Right, but just because an accounting team says "Well yeah the market values the company at $5B, but we think it's worth $15B because goodwill" does not make it so.

In some cases, there is additional value created by an acquisition that can justify that added value, but in many cases it's just a way to justify an irrational overvaluation on a balance sheet.

For example, the last time I looked CTL had lost about $2 billion in market cap after this deal was announced. That's the market saying "you overpaid for this company" or, as I prefer to say "your goodwill valuation is BS."

It doesn't work like that. You're not paying $15bn for some assets worth $5bn because you have decided that the "goodwill" is $10bn. It's the other way around: you have decided to pay $15bn and as a result you write down in your books tangible and intangible assets for $5bn and "goodwill" (the balance) for $10bn. Maybe you think it's better to write off the $10bn as wasted money right away, but that also creates some issues (for example, you would probably wipe off your profits for several years, so you wouldn't have to pay taxes).

Goodwill is the amount you paid beyond the tangible assets (cash, property, equipment, accounts paid, etc.) on the balance sheet. You can call it what you like, but basically it's something you spent cash on that you have to show on a balance sheet but has no tangible value. This is usually attributed as "synergies", "IP", "brand recognition" and other BS.

> Goodwill is the amount you paid beyond the tangible assets

Wrong. For example "Hewlett-Packard purchased Autonomy for $11 billion in 2011. The purchase price represented a greater than 65 percent premium over the price at which Autonomy was trading at the time of the announcement. Hewlett-Packard recorded $6.9 billion of goodwill and $4.3 billion of other intangible assets in connection with the acquisition."

Ha and how'd that work for them? According to the Wikipedia entry, "within a year HP had written off $8.8 billion of the value."

Thanks for helping me make my point.

You're welcome. Just to be clear, I agree that paying too much when making acquisitions is not a good business model. But goodwill is not the reason for overpaying, or an excuse for overpaying. Goodwill is the consequence of overpaying.