Question

You indicated that goodwill represnets the value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology represent. Do you think goodwill can also represent the egos or stupidity of a buyer? Support your opinion. Your post should be more than a single sentence.

Answer 1

Yes I agree that goodwill paid also sometimes represent the egos or stupidity of a buyer.

The amount of goodwill arises from the premium that the buyer pays for buing a business. It is actually the amount paid by the buyer of acompany in excess of the value of the tangible assets of the acquired company. Normally, the goodwill represnets the value of the acquired company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology used by it, if any. However, the goodwill paid by a buyer does not always represent only these items. It also, sometimes represent the egos or stupidity of a buyer as explained below:

1. Stupidity: Stupidity means foolishness. A buyer could be acting foolishly in paying a premium for acquiring a company without doing the necessary due diligence. Or the buyer could also be duped about the real worth of the assets of the company company by its Smart Alec promoter(s) which would result in the buyer paying a price that is much higher than what is reasonably deserved, resulting in payment of goodwill. A case in point here is the Nicola Corporation. As per a report released by Hindenburg Research—  a forensic financial research company on 10th September, 2020,  some of the lofty claims made by the billion-dollar Nikola Corporation, have been called into question. The company claimed in 2016 as having engineered a hydrogen fuelled truck which will run at a fraction of the cost of the diesel fuelled trucks. Many big corporates, such as Bosch and Worthington, hurried to buy a partnership stake in Nicola paying a big premium over the real networth of the company, despite the fact that the company had only designs of a truck with it. Nikola Corporation is yet to manufacture its first real commercial vehicle even to this day. Luckily for the big investors like Bosch and Worthington, Nicola issued an IPO this year and these big investors could pass on their holdings in stock market to unsuspecting retail investors to recover their money.

2. Ego: Ego represents the stubborn-ness of a buyer in being adament to buy the target company at all costs. When the ego of a buyer pushes him to buy a business, the goodwill or premium paid by him for buying it is often excessive. This results in the buyer paying a price for the target company much beyond what its business actually deserves. This often happens in case of hostile takeovers where the targeted company resists being taken over but the buyer is hell bent upon buying it at any cost. A case in point is the takeover of Peoplesoft by Oracle Corp. in 2004 at a price of $10.3 Billion which was a hostile takeover, The pricetag of $10.3 billion included a hefty premium over the real enterprise net worth of Peoplesoft just because Oracle Corp. wanted to take Peoplesoft over at any cost.

Here, it is necessary for a buyer to take the help of experienced and reputed Enterprise Net Worth Evaluaters to ward against the eventuality of paying unreasonably high price than what the business of the bought company actually deserves. While evaluating the actual enterprise net worth of a company, these evaluaters also take into consideration a raesonable amount for the goodwill of the company as represneted by the value of its brand name, solid customer base, good customer relations, good employee relations, and proprietary technology etc.