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What Does Sony $1 Billion Write-Down Mean?

A bad day for shareholders, but maybe another signal to aggressive buyers

Early Monday morning, Sony got off to an inauspicious start to its earnings week by eliminating the $962 million in goodwill it had on its balance sheet tied to Sony Pictures’ production and distribution unit. That sent the company’s stock down nearly 4 percent through midday trading and raised speculation about a possible sale of the studio.

Despite the eye-popping number, the goodwill impairment is a non-cash charge that doesn’t affect the company’s ongoing operations. It has, however, taken a bite out of the Japanese conglomerate’s stock price and could certainly reduce the valuation in an eventual full or partial sale of the studio. Goodwill is an asset, and reducing the value of the asset on a company’s books makes it worth less.

Companies take a goodwill impairment charge when the book value of assets exceeds their fair value. Or basically, when the asset can no longer deliver the financial results that justify the price paid for it. Almost all the goodwill is from Sony’s acquisition of Columbia Pictures for $3.4 billion in 1989.

Impairments can happen for a variety of reasons, including increased competition, changing market conditions or key executive departures in relevant departments that could adversely impact profit expectations. Michael Lynton, the CEO of Sony Entertainment, abruptly announced his impending departure earlier this month to focus on his role as chairman of Snap Inc., which is planning for an IPO.

Sony acknowledged some of those reasons in its release announcing the charge, pinning much of it on decline in the home entertainment space as streaming services have changed the landscape.

“The impairment charge resulted from a downward revision in the future profitability projection for the Motion Pictures business within the Pictures segment,” the statement said. “The downward revision was primarily due to a lowering of previous expectations regarding the home entertainment business, mainly driven by an acceleration of market decline.”

A note to employees for Lynton and CEO Kazuo Hirai cited “dramatic shifts in the home entertainment space currently being felt throughout the entire industry.” And although suitors like China’s hyper-aggressive are circling the waters — and now are likely assuming the price has gone down — the execs also assured them no sale of the studio is being considered, which a studio insider also told TheWrap.

“But make no mistake; Sony Corp’s commitment to SPE remains unchanged,” they said in the note. “The value of high-quality content continues to rise. As we have stated on many occasions, including at SPE’s All Hands meeting at the end of last year, Sony Corp sees SPE as a very important part of Sony group, and will continue to invest to achieve long-term growth and increased profits in this space.”

A nearly billion-dollar loss is definitely a serious matter for shareholders and corporate executives and won’t do anything to stop Sony’s recent string of difficult episodes, from the cyberattack by North Korea in 2015 to the disappointing box office performance of would-be tentpoles like “Ghostbusters.”

While such write-downs aren’t unprecedented in corporate America, they’re not usually a good sign. Last year, oil companies led the way with goodwill impairments as the price of crude tanked.

In 2003, AOL Time Warner was involved in the granddaddy of goodwill write-offs when the ill-fated union took a $45.5 billion charge as part of a $98.7 billion fourth-quarter loss that effectively wiped out most of the goodwill associated with the merger of the two media titans just two years before. That’s certainly not the ending Sony is shooting for.