Acquisition Hangover at Manpower
In its most recent quarterly filing, Manpower, Inc. detailed a write-down of $140.8 million in goodwill and $22.3 million in intangible assets, signaling another asset bubble bursting in this global slowdown -- that of employment service providers.
The charge for impaired assets came after the company determined that "deteriorating market conditions and general economic uncertainty" had reduced the value of assets associated with its outplacement services subsidiary Right Management (RMI). Consequently, Manpower recorded a charge to operating results of $163.1 million in its third-quarter 2008.
Management was careful to note in its recent 10-Q regulatory filing that it was a non-cash charge and therefore did not impact cash earnings. Yet it is RMI's inability to generate enough earnings that prompted the reduction in asset value in the first place. After all, that is how the value of assets are determined: present value of future cash flow streams, just the way it is taught in Econ 101.
RMI is one of several operating units acquired over the last several years in its attempt to capture market share and build a defensible competitive position. RMI's contribution to third quarter 2008 sales grew 9.1% over the same quarter last year and the division produced an operating profit of 7.1 percent. While the operation appears successful, it is not producing enough profit to justify the carrying value of the goodwill and intangible assets created when Manpower bought the operation in January 2004. In other words, Manpower paid too much for RMI -- $630.6 million in an all-stock transaction.
The dubious wisdom of the purchase price may have been apparent from the beginning. RMI earned $431.1 million in sales in 2005, the first year it was a part of the Manpower group, meaning Manpower paid approximately 1.5 times sales. At the time of the deal Manpower's own stock was trading at a multiple of 0.34 times sales -- a 77 percent lower valuation than what Manpower management thought RMI was worth.
The experience has apparently not changed Manpower's zest for growth by acquisition. The company has already snapped up several additional operations in 2008, adding another $50.0 million to goodwill and $53.9 million to intangible assets. Total goodwill at the end of September 2008, was $1.0 billion and intangible assets increased to $405.6 million. As a consequence goodwill and intangibles account for 19.8% of total assets, compared to 12.4% five years ago. MAN shareholders may need to reach for bomo-selzer if the environment for employment services deteriorates any further.
Reporting by contributor Debra Fiakas, who does not hold a financial interest in any stocks mentioned in this article. The 10-Q Detective has a Full Disclosure Policy.