Valuation

TransactionConsulting

Real EstateAdvisory

Fixed AssetManagement

®

Thoughts on Goodwill Impairment

February, 2009

Impairments in the current scenario

There has been a lot of discussion regarding impairment of goodwill in the case of some recenttransactions like Daiichi-Ranbaxy, ArcelorMittal-Arcelor, Hindalco-Novelis etc.

However, goodwill impairment is not a new phenomenon. We have seen some high profilegoodwill write-offs globally over the past several years.

The year 2001 saw a large number of goodwill write-offs on account of tech-bubble burst. It isestimated that companies had written off USD 51bn in 2001, which is 20 times all write-offsrecorded from 1994 through 2000.

Some other large cases of impairment included:

• AOL-Time Warner had written off USD 93.4bn in 2002 following acquisition of Time Warner forUSD 147.0bn in 2000. Till date they have written off USD 101.7bn of goodwill, which isapprox. 80% of total goodwill recorded.

• Similarly, Vodafone has, until now, taken a hit of about GBP 30bn or approx. 36% of goodwillrecorded for acquisition of Mannesmann AG for GBP 101.4bn in 2000.

A few other examples are provided on the next slide.

2

3

Recent cases of impairments

Transaction DetailsGoodwill

recorded at time of acq.

Impairment in FY 2006

Impairment in FY 2007

Impairment in FY 2008

Total Impairment

Vodafone-Mannesmann (Feb 2000) : GBP 101.4bn GBP 83.0bn GBP 19.4bn GBP 6.7bn - GBP 30.1bn*

ConocoPhilips-Burlington Resources (Mar 2006) : USD 35.6bn

USD 16.6bn - - USD 16.5bn USD 16.5bn**

Mittal-Arcelor (Jun 2006) : USD 29.1bn USD 5.9bn - USD 260.0mn USD 560.0mn USD

820.0mn

British Sky Broadcasting-ITV (Nov 2006) : GBP 946.0mn NA - GBP 151.0mn GBP 465.0mn GBP

675.0mn***

AT&T-Bellsouth (Dec 2006) : USD 66.8bn USD 26.5bn - USD 1.6n - USD 1.6n

Kinross Gold-Bema Gold (Feb 2007) : USD 2.9bn USD 1.7bn - - USD 1.0bn USD 1.0bn

Source: Annual and Quarterly reports from Bloomberg and company websites

*Includes a write-off of GBP 4.0bn in 2002** Based on write-offs at reporting segment level

***Includes a write-0ff of GBP 59.0mn in 2009

4

Recent major cases of impairments

Transaction DetailsGoodwill

recorded at time of acq.

Impairment in FY 2007

Impairment in FY 2008

Impairment in FY 2009

Impairment in FY 2010

Total Impairment

Mittal-Arcelor (Jun 2006) : USD 29.1bn USD 5.9bn - USD 303.0mn USD 560.0mn - USD 863.0mn

AT&T-Bellsouth (Dec2006) : USD 66.8bn USD 26.5bn - USD 1.6n - - USD 1.6n

Hindalco-Novelis (Feb 2007) : USD 3.4bn USD 2.2bn - - USD 901.8mn - USD 901.8mn

NYSE-EuroNext (May 2008) : USD 10.2bn USD 4.4bn - USD 1.6bn - USD 1.6bn

Daiichi Sankyo-Ranbaxy (Jun 2008) : YEN 488.4bn

YEN 439.5bn - - YEN 354.0bn YEN 354.0bn

Source: Annual and Quarterly reports from Bloomberg and company websites

Some key observations

A goodwill write-off is a non-cash event and does not necessarily impact the share price. How themarket reacts to news of impairment write-offs depends upon how well the market has factored inthe possibility of a write-off.

It is difficult to discern a sector focus in the impairments. There have been impairments across allsectors, including telecom, pharma, metals, oil & gas, financial services.

It appears to be a more a case of timing of acquisition. When some acquisitions were made atthe peak of the market, the write-offs have been significant. Take the case of Vodafone-Mannesmann. The acquisition made in 2000 had a higher amount of goodwill - 81.8 percent oftotal deal price and higher write-offs till date - 36.3 percent of total goodwill, as compared toAT&T-Bellsouth acquisition made in 2006, which had relatively lower amount of goodwill - 39.6percent of total deal price and lower write-offs till date - 5.9 percent of total goodwill.

Perhaps it makes sense for companies to carry out a purchase price allocation even as they aredeciding to make an acquisition. This will enable the management to get a view of the level ofgoodwill they have to record, and the amortization expenses for the intangibles assets that arebeing acquired.

5

Varun GuptaManaging Directorvgupta@american-appraisal.com

American Appraisal IndiaLevel 1, Trade Centre Bandra -Kurla Complex, Mumbai - 400 051Tel- +91 22 4070 0200

www.american-appraisal.co.in

Valuation / Transaction Consulting / Real Estate Advisory / Fixed Asset Management

6