Does MDC Partners Have a "Goodwill" Problem?

In the world of MDC Partners CEO Miles Nadal, everything only seems to go up. In his last conference call with investors, he predicted MDC's revenues will rise in 2009 by 1-3 percent and profits will grow 3-6 percent.

Could happen. But there's another growing thing on MDC's books, and that's the value of "goodwill" that the holding company has written up as it acquires stakes in agencies. BNET noted on Feb. 27 that roughly half of all MDC's assets are "goodwill" -- about $238 million. The company has only $41 million in cash.

Why is this asset going up and not down?

"Goodwill" is written onto a company's balance sheet whenever it acquires another company or property. It's the difference between the "book value" of the company (the price of its assets) and the premium the buyer paid to get it. It's a difficult asset to trade (you'd have to find someone who would want to buy the thing you just bought); and it really represents a loss of cash rather than a gain of cash.

In recent weeks, several advertising companies wrote down their goodwill as they perform "tests" to see if that asset is sound. In a recession, asset values fall because there's a lower likelihood that you can sell the assets you own. As a result, companies take charges against their earnings to reflect the lower asset values -- and their profits fall.

Among the companies indicating a reduction in goodwill are Valassis, which wrote off $246 million; ValueClick wrote down $327 million and said more might come; and Clear Channel Outdoor took down a massive $3.2 billion. Even Interpublic, whose goodwill was flat, warned that deteriorating economic conditions could lead to write-downs. So MDC is going against the tide with its increase in goodwill.

In part, that increase came from its increasing stake in Crispin Porter & Bogusky. It upped its ownership to 77 percent in December 2007. MDC also merged with Clifford PR in February 2008. As Fast Company explains, the value of these stakes far exceeds what MDC has paid for them. That justifies an uptick, but it is offset slightly by the departure of MDC's stake in Cliff Freeman & Partners, which is now gone.

The question is, when you've bought two assets right before a recession and a dramatic collapse in asset values, is the goodwill value of those assets likely to go up or down? One might expect it to go down. Amazingly, MDC is beating the odds -- and its revenues, profits and goodwill only go up.

It is difficult to see how this can continue. CP&B announced layoffs of 6 percent of its staff recently, and gave this gloomy statement:

In response to the current economic climate, advertising budgets are being reduced in virtually every industry. On a comparative basis, CP+B's business is doing well but we are not immune to the constriction of the economy.

• See BNET's previous coverage of MDC Partners:
• MDC Partners Q4: Cliff Freeman Mystery Deepens
• MDC Cuts Cliff Freeman Free; Venerable Agency's Options Get Narrower
• Alloy Beats WPP, IPG et al in Network Efficiency Ranking