwill exceeded their market values as of Tuesday. The list has a number of familiar names that have made deals but have since fallen deeply out of favour, led by Yellow Media Inc. Two newspaper companies – Postmedia Network Canada Corp. and Glacier Media Inc. also make the list.

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Only two companies have more than $1-billion (Canadian) in market value – Quebecor Inc. and Petrobank Energy and Resources Ltd.

Under International Financial Reporting Standards, Canadian public companies need to test goodwill for impairment at least once a year, and perhaps more often if "impairment indicators" are present. If a Canadian company announces an impairment loss in coming months, don't be surprised if it's on this list.

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