The Dangers of Goodwill: When Growth Turns into Value Destruction

Mergers and acquisitions (M&As) are among the most powerful tools companies use to grow, expand their market presence, and create synergies. The idea is simple—by acquiring another company, firms can integrate new capabilities, increase market share, and boost earnings. But not all acquisitions create value. In fact, many destroy it. A major culprit? Goodwill.

When a company acquires another business, it often pays more than the fair value of the target’s net assets. The excess—what accountants call goodwill—is recorded as an intangible asset on the balance sheet. This represents expected synergies, brand value, customer relationships, and future growth potential. 

However, when an acquisition doesn’t perform as expected, goodwill should be impaired, meaning written down to reflect the actual fair value of the acquired business. And that immediately impacts the company’s profits that year.

Many companies resist taking timely goodwill write-downs. And when they don’t, financial statements can become misleading, leading to disastrous consequences for investors. A recent case with UPS provides a striking example.

UPS: A Case of “Bad Goodwill”

The U.S. Securities and Exchange Commission (SEC) recently fined UPS $45 million for failing to properly account for goodwill impairment. The case revolved around UPS Freight, a division that transported less-than-truckload (LTL) shipments. The SEC found that UPS ignored clear evidence that its Freight business unit was worth far less than its reported value.

By 2019, UPS had already determined that its Freight business was struggling and likely worth no more than $650 million. Under Generally Accepted Accounting Principles (GAAP), this should have triggered a goodwill impairment of nearly $500 million. Instead, UPS hired an external consultant who valued the business at $2 billion—three times the internal estimate. Even worse, this valuation relied on assumptions that no real buyer would ever make, and the consultant was not given full information for a fair assessment.

This allowed UPS to avoid recognizing a goodwill impairment, meaning its earnings and reported financials looked much stronger than they truly were.

In 2020, UPS sold Freight for $800 million—well below the $2 billion valuation it had used internally. But even then, UPS didn’t adjust its goodwill. Once again, it ignored its own internal estimates and relied on the inflated consultant valuation.

It wasn’t until late 2020, after finalizing the sale, that UPS finally wrote down the goodwill—wiping out a significant portion of its reported earnings and reducing shareholder equity by 32%.

As the SEC put it:

“Goodwill balances provide investors with valuable insight into whether companies are successfully operating the businesses they own. Therefore, it is essential for companies to prepare reliable fair value estimates and impair goodwill when required. UPS fell short of these obligations.” — Melissa Hodgman, SEC Associate Director

This raises two critical questions:

1. Where was the Board?

2. Where was the External Auditor?

The board is responsible for overseeing financial transparency, while auditors are supposed to enforce goodwill write-downs when necessary. Yet, in this case, both failed. The CEO and management team had every incentive to avoid the impairment—it would have been a public admission that the acquisition was a failure. But it’s precisely in these situations that strong governance is needed.

The Bigger Issue: Goodwill as a Red Flag

UPS is not an isolated case. Many large multinationals have significant goodwill on their balance sheets—sometimes more than their entire market value.

Let’s look at two well-known companies:

📉 Volkswagen

• €89 billion in intangibles (as of Dec 2023), of which a third is goodwill.

• Market cap: ~€50 billion.

This means Volkswagen’s goodwill and other intangibles are nearly twice the value investors assign to the entire company. Does the market truly believe in the synergies and value of past acquisitions?

📉 Vodafone

• £27 billion in goodwill.

• Market cap: ~£18 billion.

Here, the company’s goodwill alone is worth significantly more than its total market value. This suggests that a large portion of past M&As has failed to generate value.

The data is clear—many companies overpaid for acquisitions and refuse to acknowledge value destruction. Instead of impairing goodwill, they keep delaying reality until they have no choice but to write it off.

Lessons for Boards and Investors

These are not isolated cases. In my book, The Value Killers, I document many similar failures and provide key rules for ensuring that M&A growth doesn’t lead to value destruction.

1. Boards Must Be Proactive and Take Responsibility

A core responsibility of the board is to ensure financial transparency and challenge management assumptions. Did they push back on these inflated valuations?

A board’s role is not just to approve deals but to monitor their success. If an acquisition is underperforming, they must push management to recognize impairments early. This is the only way to be transparent with investors, prevent misleading financial statements, and hold management accountable for value-destroying deals.

2. Auditors Must Do Their Job, Monitored by the Board

External auditors are supposed to enforce goodwill write-downs when acquisitions don’t perform as expected. If they lack the power—or the willingness—to challenge management, they are failing their duty.

3. Investors Should Watch Goodwill Closely

A high goodwill balance isn’t necessarily bad, but when it far exceeds the market value, investors should dig deeper into the company’s acquisitions and reported synergies.

4. M&As Must Be More Than Just Growth Stories

Many companies pursue acquisitions as a quick way to grow, but they often overpay and fail to integrate businesses effectively. CEOs are reluctant to admit failure, which leads to delayed goodwill impairments and hidden value destruction.

Growth does not necessarily lead to profitability and value creation. That’s why governance matters.

Final Thoughts: When Goodwill Becomes “Bad Will”

In my M&A courses, we often discuss how mergers can destroy shareholder value and how companies (and boards) can avoid such pitfalls.

Goodwill is supposed to reflect future value, but too often, it turns into a sinking cost that companies refuse to acknowledge. The UPS case is just one example, but many other companies are sitting on goodwill that doesn’t match economic reality.

Large multinationals frequently grow by acquiring others, booking significant goodwill on their balance sheets. Nothing wrong with that—provided the price paid was adequate, and the expected synergies and value are realized.

This should be a wake-up call for boards. Boards must ask tougher questions before approving “transformational” deals.

Investors and Boards should always ask:

• How much goodwill does a company have?

• Does it exceed a reasonable percentage of market value?

• Has the company been transparent about impairments?

Goodwill is not just an accounting entry—it’s a reflection of whether acquisitions are actually creating value:

• If goodwill exceeds the company’s market value, be scared.

• If goodwill exceeds 50% of a company’s market value, be very concerned.

• If goodwill represents more than 20% of a company’s market value, stay vigilant.

If you want to learn more about M&A disasters, and steps to avoid them, check out my book “The Value Killers How Mergers and Acquisitions Cost Companies Billions—And How to Prevent It”, and visit my website for more insights on this, and other topics.

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