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By | Chris Mellor 3rd February 2009 14:43

Seagate kisses Maxtor goodwill goodbye

$2.3bn down in ink, up in smoke

In a telling move, Seagate is writing off $2.3bn goodwill from its Maxtor acquisition and other intangible items.

Maxtor was purchased for $1.9bn in May, 2006, so Seagate is writing the entire acquisition value off and a bit more besides. There will be a $2.3bn non-cash charge for the second quarter results this financial year which finished on January 2. The Maxtor goodwill write-off accounts for $2.2bn of that. The Q2 results report mentioned a $2.3bn - $2.6bn impairment charge, so the damage isn't quite as large as feared.

Goodwill is a sort of funny money. It reflects the value of an acquired company to make a profit above and beyond the raw value of its tangible assets, such as its manufacturing plants and machinery. The impairment charges for lost goodwill will not result in any current or future cash expenditures. However, when Seagate bought Maxtor there was an amount in the acquisition cost which corresponded to the goodwill item.

The Maxtor entity's ability to make a profit beyond the book value of its tangible assets has evaporated. Seagate paid for something two and half years ago that is now worthless. ®

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