In addition to laying off another 600 workers — 100 more than expected — AMD is also undertaking a goodwill impairment charge on the value of their ATI acquisition.
When a company buys another for a price that exceeds the book value of its assets and commodities, the value in excess is recorded as “goodwill.” If the purchased company fails to meet the expectations set by the higher purchase price, that asset is “written down,” or reduced in value.
Evaluation of “goodwill” purchases happens once per year under US Generally Accepted Accounting Principles and the Securities and Exchange Commission. Devaluation of the asset will appear as an expenditure on a company’s balance sheet, as the sum of the write down is debited to a loss account which must be paid from the account of the devalued asset.
When this impairment charge joins the one from July of this year, it is an admission that ATI’s value was less than half of the $5.4 billion AMD paid to acquire the firm. While such devaluation cannot be blamed on weak sales — ATI did well this year — a global GPU sag and an inflated purchase price are definitely to blame.
AMD expects that the charge will be material (a polite way of saying “WE’RE GOING FURTHER IN THE RED?! FFFUUUUUU–“), and explains their reasoning in the filing:
The Company concluded that the current carrying value of its goodwill, which the Company had recorded as a result of its October 2006 acquisition of ATI Technologies Inc. (the “ATI Acquisition”), was impaired. This conclusion was reached based on the results of an updated long-term financial outlook for the businesses of the former ATI Technologies Inc. in light of the current market conditions and economic outlook, which the Company conducted as part of its annual strategic planning cycle during the Company’s fourth quarter and based on the preliminary findings of the Company’s annual and interim goodwill impairment testing that commenced in October 2008. The conclusion was also due to the deterioration in the price of the Company’s common stock and the resulting reduced market capitalization.
There’s really no way to put this in a positive light. We’ll keep you updated as the full value of the charge unfolds in the coming days.
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