By: Lucia Moses

Goodwill On the FASB Track

One reason newspapers say they are undervalued is the way Wall
Street evaluates them, something they hope will change under a
proposed revision in accounting rules.

Companies are required to subtract goodwill related to
acquisitions from earnings, the bottom line for many investors.
So while cash earnings may rise, profits suffer. With newspapers,
goodwill – an intangible measure of a newspaper’s value
– can account for up to three-fourths of the purchase price,
so acquirers often take it on the chin.

Under a proposed change by the Financial Accounting Standards
Board (FASB), companies wouldn’t have to subtract goodwill from
earnings unless the acquisition loses value over time –
something that generally doesn’t happen with newspapers.

The proposed revision, which could take effect at midyear, could
give newspaper stocks some relief. “The Street has consistently
ignored the fact that most newspaper sector acquisitions are
accretive to cash earnings,” Credit Suisse First Boston analyst
William B. Drewry wrote in a recent research note. “The new FASB
ruling … would remove this impediment to newspaper companies’
being able to make investor-palatable acquisitions, in our

One company that stands to gain a lot from such a change is
Gannett Co. Inc., whose stock was pummeled after a string of big
newspaper deals last year. In addition to being able to revise
its earnings, Gannett would be encouraged to buy other non-
newspaper assets, Drewry wrote. “We believe Gannett would emerge
as a major winner from the proposed FASB rule change.”

Others downplay the impact of the proposed revision. The real
reason Wall Street is down on newspaper stocks is softening ad
revenue, and there’s little they can do about that, says
newspaper analyst John Morton. It’ll take improvement in the
economy, along with the lifting of the media cross-ownership ban,
to move stock prices, he says.

Meanwhile, some companies are reporting cash earnings, which adds
back goodwill, to emphasize the benefits of acquisitions, but
most analysts aren’t so easily fooled. “It does not matter what
they emphasize,” says Alan J. Gottesman, a former media stock
analyst turned communications consultant. “Analysts will do what
they want.”

Lucia Moses ( is an associate editor covering business for E&P.

Copyright 2001, Editor & Publisher.

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