An analysis produced by industry research newsletter Marketing Services Financial Intelligence found that of the total amount spent on goodwill and other intangible assets, which make up the bulk of the price paid for marketing services firms, 27% has been written off to date.
The report found that four of the eight companies examined had not accumulated a penny of profit for their shareholders over the last five years.
The worst case by far is troubled Cordiant Communications, which is currently the subject of intense bid speculation, with a deal that could spell the break-up of the group set to be announced any day now.
Over the years, Cordiant has written off 44% of the original cost of goodwill and, since its demerger from Saatchi & Saatchi, it has lost an average of 拢88m each year -- a total of 拢441m.
A major component of Cordiant's losses has been goodwill write-offs, along with major restructuring costs. So far, Cordiant has written off 44% of the 拢859m spent on goodwill.
In contrast, the biggest UK marketing services company WPP Group has written off 20% of the amount paid for goodwill and brand names to date, but has continued to report sizeable, if much reduced, profits.
WPP has still paid high prices, both for Young & Rubicam and most recently Tempus Group, but it has justified it by projected returns and no provision has been made for possible impairment of the goodwill recorded at the time of purchase.
However, the fact the major advertising holding companies have overpaid is hardly surprising, according to the report, given the unrealistically bullish state of the stock markets in recent years and the constant pressure from institutional investors to increase earnings per share.
According to editor Bob Willott, who is also a special professor at the University of Nottingham Business School: "That pressure inevitably encourages companies to bid higher for their prey than would otherwise be the case, especially when they are competing with other equally acquisitive groups. Now those same shareholders are nursing substantial write-downs and negative earnings per share in a number of cases."
After Cordiant comes Lord Bell's Chime Communications, another of the smaller groups that has suffered over the last 18 months. Chime has incurred cumulative losses over the last five years and has written off 64% of goodwill purchased to date. Incepta Group has also incurred cumulative losses in the past five years, but so far has written off a more modest 22% of goodwill acquired.
Some companies, like media and research group Aegis, has managed to earn a profit over the last five years despite massive goodwill write-offs in the past. At Aegis, much of the 62% goodwill write-off was incurred after an earlier buying spree and so the impact on recent years' profits has been less acute.
Overall, the UK companies analysed have spent nearly 拢10bn on goodwill arising on acquisitions. Of this amount, 拢2.7bn, or 27%, has been written off to date.
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