First, a company pays cash for part or all of an acquisition. Then it turns out the acquiring company overpaid because either the valuation assumptions were unrealistic or irrationally exuberant, performance failures or even fraud. In the end, the acquired company turns out to be worth much less then it was purchased for.
Accounting rules state the acquirer must then write down the value of the company it acquired. Management refers to this loss as "non-cash" because it is technically a non-cash charge at this point in time. However, it also gives false impression the acquirer did not lose any real cash. This is completely false and misleading to investors. When a company acquires something for cash, and then must later write down the value of that asset, the company did lose cash - cash paid out earlier.
When management tries to explain a loss as, "do not worry, it was a non-cash charge", they are either intentionally misleading you or do not understand what really happened. In either case, put your hand on your wallet and quickly walk away.
It is also misleading when a company acquires another company with stock and subsequently has to write down its value, calling this charge non-cash. This may technically be non-cash, but management wasted company value that could have been invested in something else. When cash was used, real cash was lost. When shares were used, real value was lost. In either case, management did a poor job and should be held accountable.
Source: "Wrong Way to Admit You Blew Millions of Dollars", Bloomberg, January 25, 2013
CKB Solutions is all about real solutions for the real world. To learn how we can help your business, contact Greg Kovacic in Hong Kong.