Negative Goodwill: When a Business Sells for Less
Introduction
Most business acquisitions require buyers to pay more than the fair value of a company’s net assets. Considered as intangibles like brand recognition, customer loyalty, or strategic positioning, that extra amount is known as goodwill. Every once in a while, though, the script turns around and a buyer pays less than what the fair value of what they are purchasing. This unusual and intriguing situation is referred to as negative goodwill, or a bargain purchase.
At Markowski Investments, we think in guiding readers toward not only what shows on the financial statements but also the underlying reasons for them. Here we’ll look at this unique accounting anomaly: what it is, why it occurs, and what it means for your investment strategy.
What Is Negative Goodwill?
Negative goodwill occurs when the total purchase price of an acquisition falls short of the fair market value of the acquired company’s identifiable net assets. That difference does not simply disappear; it is immediately recognized as income on the acquirer’s income statement.
Example: Under U.S. GAAP (FASB ASC 805 – Business Combinations), the $5 million difference becomes a bargain purchase gain if Company A purchases Company B for $10 million and Company B has $15 million in identifiable net assets.
Negative goodwill strikes income right away, unlike conventional goodwill, which is progressively tested for impairment. This makes it quite obvious—and frequently under close examination—by both investors and analysts.
Why Does Negative Goodwill Occur?
Keeping things forthright, there’s usually a reason someone sells something for less than its worth. And in the realm of mergers and acquisitions, it’s not different either. Among the most often occurring reasons are
- Distressed Sales: Companies dealing with liquidity problems or bankruptcy sometimes settle for less in order to keep business afloat—that is, to survive.
- Limited Buyer Pool: Particularly in niche markets or during a recession, sellers might have no option but to take the only offer on hand.
- Urgent Need to Leave: Business owners approaching retirement, dealing with conflicts, or needing quick liquidity could sell at a discount to get out quickly.
- Underappreciated or Neglected Assets: Like real estate, patents, or long-term contracts, smart buyers sometimes find value in the seller’s not pricing.
- Post-Acquisition Adjustments: Reevaluations of fair value done following the acquisition may inadvertently result in a reported bargain purchase gain.
Real-World Example: Credit Suisse Takeover Could Result in $35 Billion Gain for UBS
One of the most talked-about examples of potential negative goodwill in recent years has been UBS’s government-brokered takeover of Credit Suisse in 2023. As a global bank with hundreds of billions in assets, UBS agreed to acquire Credit Suisse for an astonishingly low price of $3.25 billion.
Analysts believe the fair value of Credit Suisse’s net assets could be as high as $35 billion, exceeding the purchase price by Should post-acquisition accounting confirm this difference, UBS would mark it as a one-time gain among the largest bargain purchase gains in financial history.
Like past cases, though, the purchase carries significant risk. Mass client withdrawals, mismanagement, and scandals had beset Credit Suisse. The discounted price represents not only asset worth but also possible liabilities and uncertainty.
This real-world situation shows the dual nature of negative goodwill: although the figures may look good on paper, they usually reflect a high-stakes environment whereby success depends on what happens following the close of the deal.
Final Thoughts – Not All Discounts Are Deals
Though it initially seems like a victory, negative goodwill can indicate more underlying problems. A company sold below book value could be a sinking ship, more than just a great deal. The important lesson for investors is this: Always probe why the bargain exists.
Once you have asked “why,” the next question is just as crucial: How will the purchasing company handle and account for this so-called deal?
That brings us to the next section, where strategic execution and accounting coexist.
