In 2013, Duff & Phelps launched its inaugural study of goodwill impairments recognized by European companies.
Now in its fifth edition, the 2017 European Goodwill Impairment Study (2017 Study) continues to examine general goodwill impairment trends across countries and industries within the European market.
The analysis in the 2017 Study is focused on companies in the STOXX® Europe 600 Index, which is comprised of large, mid and small capitalization companies across just under 20 countries of the European region, for the 2012-2016 calendar years.
In this fifth anniversary edition, Duff & Phelps is also introducing new analyses of goodwill impairment trends and statistics for benchmark stock market indices in four highlighted countries:
- CAC 40 in France
- DAX 30 in Germany
- IBEX 35 in Spain
- FTSE 100 in the United Kingdom
Highlights of the 2017 Study
The 2017 Study focused on financial data for companies comprising the STOXX® Europe 600 Index in calendar years 2012 through 2016.
This five-year period was characterized by economic uncertainty within Europe, with effects from the euro sovereign debt crisis dating back to 2010 still lingering. Nonetheless, the Eurozone economy is finally showing growth momentum, despite the uncertainty created by the United Kingdom’s vote in June 2016 to end its membership in the European Union (known as “Brexit”). Assisted in part by European Central Bank’s (ECB) quantitative easing (QE) policies, all Eurozone economies expanded for a second consecutive year in 2016, with the exception of Greece. However, the United Kingdom saw real growth slow down to 1.8%, its lowest level since 2012.
M&A activity in 2016 was very strong in Europe, despite some uncertainty introduced by Brexit. This led to €229 billion of goodwill being added to the balance sheets STOXX® Europe 600 companies – the highest level since we began tracking this information in 2010 – with Germany adding the most. From an industry perspective, eight out of ten industries registered an increase in 2016, with Consumer Staples seeing the largest gain.
Total goodwill impairment recorded by European listed companies in the STOXX® Europe 600 was cut by a quarter, from €37 billion in 2015 to €28 billion in 2016, reflecting an improved outlook for the global economy. This was also the lowest level in aggregate goodwill impairment for the STOXX® Europe 600 since 2010, the onset of the Euro sovereign debt crisis. The number of goodwill impairment events also dropped from 146 - 121 from the same period. Hence, the average impairment amount per event declined by nearly 8%, from €254 million in 2015 to €233 million in 2016.
Diving deeper into the details, we find that seven out of the ten industries analyzed saw their aggregate goodwill impairment amounts decrease – with Telecommunication Services and Consumer Discretionary being notable exceptions. The top three industries in 2016 with the highest decline in goodwill impairment amounts are as follows, in order of magnitude (€ billions):
- Financials & Real Estate (€14.3 to €7.9)
- Utilities (€9.0 to €4.7)
- Industrials (€4.0 to €1.4)
Despite the noticeable improvement, Financials & Real Estate remained the top industry with the highest aggregate goodwill impairment for a second consecutive year. In general, the effect of ECB’s QE policies, conducive to an environment of ultra-low or even negative interest rates, has substantially hurt margins of European banks in 2015 and 2016.
Telecommunication Services followed in second place with an aggregate impairment amount of €7.9 billion, a fivefold increase from the 2015 level of €1.4 billion, primarily driven by a single impairment event. Absent that event, goodwill impairment would have increased by 40% from 2015. Energy saw the largest decline in the number of companies that recorded a goodwill impairment, reflecting a recovery in oil prices in 2016.
From a geographic perspective, the United Kingdom was the country with the highest aggregate amount of goodwill impairments in 2016 at €13.7 billion. This represented almost double the 2015 level (of €7.7 billion), but the top impairment event accounted for nearly 40% of the country’s total impairment amount. In fact, absent the top goodwill impairment event of 2015 and 2016, aggregate goodwill impairment would have risen by 31% in the United Kingdom, with Brexit already showing some impact. In contrast, Germany, Switzerland, and Spain saw notable declines in 2016, a reflection of a stronger European economy.
When reviewing other benchmark country stock market indices, we observed the following trends in goodwill impairment (€ billions):
- Slight (8%) decline for CAC 40 companies (€5.9 to €5.4)
- Drop of nearly 60% for DAX 30 companies (€11.2 to €4.8)
- Significant decrease (80%) for IBEX 35 companies (€2.3 to €0.5)
- Twofold increase for FTSE 100 companies (€5.8 to €12.4)
