What is 'Shareholder Activism'
Maruti Suzuki Feb 2014. India
Top fund houses in India acting as Custodians of retail investors' funds have jointly questioned the decision taken by a Maruti Suzuki. The plan of the company is to have Japanese parent Suzuki take over the plant at Vitthalapur, produce cars and sell them to Maruti
Shareholder activism is a way in which shareholders can influence a corporation's behaviour by exercising their rights as owners. Although shareholders don't run a company, there are ways for them to influence the board of directors and management.
It can take from of proxy battles, publicity campaigns, shareholder resolutions, litigation, and dialogue and negotiations with management, dialogue with management being the modest to formal proposals that are voted on by shareholders at a company's annual meetings being the extreme.
· The goals of activist shareholders can be financial (increase of shareholder value through changes in corporate policy, financing structure, cost cutting, etc.) Investors may believe that a company's management is doing a bad job and who attempt to gain control of the company and replace management for the good of the shareholders.
· The goals can be non-financial aslo. It can also relate to social change. Some of the issues most often addressed by shareholder activists are related to the environment, investments in politically sensitive parts of the world and workers' rights (sweatshops).
Maruti Suzuki Feb 2014. India
Top fund houses in India acting as Custodians of retail investors' funds have jointly questioned the decision taken by a Maruti Suzuki. The plan of the company is to have Japanese parent Suzuki take over the plant at Vitthalapur, produce cars and sell them to Maruti
The situation in India is quite the opposite of what happens overseas,
where institutional investors are very active. For instance, when Walmart
Mexico was named in a bribery case, the institutions demanded that the chief
executive officer of Walmart US step down as he was responsible for the
company's global business and hadn't been proactive in checking incidents
related to bribery or fraud.
Usually, as a study by proxy voting advisory firm
InGovern shows, institutional investors tend not to raise awkward questions at
board meetings. The InGovern study on the voting patterns of mutual funds in
2013 says that out of a total of 28,290 resolutions disclosed, mutual funds
voted against just 1.5 per cent of them. They favoured 47 per cent of the
resolutions and abstained from voting in 51.5 per cent. While no such data is
available for LIC's participation in resolutions, experts say it rarely stands
up as a naysayer. "These companies do not voice their opinion in corporate
decisions. They typically skip the routine resolutions. They only raise their
voice when controversial decisions are being taken," says Shriram
Subramaniam of InGovern.
There have a few occasions when India's minority investors have raised
their voices aggressively. In 2008, they protested against the inflated
valuations when Satyam Computer Services announced its plan to acquire Maytas
Properties and Maytas Infra. The deal didn't go through. In the same year,
minority shareholders of Sterlite Industries India were adamant that a restructuring
proposal floated by parent Vedanta was against their interests. Earlier this
year, some minority shareholders complained that Siemens AG, the German
engineering company, had paid a low price for acquiring additional shares of
its Indian subsidiary.
However, experts also admit that in many cases, the minority shareholders can do little except to dump the shares of the company. Indeed, this is what is happening to Maruti too. "We redeemed some of our holding in Maruti a couple of weeks after the announcement, in late-January and early February," says a fund manager. "However, we are still holding on to some shares till more clarity emerges." Mutual fund brokers say that fund managers are ready to sell Maruti shares as there is no confidence that the company will review the decision on the back of shareholders' feedback.
From January 8, 2014, when it quoted at Rs 1,839.15, the Maruti stock dipped to Rs 1,563.2 on January 28. It closed at Rs 1,581.75 on March 3. Between January 8 and March 3, the stock lost almost 14 per cent; investors have lost as much as Rs 5,000 crore in market capitalisation.
However, experts also admit that in many cases, the minority shareholders can do little except to dump the shares of the company. Indeed, this is what is happening to Maruti too. "We redeemed some of our holding in Maruti a couple of weeks after the announcement, in late-January and early February," says a fund manager. "However, we are still holding on to some shares till more clarity emerges." Mutual fund brokers say that fund managers are ready to sell Maruti shares as there is no confidence that the company will review the decision on the back of shareholders' feedback.
From January 8, 2014, when it quoted at Rs 1,839.15, the Maruti stock dipped to Rs 1,563.2 on January 28. It closed at Rs 1,581.75 on March 3. Between January 8 and March 3, the stock lost almost 14 per cent; investors have lost as much as Rs 5,000 crore in market capitalisation.
Limited choices
But dumping stock isn't an efficient strategy either, says J N Gupta, founder and managing director of another proxy advisory firm, Stakeholders Empowerment Services. This can be effective only in a system that has high standards of corporate governance. In the Indian market, governance is an issue that crops up regularly.
When investors dump the stock because of perceived governance issues, it can actually hurt investors. There is a decrease in the number of companies that are seen as investment-worthy. As a consequence, all investors chase the same limited number of companies, causing volatility and increase in share prices. The increased demand and higher prices drive up price-to-earnings (PE) ratio of the stock, increasing risk and reducing returns on investment. This makes the markets unattractive for investors.
On the other hand, if the investors engage with the companies, governance standards will improve and the pool of companies worthy of investment becomes enlarged. This will lead to a reduction in risk, increase returns, reduce volatility and improve the confidence of investors. "Participation by investors in company meetings and engaging with promoters and management is, for these reasons, a must," says Gupta. Anil Harish of legal firm DM Harish & Company advises shareholders to either "take part in the voting on the resolutions proposed by a company or raise questions and apprise the promoters of their concerns in annual general meetings".
The general acquiescence of mutual funds in boardrooms is telling - as the InGovern figures show, they abstained from voting on 13,037 resolutions in 2013. This may have been the reason why the Securities and Exchange Board of India, or Sebi, is said to be exploring the possibility of creating a platform for non-controlling shareholders. (Non-controlling shareholders are individual or institutional stakeholders who are neither promoters nor have board representation.) This will help to protect the interests of minority shareholders and improve corporate governance.
Till such a time as such platforms and measures are adopted, minority shareholders may have little leverage against corporate decisions, to the disadvantage of retail investors. The fact that mutual fund investors in Maruti are disposing of their stocks seems to indicate that the protest of the sort they carried out may not yield much dividend, at least at this point of time.
Zee Entertainment Sep 2021
The minority shareholders could play a more meaningful role in companies once the Companies Bill, 2012 is renacted to replace the half-century-old Companies Act, 1956. The Bill incorporates some sweeping changes related to minority shareholders.
Board representation: The new Bill mandates representation in the board for minority investors. Currently, any appointment of a director to represent the small investors is at the discretion of the company. It also says that at least one-third of the total number of directors in listed companies should be independent directors. (An independent director is a person who is not related to the promoters or other members of the company). Having independent directors may not be a proven method of deterring malpractices, yet could ensure greater accountability. The new Bill also warrants that in case of a company with more than 5,000 members, a shareholders' meeting should have the personal attendance of at least 30 members, failing which such a meeting should be adjourned.
Class-action suit: The Bill has a provision for class-action suit to allow shareholders to seek damages from the company and its directors for any fraudulent act. Shareholders will also be able to seek damages from auditors and audit firms in case of mis-statement of facts.
Exit option: The new Bill says that if a company has funds remaining unused after being raised in an initial public offer and wants to change the objectives for which the funds were raised, it has to provide an exit opportunity to shareholders who do not support such a step. It also decrees that such an exit should be offered at a price specified by Sebi to help shareholders move out at a reasonable price. This is of special significance for stocks that plunge below offer price soon after listing.
Protection for whistleblowers: Under the new Bill, an independent director of a company or any employee who brings a company's malpractices to light will be protected from unfair treatment by the management. The new legislation requires all listed companies to establish in addition a mechanism through which employees can report to the chairperson of the audit committee their apprehensions about the conduct of the business, its accounting methods or any other aspects of business. The companies have to provide details of such a system on their website.
Insider trading: The new Bill prohibits insiders of a company from trading directly or indirectly in shares both in the cash and futures market. Any person who violates the clause will face a cash fine or imprisonment or both.
But dumping stock isn't an efficient strategy either, says J N Gupta, founder and managing director of another proxy advisory firm, Stakeholders Empowerment Services. This can be effective only in a system that has high standards of corporate governance. In the Indian market, governance is an issue that crops up regularly.
When investors dump the stock because of perceived governance issues, it can actually hurt investors. There is a decrease in the number of companies that are seen as investment-worthy. As a consequence, all investors chase the same limited number of companies, causing volatility and increase in share prices. The increased demand and higher prices drive up price-to-earnings (PE) ratio of the stock, increasing risk and reducing returns on investment. This makes the markets unattractive for investors.
On the other hand, if the investors engage with the companies, governance standards will improve and the pool of companies worthy of investment becomes enlarged. This will lead to a reduction in risk, increase returns, reduce volatility and improve the confidence of investors. "Participation by investors in company meetings and engaging with promoters and management is, for these reasons, a must," says Gupta. Anil Harish of legal firm DM Harish & Company advises shareholders to either "take part in the voting on the resolutions proposed by a company or raise questions and apprise the promoters of their concerns in annual general meetings".
The general acquiescence of mutual funds in boardrooms is telling - as the InGovern figures show, they abstained from voting on 13,037 resolutions in 2013. This may have been the reason why the Securities and Exchange Board of India, or Sebi, is said to be exploring the possibility of creating a platform for non-controlling shareholders. (Non-controlling shareholders are individual or institutional stakeholders who are neither promoters nor have board representation.) This will help to protect the interests of minority shareholders and improve corporate governance.
Till such a time as such platforms and measures are adopted, minority shareholders may have little leverage against corporate decisions, to the disadvantage of retail investors. The fact that mutual fund investors in Maruti are disposing of their stocks seems to indicate that the protest of the sort they carried out may not yield much dividend, at least at this point of time.
Zee Entertainment Sep 2021
Zee Entertainment's largest
shareholders, Invesco Developing Markets Fund and OFI Global China Fund LLC,
have called an extraordinary general meeting (EGM) seeking the removal of CEO
Punit Goenka.
Invesco
Developing Markets Fund and OFI Global China Fund LLC, which together hold
17.88 percent of the total paid-up share capital of the company, have sought to
appoint six new independent directors.
With
Zee likely to see a change in management, will it spell good news for the media
company?
According
to analyst Karan Taurani, Senior Vice-President, Elara Capital, new management
will mean a new strategy for the company, which is need of the hour.
Kotak
Institutional Equities too has put out a note saying that this “development
calls for a valuation re-rating.” It has upgraded its recommendation on the
stock to buy from ‘reduce’ earlier.
The
brokerage has pointed out three scenarios which can play out.
One,
change in Board followed by a change in management. "This scenario assumes
the appointment of a new CEO by the new Board. There is also a possibility that
the new Board receives interest from strategic/financial investors to acquire a
majority stake and management control."
Two,
change in Board with continuity of management. This scenario assumes that the
new Board continues with the existing management (Punit Goenka as MD & CEO)
but seeks better cash generation and tighter control on capital allocation.
Three,
continuity of management with a new set of investors. This case assumes
shareholder churn and a new set of investors/shareholders backing Punit Goenka
as MD & CEO.
Whether
there's a change in new management or Goenka continues as CEO, the focus
has to be on two segments-- TV and OTT.
Broadcast
business
Taurani
said that while the company has been doing well in terms of business
performance under the current CEO’s leadership, especially in the Hindi
GEC space, Zee has not seen a strong performance in the last
three years.
“This
is due to loss of share in the regional genre on the back of competitive
intensity and poor performance in the Hindi GEC space,” he said.
In
July, Zee’s flagship GECs — Zee Anmol and Zee TV — had failed to feature in the
top-10 channel list.
Zee’s
network share has declined from 19.7 percent in FY19 to 18.4 percent and 18
percent in FY20 and FY21, respectively.
The
company noted that its network share dropped in FY21 due to non-availability of
fresh content in the first quarter and the weak performance of some channels,
especially in the Hindi, Tamil and Marathi markets.
Focus on
digital
Another
segment where Zee needs to focus is its video-streaming platform Zee5, said
Taurani. “There has been a problem investing into large-scale content,
which is a key to drive eyeballs in digital,” he added.
In
the fourth quarter of FY21, revenue growth in Zee5 declined 9 percent
quarter-on-quarter (QoQ) despite steady growth in monthly active users (MAUs)
and daily active users (DAUs), which were at 72.6 million and 6.1 million,
respectively.
Then,
in the first quarter of FY22, while Zee5 reached 80.2 million global monthly
active users (MAUs) and 7.1 million daily active users (DAUs), its operating
loss stood at Rs 203.3 crore, widening 25.1 percent from Rs 162.5 crore in Q4
FY21.
The
platform incurred a higher marketing cost during the June quarter on account of
Salman Khan-starrer Radhe’s release.
The
video-streaming platform, which is estimated to have around 4-5 million
subscribers, had paid around Rs 225- Rs 250 crore to acquire Radhe.
Taurani
pointed out that despite the release of big-ticket films such as Radhe,
MAU in Q1 FY22 grew 10 percent quarter-on-quarter (QoQ) versus average QoQ
growth of 8 percent in the previous four quarters. This is why he believes that
successful franchise-based web series remain an important strategy to drive
subscriber retention.
The minority shareholders could play a more meaningful role in companies once the Companies Bill, 2012 is renacted to replace the half-century-old Companies Act, 1956. The Bill incorporates some sweeping changes related to minority shareholders.
Board representation: The new Bill mandates representation in the board for minority investors. Currently, any appointment of a director to represent the small investors is at the discretion of the company. It also says that at least one-third of the total number of directors in listed companies should be independent directors. (An independent director is a person who is not related to the promoters or other members of the company). Having independent directors may not be a proven method of deterring malpractices, yet could ensure greater accountability. The new Bill also warrants that in case of a company with more than 5,000 members, a shareholders' meeting should have the personal attendance of at least 30 members, failing which such a meeting should be adjourned.
Class-action suit: The Bill has a provision for class-action suit to allow shareholders to seek damages from the company and its directors for any fraudulent act. Shareholders will also be able to seek damages from auditors and audit firms in case of mis-statement of facts.
Exit option: The new Bill says that if a company has funds remaining unused after being raised in an initial public offer and wants to change the objectives for which the funds were raised, it has to provide an exit opportunity to shareholders who do not support such a step. It also decrees that such an exit should be offered at a price specified by Sebi to help shareholders move out at a reasonable price. This is of special significance for stocks that plunge below offer price soon after listing.
Protection for whistleblowers: Under the new Bill, an independent director of a company or any employee who brings a company's malpractices to light will be protected from unfair treatment by the management. The new legislation requires all listed companies to establish in addition a mechanism through which employees can report to the chairperson of the audit committee their apprehensions about the conduct of the business, its accounting methods or any other aspects of business. The companies have to provide details of such a system on their website.
Insider trading: The new Bill prohibits insiders of a company from trading directly or indirectly in shares both in the cash and futures market. Any person who violates the clause will face a cash fine or imprisonment or both.
Fund house officials, who did not want to be named, said that they will now approach Sebi to address their concerns. Seven mutual funds including ICICI Asset Management Company, Reliance Asset Management Company UTI, HDFC and SBI Asset Management companies had recently written to the Maruti Suzuki's management, saying that the proposed move was not fair and not in the interest of local shareholders. They said that it will lead to erosion in the company's value.
Reflecting the concerns of investors, the Maruti stock lost 4.5% to close at Rs 1,586, a share on the BSE on Friday, the lowest close in one month. The market cap of India's biggest car maker has lost Rs 7,700 crore since January. The stock is likely to be under pressure as analysts continue to debate on the mark-up percentage that the manufacturing entity will keep to maintain a robust operational performance.
While an earlier notification said that Maruti was expected to bear only the cost of production and depreciation expenses of the Gujarat plant, the new clause which provides for deploying funds generated through the Gujarat plant to fund Suzuki's capital expenditure has added another layer of invisible costs. The company's clarification on Thursday has caused more dismay and confusion among investors than its original intention to explain and simplify the new structure, fund managers and analysts said. The most disruptive element from a Maruti shareholder's perspective would be the percentage of margins to be ploughed back to the Gujarat plant to fund incremental capital expenditure requirement for the car maker.
Among the three sources of financing, the capital expenditure of the Gujarat plant includes the mark-up levied on Maruti Suzuki. It is negative on two counts. Firstly, investors did not reckon any mark-up to be included in the transfer pricing earlier. Secondly, it only factored the cost of production and depreciation to be charged to Maruti Suzuki. The inclusion of mark-up now implies that vehicles made at Gujarat plant will have lower margin then the existing facility in Haryana. Thus, higher the amount beyond 33% of net surplus, it would lower margins for Maruti. The company's statement did not elaborate on the how the markup would be calculated.
A CLSA note by analysts Abhijeet Naik & Nitij Mangal after the clarification was issued to the stock exchanges said that if incremental capital expenditure requirement in Gujarat over FY20-24 is split 50-50 between Suzuki an Maruti, it would imply that the Gujarat plant would need to charge 4% of revenue as mark-up on vehicles on Maruti over and above the depreciation charges. In this scenario, the margins accruing from vehicles produced in the Gujarat plant would be on an average 6% lower than the Haryana plant. Even the clarification on the transfer of assets in Gujarat at fair value to Maruti after 15 years, if the contract is not renewed, will add to investor concerns, given that it would be construed as an indirect route to increase the holding in the company. This instance could be quite similar to what eventually happened in Suzuki Powertrain in June 2012, which resulted in the Japanese parent's shareholding going up by 2%.
The statement has also been silent on two critical issues. One, what would happen in case demand is lower than production. What would be critical in such a scenario is clarity on which of its subsidiaries will bear the burden of reducing production. Secondly, determining the precedence of capacity utilisation and the vehicle models to be manufactured from which plant will be another moot point to ponder over.
The basic question still remains unanswered: What merits the setting up of a new plant under the aegis of Suzuki considering that Maruti has strong cash surplus. Is there a real advantage, when it appears that most officials of the new entity are expected to be drawn from Maruti, especially when even the vendor sourcing would be done by the Indian entity.
Jefferies analyst Govindarajan Chellappa and Rajasa, in a note written on Friday, said that "investors worried about Maruti's independence today. This is hardly reassuring. We wonder why this structure is needed in the first place. If Suzuki has excess cash on its balance sheet which it wants to utilise to help Maruti, there are other cleaner ways to extend a loan or give one-year credit on royalty".
Stock Analysts turn as Activists
Cautious investors have new friends — analysts from brokerages. Mainstream brokerage analysts, once happy writing about the rosy picture of the India growth story, are venturing into some not-so-clean areas of corporate India.
While companies at the receiving end have either ignored or rubbished them, such reports have gained momentum.
In a space of a few days, at least five companies from diverse sectors have faced the wrath of brokerage analysts, who questioned their accounting practices, utilisation of cash and other governance-related issues. In a few cases, they even downgraded the company in question to a “sell”.
| ANALYSTS ON THE FRONT FOOT |
|
| Companies rubbished reports in all cases |
Towards the end of May, Portugese broker Espirito Santo slammed Biocon and Educomp Solutions. In Biocon’s case, the accounting treatment of a couple of deals was questioned, while Educomp was accused of certain conflicts of interest in the appointment of auditors.
Even Sensex firms such as mortgage lender HDFC and IT major Infosys have not been spared. Earlier this month, Macquarie Securities downgraded HDFC on charges of dodgy accounting practices — charges the company trashed. Infosys’ Rs 20,000-crore cash drew concerns from analysts at Kotak, Motilal and Barclays.
While scams and scandals over the past few years, beginning with the Satyam Computer scandal, have sensitised investors to such issues, over the past year the income stream of brokerages has seen a shift from the traditional corporate to investors, say analysts.
“In tough market conditions, only the good and clean companies can survive. With public issues drying up, equity research has become the bread and butter of brokerages. What is keeping brokerages afloat are the investors, who are also buying their research,” said one.
Saurabh Mukherjea of Ambit claims to be among the earliest to spot this broader drift towards corporate governance a while ago. Rightly so, because Mukherjea had started the India practice of the UK-based Noble as its research head. As early as 2009, Noble had published a report on creative accounting practices and promoter tricks such as “pump and dump” and “blab and grab” soon after the Satyam and Pyramid Saimira scandals.
Noble was later bought by Execution and became Execution Noble. In 2010, Execution Noble was acquired by Espirito Santo. While Mukherjea moved to Ambit Capital, some of his team members stayed back.
Espirito Santo says it has “benchmarked reporting standards in India versus developed markets and found several areas where reporting and corporate governance can be improved.”
Both Espirito and Ambit have been rating companies on corporate governance and accounting practices for a while. The Canada-based Veritas, which has come up with occasional, sensational reports, has been routinely criticised for allegedly one-sided views.
Though most companies routinely rubbish or ignore them, some experts say they contribute to the diversity of opinion in the markets, which even regulators prefer. Recently, the regulator itself set up a forensic accounting cell to monitor accounting practices.
Some brokers like Nirmal Bang have gone beyond financials and research reports by arranging for investors to talk to the union leaders of Maruti and Arvind facing labour trouble. Rahul Arora, CEO, institutional equities, Nirmal Bang, said, “We have reached a stage where people want to know every side to each story.”
Varatharajan S of ICICI Securities, SVP and head of research, said, “Companies have always been rated (by the market) on their disclosure level. This wasn’t as talked about as now, possibly because in the past it was largely with relatively small companies.”
N Sundaresha Subramanian & Malini Bhupta June 21, 2012 Business Standard
REGULATOR ACTIVISM
US SEC- Securities Exchange Commission issues Comment Letters.
Examples of some SEC Comments Related to Goodwill
Examples of some SEC Comments Related to Goodwill
Company A
Question 1: Please tell us when you are evaluating your individual reporting units for impairment how you validate the reasonableness of the fair values determined. For example, tell us whether you reconcile the fair values determined in your analyses to your total market capitalization. In this regard, we note that paragraph 23 of SFAS 142 indicates that the fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date, and that that quoted market prices in active markets are the best evidence and should be used if available. In circumstances where an entity has multiple reporting units, and all reporting units have goodwill that are tested for impairment, a tool that could be used to validate the reasonableness of the fair values determined for the individual reporting units is a reconciliation of the total fair values of the reporting units, to the market capitalization of the company, adjusted for any control premium as deemed appropriate. If you do not perform such an analysis, please indicate whether this is due to the fact that such an analysis cannot be easily performed (for example, because not all of your reporting units contain goodwill or there were not triggers of impairment at each of your reporting units at each of the times you tested goodwill for impairment), or whether you don’t believe such an analysis is meaningful. Additionally, if such an analysis is not performed, please tell us whether you perform any other procedures to evaluate the reasonableness of the fair value of the reporting units. If such an analysis is performed, please tell us the results of your procedures, including a discussion of any control premium assumed in the analysis, and how the reasonableness of that premium was evaluated;
Question 2: Please provide us examples of the market comparables and multiples used in preparing the analyses of the fair value of your reporting units. In your response, please include XX reporting unit and the actual multiples and market comparables used in your analysis of that reporting unit. Please explain how those multiples and market comparables are similar to your XX reporting unit (and the other examples provided), in regards to nature, scope and size of operations, as contemplated in paragraph 25 of SFAS 142; and
Question 3: We note that you use a single valuation approach to determine the fair value of all of your reporting units except for XX reporting unit. In light of the guidance in paragraph 19 of SFAS 157, which indicates that multiple valuation techniques could be appropriate in determining the fair value of reporting units, and the fact that it is often difficult to identify market comparables for single reporting units, please tell us how you concluded that it was appropriate to only consider one valuation approach for these reporting units.
Company B
Question: We note your disclosure regarding your policy for testing goodwill for impairment and the related changes to your methodologies during the first and second quarters of 2008. Please respond to the following regarding those methodologies:
· Tell us and provide enhanced disclosure in future filings describing why you moved exclusively to a discounted cash flow methodology from the earnings multiple methodologies use in prior periods. Specifically, tell us how you concluded that this approach is more reflective of a market participant’s view, and tell us whether you would always expect to use this methodology in the future given your belief it is more reflective of a market participant’s view, or whether you only believe it is more reflective of a market participant’s view given the current economic conditions.
· Please clarify how your discount rates “reflect current market capitalization plus a control premium.” Specifically, consider providing an example illustrating how the discount rates were determined, and how they reflect a control premium. Please also tell us the control premium assumed.
· Please tell us why the discounted cash flow methodology used at December 31, 2007 to determine the fair value of your reporting units did not use a discount rate that factored in control premiums. Please explain why you believe the use of a discount rate that factors in a control premium is more appropriate in determining the fair value of the reporting unit.
· Please clarify why you added a third method, based on market multiples of peer companies adjusted to include a control premium, in the first quarter of 2008 in addition to the approach based on market multiples of peer companies not adjusted for control premiums. Specifically, explain why this approach is appropriate, or more consistent with fair value, than the approach used in prior periods that did not factor in a control premium.
· We note your previous disclosure on page 96 of your Business Segment footnote that states that provisions for credit losses are allocated to each core business segment in an amount equal to net charge-offs and any difference between the consolidated provision and the provision allocated to the segments is reflected in the Parent segment. Please confirm that when estimating the fair value of your reporting units, whether based on a market multiple or discounted cash flow approach, that you factor in all of the provision related to the loans contained in that segment, as opposed to solely being based on an amount equal to net charge-offs. If not, please tell us why you believe your methodology is appropriate, and tell us whether you believe that the use of an incurred loss model would result in a different conclusion about any goodwill impairment charge.
· Tell us whether you performed your goodwill impairment tests as of March 31, 2008 and June 30, 2008 using the methodology used as of December 31, 2007. If so, please tell us the results of those tests.
· Please tell us whether each of the changes in methodologies and approaches was discussed with your Audit Committee in advance of the change.
Company C
Initial comment letter: In connection with the current economic environment, we note the decline in your retail store operating results and the negative growth in identical store retail sales during the first quarter of fiscal 2009. Further, we also note your shares of common stock are trading price much lower than a year ago. Along with lower consumer confidence and an unfavorable retail climate, these are key indicators warranting a close review for impairment of the $X billion in goodwill and other indefinite-lived intangible assets associated with your retail segment. Please advise us of the results of your review and analysis performed in accordance with paragraphs 26 through 28 of SFAS 142.
SEC follow-up question: We note the supplemental information you provided and your response to our prior comment regarding an impairment review of goodwill under SFAS 142. Even though we understand the quoted price of your common stock should not be the sole measurement basis of your fair value, we believe market capitalization can be used as an overall evaluation in the review process. In this regard, using your closing share price of $24 as of August 31, 2008 your market capitalization value was approximately $5.1 billion, compared to recorded goodwill of $7 billion, yielding a material negative variance of $1.9 billion, or 27%. Further, using your closing stock price of $28 as of February 29, 2008, your market capitalization value was approximately $5.8 billion, compared to recorded goodwill of $7 billion, yielding a large negative variance of $1.2 billion, or 17%. We believe the existence of such material negative variances raises serious questions about whether any impairment of goodwill has occurred. In light of the further deterioration of an unfavorable business climate, the continuing decline in consumer spending and negative same store sales performance, please provide us with a copy of the recent sensitivity analysis you prepared supporting your conclusion as of August 31, 2008 that there was no indication of impairment of goodwill since the last annual test. Please also provide us with a comprehensive discussion of the basis for each of the major assumptions relating to revenue growth, operating ratios, and annual gross margin and EBIT percent used for each reporting unit by forecast year. We may have further comments upon our review of your responses.
Company D
Initial Comment Letter – Question 1: We note that there was a significant decline in your market capitalization during the first six months of 2008. It appears that this is a triggering event that would require you to reassess your goodwill for impairment. Please tell us what consideration you gave to reassessing the recoverability of your goodwill as of March 31, 2008 and June 30, 2008. If you did not perform impairment tests as of March 31, 2008 and June 30, 2008, please explain why. To the extent that impairment tests were performed, tell us how you determined that no impairment existed.
Initial Comment Letter – Question 2: Please tell us what consideration you have given to providing MD&A disclosure that addresses how the significant decline in your market capitalization has impacted the timing of your goodwill impairment testing. Also tell us how you considered providing an update to your Critical Accounting policy as of June 30, 2008. In this regard, it would appear that your method of impairment testing may change now that you operate under a single reporting unit.
SEC follow up – Question 1: Your response to prior comment number 1 indicates that when assessing whether an impairment analyses is necessary, you compare the book value of net assets to your average market capitalization over a period of nine to twelve months. Please explain to us, in greater detail, why you believe that the use of an average market capitalization is appropriate under paragraph of 28 of FAS 142. In this regard, we note that paragraph 28 looks to events or changes in circumstances, such as price declines, that by their occurrence should be considered.
SEC follow up – Question 2: Your response indicates that you did not believe that the declines in market price were a triggering event and it remains unclear to us how you came to this conclusion. In this regard, we note that you experienced consistent declines in market price in each of the last four quarters. We also note that your price declines were more severe than those of the comparable companies identified in your response. Please describe, in further detail, why you believe that the declines in market price were not a triggering event as described in paragraph 28(a) of SFAS 142.
Company E
Question: We note the recent drop in your stock price and market capitalization since the quarter ended October 3, 2008. It appears as though this event may represent an occurrence of a triggering event that may require you to test your goodwill for impairment before your annual test pursuant to paragraph 28 of SFAS 142. Tell us whether the Company has performed (or intends to perform) an interim analysis of goodwill pursuant to this guidance and if so, please tell us how your evaluation of goodwill impairment complies with paragraphs 10 through 22 of SFAS 142. Explain how you determine the fair value of your reporting units and hoe your estimate of fair value complies with paragraphs 23 through 25 of SFAS 142. Compare the fair value for your reporting units to the Company’s market capitalization, and if materially different, please provide us with the underlying reasons. Alternatively, if you do not believe the decrease in your market capitalization represents a triggering event, then please explain how you concluded as such.
Company f
Question: We note that the market value of your common stock outstanding as of June 28, 2006 is significantly less than the book value of your stockholders’ equity. Although we recognize that the fair value of a reporting unit can exceed its market capitalization, in light of your conclusion that goodwill was not impaired despite your market capitalization, recurring operating losses, and negative cash flows from operations, please provide us with more information about the results of your latest goodwill impairment test. In your response, please quantify each reporting unit’s carrying value and calculated fair value as of your latest impairment test and provide a sensitivity analysis that shows how this fair value would fluctuate based on hypothetical changes in your assumptions and judgments. If the first step of the test identified a potential impairment, thus requiring you to perform the second step of the test, please provide us the details of your determination of the implied fair value of goodwill. Consistent with our comment above, this type of information should be disclosed in future filings as part of your discussion of Critical Accounting Estimates.
Company G
Question 1: We note that your net book value exceeded your market capitalization at December 31, 2007. Please tell us how you considered this factor in your goodwill impairment analysis.
Question 2: We note the material balance of goodwill at December 31, 2007 and the significant increase during 2007. Please provide us supplementally, and disclose in future filings, the following information:
· Define and describe the reporting units at which you test goodwill for impairment and address any changes in those units or goodwill allocations during the period presented.
· We note that the “primary valuation method” for determining the fair market value of your reporting units is a discounted cash flow analysis.
· Please disclose any other methodologies you use, including a description of and the assumed benefits of a valuation prepared under each method, and why management selected each applicable method as being meaningful for preparing your goodwill impairment analysis.
· If applicable, please disclose how you weight each of these methods, including how you determined the weights for each method. To the extent that the weight assigned to each method is a subjective estimate, please include a sensitivity analysis to address the impact on fair value if you weighted the methods differently.
· For each methodology, provide a description of the material assumptions used and the sensitivity of those assumptions in determining fair value. For example, for a discounted cash flow analysis such assumptions may include the discount rated used, revenue growth rates, operating profit margin percentages and the terminal rate.
· To the extent that the carrying value of an of your reporting units is not materially different from its estimated fair value or if a reasonably possible impairment charge would be material to your consolidated financial statements, please specifically address those reporting units, including the amount of goodwill allocated to the reporting unit, the carrying value of the reporting unit and the fair value of the reporting unit.
Company H
Question: Please provide us a comprehensive discussion (timing, description of reporting units, etc.) of your most recent goodwill impairment tests and consider the guidance in paragraphs 16-35 of SFAS 142 as your formulate your response. In your response, please:
· Provide detailed information on how you determined the fair value of each of your reporting units including a summary schedule of your SFAS 142, step 1 test results and an analysis of the results;
· Tell us how you considered the relationship between your quoted common stock price and your reported book value and net tangible asset value as of year-end and latest interim period and whether or not there is an “implied” impairment of assets;
· Tell us how you considered whether you were required to test for goodwill impairment in 2008 due to current market conditions, the decrease in your stock price, published media reports detailing the financial condition of major customers, third party borrower default guarantors and any other applicable factor(s) in paragraph 28 of SFAS 142;
· Tell us whether you have had any discussions with third parties regarding offers to purchase any particular group of assets and how any discussions may have influenced your decision as to retest goodwill or recognize an impairment at any particular balance sheet date;
· Tell us what other information would have been required for you to conclude that an impairment loss was probable and reasonable estimable at year-end and the latest interim period if you conclude that an impairment does not currently exist;
· Discuss what involvement your independent auditors have had regarding comments we have raised on this issue, including any consultation at the national office level.
Company I
Question: In the interest of providing readers with a better insight into your judgments in accounting for goodwill, please consider disclosing the following in future filings:
· The reporting unit level at which you test goodwill for impairment and your basis for that determination;
· Each of the valuation methodologies used to value goodwill (if multiple approaches are used), including sufficient information to enable a reader to understand how each of the methods used differ, the assumed benefits of a valuation prepared under each method, and why you selected these methods as being the most meaningful in preparing the goodwill impairment analyses;
· How you weight each of the methods used including the basis for that weighting (if multiple approaches are used);
· A qualitative and quantitative description of the material assumptions used and a sensitivity analysis of those assumptions based upon reasonable likely changes; and
· How the assumptions and methodologies used for valuing goodwill in the current period have changed since the prior periods, highlighting the impact of any changes.
Company J
Question: We note that you have recognized significant impairment charges during the year ended September 30, 2008 and the three month period ended December 31, 2008 related to your XXXXX business. In the interest of providing readers with a better insight into management’s judgments in accounting for impairments of long-lived assets including plant and equipment, goodwill and intangible assets, please consider disclosing the following in future filings, beginning with your next interim filing:
· Please clarify how you determine which property, plant and equipment held for use should be tested for impairment as well as at what point in time they should be tested for impairment. Please state the types of events and circumstances that you believe indicate impairment;
· The reporting unit level at which you test goodwill for impairment and your basis for that determination;
· Sufficient information to enable a reader to understand how you apply the present value of future cash flows in estimating the fair value of your reporting units and why management selected this method as being the most meaningful in preparing your goodwill impairment analysis;
· How you determine the appropriate discount rates and attrition rates to apply in your intangible asset impairment analysis;
· A qualitative and quantitative description of the material assumptions used in determining impairments for all long-lived assets and a sensitivity analysis of those assumptions based upon reasonably likely changes; and
· If applicable, how the assumptions and methodologies used for valuing property, plant and equipment, goodwill and intangible assets in the current year have changed since the prior year, highlighting the impact of any changes.