February 24, 2012
The following video is part of our "Motley Fool Conversations" series, in which analyst Rex Moore discusses topics across the investing world.
The difficulties of buying and successfully integrating companies into an existing culture are well-known -- and can lead to poor stock performance.
In accounting, goodwill is simply the difference between the price paid for a company during an acquisition and the net assets of that acquired company. As I've noted in my ongoing series about intangible assets, the problem with a large amount of goodwill is that it may have to be written down if the acquisition or merger doesn't create the amount of value that was expected -- and share prices usually react badly to such writedowns.
Frontier Communications (NYSE: FTR ) , Swisher Hygiene (Nasdaq: SWSH ) , Central European Distribution (Nasdaq: CEDC ) , and Green Mountain Coffee Roasters (Nasdaq: GMCR ) are examples of companies that have 40% or more of their total assets made up of goodwill and other intangibles.
Investors in companies such as these would do well to listen how Blackboard CEO Michael Chasen evaluates possible good acquisitions. Watch the third and final part of my series for details.
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