If we evaluate GENDA’s performance based on “operating income before depreciation and amortization of goodwill (EBITDA)” and “Net income before amortization of goodwill,” which do not take into account the amortization of goodwill, does it matter how much goodwill is generated as a result of high entry valuations?

The entry valuation being high relative to the cash flow to be generated by the target company in the M&A transaction, is a critical issue. This is because there is a high probability that the cash invested will not be recouped in the future.

Therefore, GENDA places the highest importance on cash flow-based valuations in its M&A strategy.

From the above perspective, the absolute amount of goodwill itself is not necessarily a problem in theory. However, in general, the absolute amount of goodwill tends to be larger for more high valuation M&As, and it is important not to increase the absolute amount of goodwill in order to avoid unnecessarily depressing operating income, after deducting goodwill amortization expenses under Japanese GAAP.

In light of the above, GENDA’s “M&A discipline” places the highest importance on entry valuation on a cash flow basis in M&A and ensures that M&A are conducted at appropriate valuations. Once this premise is fulfilled, we also strive to minimize the amount of goodwill to the extent possible.

As a result, the recoup of the initial investment is progressing smoothly, as described in the “M&A Progress and First Quarter Outlook” disclosed today.

In addition, as described in “Q3” of this report, PMI has been more successful than expected due to significant synergies in areas other than amusement arcades. We will announce the status of PMI in areas other than amusement arcades in the future as well.

For example, in amusement arcade M&A, assets with relatively small book value such as crane games, or assets that have depreciated to a small amount in terms of book value, may generate ample cash flow, supported by customer demand due to the popularity of cartoons and other factors.

In such cases, the net asset value on the balance sheet may appear smaller than the valuation based on future cash flows, and as a result, goodwill may easily arise as a result. However, based on the theory of valuation, GENDA gives priority to valuations based on cash flows, while also trying to minimize the amount of goodwill as much as possible.

Tag: 2024/4/23