a. What’s the difference between GAAP and non-GAAP earnings for HP? Which set of numbers do investors believe in this case?
GAAP earnings may be identified as those calculated from through generally accepted accounting principles. These reports usually include accrual accounting, expense matching, and revenue recognition. On the other hand, non-GAAP earnings identify the alternative measures used by corporations to provide a clear description of its performance within a certain period. This practice usually includes cash and operating earnings along with earnings before interests, taxes, depreciation, and amortization. The investors are more likely to believe in the GAAP earnings as they provide the company’s actual performance and prevent dubious or cooking of numbers.
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b. What is goodwill?
Goodwill refers to the intangible asset that is found when one company acquires another for a premium amount. It is noted that the aspect is intangible as it does not represent a physical asset like a building or machinery. It is usually found within the assets portion of the balance sheet of the company. Some of the goodwill assets may include the brand name of the company, patents, good employee technology, proprietary technology, solid customer base, or good customer relations.
c. Why do they write-down goodwill?
Goodwill usually arises during mergers and acquisitions where the company purchased is the target company and the one purchasing the other is the acquiring company. The goodwill is evident when the latter pays for the target usually over its book value. This is an indicator of a positive value of goodwill. However, when the acquiring company pays less than the target’s book value it gains a ‘negative goodwill”. The process of writing down this intangible asset is to recognize estimates or interpretations of the most appropriate valuation of the company’s goodwill.
d. How do investors respond to the news?
It is evident that the reaction by investors is broad particularly in acquisitions where the goodwill accounts for more than $2 billion. The intangible asset cannot be sold independently of the company hence its reveal during the acquisitions and mergers. More than 50% of investors are usually annoyed when the goodwill is excessively high and some may actually seek to sell their shares in the company to avoid future losses.
