In 2015 Rakuten Took a $70 Million Write Down on Kobo, and Paid Five Times More Than OverDrive Was Worth
Rakuten released its annual financial report on Friday. While the news was generally good, the report also revealed embarrassing details about Rakuten’s ebook ventures.
Overall company revenues rose by 19% to 713 billion JPY for the year. Quarterly revenues were also up 14%, to 198 billion JPY, while net profit for the year slipped 38% to 44.3 billion JPY.
eBooks were hardly mentioned at all. There were a couple mentions of OverDrive, which Rakuten acquired in March 2015 for $410 million, yes. It’s library loans were up 23.5% YoY in the fourth quarter, and Rakuten indicated in its "Vision 2020" brief is that the combined EBITA for Kobo+OverDrive will be positive in 2016. That is a first for Kobo, which has stayed a money pit even two years after Rakuten put a fixer in charge of the ebook company.
The single most important mention of Kobo was in a related document where Rakuten explained the write offs it is taking this year on several of its subsidiaries.
The Japanese retail conglomerate announced a 7.8 billion JPY goodwill impairment on Kobo.
According to Wikipedia, in this situation goodwill is an accounting term for a certain type of intangible asset:
Goodwill represents assets that are not separately identifiable. … Examples of identifiable assets that are not goodwill include a company’s brand name, customer relationships, artistic intangible assets, and any patents or proprietary technology. The goodwill amounts to the excess of the "purchase consideration" (the money paid to purchase the asset or business) over the total value of the assets and liabilities.
Shane Leonard, CFA and CEO of Stockflare.com, has a simpler explanation. Over on Quora this certified accountant explains that "goodwill" is used to describe the difference between the amount paid to buy a company and what its assets are really worth. (Several other accountants chimed in with similar explanations.)
Basically, if company A pays $200 million to buy company B, and company B has assets which are worth $100 million, then company A lists the difference between the actual value of company B and the purchase price as goodwill.
It is, as a reader pointed out, a concept that was invented by the Ministry of Accounting in Orwell’s 1984.
And when a company decided to take that goodwill as a loss, it is called a goodwill impairment.
In this case, the Kobo write off is worth about $69 million, or about a fifth of the $315 million Rakuten paid for Kobo in 2011. You could frame this as Rakuten conceding that they overpaid for Kobo way back when, but that’s not quite true.
At the end of 2014, Rakuten showed 20 billion JPY in goodwill on Kobo, but that was cut down to 10 billion JPY in goodwill at the end of 2015 (after which Rakuten took the goodwill impairment).
And at the end of 2012, Rakuten was listing 16.8 billion JPY in goodwill on Kobo, meaning that Rakuten overpaid by about $149 million when it bought Kobo in 2011 for $315 million.
That’s pretty bad, but the situation with OverDrive is actually worse.
According to Rakuten’s own documents, they’re currently carrying 37.6 billion JPY in goodwill on OverDrive. That comes to about $333 million, on a company that was acquired for $410 million.
Yes, Rakuten paid about five times what OverDrive’s assets were worth when they bought the company last year.
There’s no way for outsiders to tell why that happened, but do you suppose they had to outbid Amazon?
P.S. TechCrunch reported on this story on Friday, but they accidentally swapped two of the figures and misreported the Kobo write off as 17.2 billion JPY. That is not correct. (They also neglected to explain the meaning and context of goodwill, and missed the detail about OverDrive.)