High Court Judge has a crack AFR Wkend ed., page-23

The way I see it is fundamentally there is a difference between goodwill and whether a price paid is cheap or expensive. Goodwill is simply the excess paid over fair value of tangible assets. To test goodwill for impairment an acceptable method of valuing future cash flows derived from that business and an appropriate discount rate must be used.

An acceptable method cannot be 'we think' or 'it should'. An acceptable method of testing goodwill needs to based on what is known today. So as at today what is a reasonable estimation of the business, using a robust model , as it stands, generating cash flows over the next five years and then what would a terminal value be at that time - discounted back to today at an appropriate rate.

We know that the annual report had an estimated value of SG some $100m plus of what was booked as goodwill so there is a fair amount that can be reduced and still remain within the goodwill noted on the book for that business. We must assume though that risk has escalated therefore the discount rate will have risen and there is likely to be a more conservative estimation of cash flow and growth. So it is fair to assume that the $100m and more will be reduced from the value at 30 June goodwill for UK business. I can't see any reason why Australia should be impaired.

Back to a fair price. Said many times I don't think we can determine if a fair price was paid for at least three years or more. As only a select few were involved in negotiations we can't say for sure whether the price paid was 'cut to the bone' take it or leave it situation. Then there is the added complication that the business itself might have rapidly deteriorated if a deal wasn't done there and then, rendering it a lost opportunity.

In three years the networks established now might well open up other revenue streams that are not obvious today. That is one of the benefits of scale and being the largest player others are more likely to want to hear you and do business with you. Not to mention the competitive advantage due to shared services across the group.

None of the above future potential due to scale can be reflected in goodwill today as it cannot be reliably measured. So an impairment to goodwill today doesn't necessarily mean it paid too much. It implies it paid to much but that cannot be said with certainty unless one was part of the negotiation team and knew that more could have been squeezed out of Quindell in a short timeframe (before that business deteriorates). If knew it could have paid less then so be it but even so it still doesn't answer the question of paid too much overall until we can see the picture in three years time or more.

Note:
Important to do your own research and anything I say should not be construed as advice, recommendation, courting, flirting, storytelling or blasphemy. It may be read as that opinion of an individual who spends an inordinate amount of time studying the industry and the company; however, interpretations and deductions may be accurate inaccurate or partially accurate.