Microsoft Investors Should Brace Themselves for the Next Massive Writedown

It's been almost three years since Microsoft took a massive and painful $6.2 billion goodwill impairment related to its misguided acquisition of aQuantive. At the time, Microsoft desperately wanted, and needed, to strengthen its online advertising business. So desperate, it seems, that it paid an 85% premium.

Incredibly, the writedown represented 98% of the total $6.3 billion price tag. Needless to say, it didn't work out.

What will Microsoft's next massive writedown be? Will it be Skype? Or will it be Nokia's handset division? I bet it's the latter.

$10 billion qualifies as massiveWhen Microsoft closed its acquisition of Nokia's handset business last year, the final price tag actually ended up a fair amount higher than originally announced. The $7.2 billion deal turned into a $9.4 billion deal. Here's how Microsoft allocated everything that it got for all that money.

Source: SEC filings.

That's an incredible amount of goodwill and intangible assets associated with this deal. We're talking about $10 billion that's sitting on the balance sheet, waiting to get written down if the flashy handset acquisition doesn't work out as well as planned.

Microsoft notes: "Goodwill was assigned to our Phone Hardware segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of NDS." That's an awful lot of "increased synergies" that Microsoft hopes to realize given that it's never been in the phone hardware business before.

Microsoft is also warning you loud and clearDon't just take my word for it. Microsoft has directly acknowledged that a possible goodwill impairment for its phone hardware division may be on the horizon. The company sold 8.6 million Lumia units last quarter, bringing in $1.4 billion in revenue in the process. Here's CEO Satya Nadella on the April earnings call:

CFO Amy Hood also had a little bit to add:

If that wasn't enough, the subsequent 10-Q filing makes it plain and clear (emphasis added):

That aforementioned forecast that Microsoft is referring to is the completely unrealistic "strategic rationale" that Microsoft put together when it initially announced the blockbuster deal, assuming that it could ship more than 250 million units in 2018 with an operating margin of 5% to 10%. Keep in mind that, in the last quarter before the deal closed, Nokia's handset business reported a negative operating margin of 17%.

This initial forecast may have been a tad bit too optimistic. Source: Microsoft.

Brace yourselves, Microsoft investors... a goodwill impairment is coming.

The article Microsoft Investors Should Brace Themselves for the Next Massive Writedown originally appeared on Fool.com.

Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.