There's only so much goodwill tech can take

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The Independent Online

The savaging of Marconi could seem gentle compared with what the market has in store for many other technology and telecoms companies, including Vodafone, BT and Vivendi.

According to research by HSBC, the next biggest threat hanging over the already battered new economy is that of an industry-wide decision to write off the huge quantity of goodwill amassed on the balance sheets over the course of last year. When that happens, the market will have no choice but to slash yet again its valuations on a range of blue-chip companies.

Until three weeks ago, many investors were cautiously beginning to believe that the worst of the technology bubble fallout had passed. The US economic slowdown has taken its toll on a variety of sectors, but after a string of profits warnings, companies seemed to have got most of their bad news out and taken all the damage to their shares.

But at the end of June Nortel changed that. The group's announcement that it would be writing off $12bn (£8.5bn) of goodwill destroyed what little market confidence had re-emerged. Nortel, like the great majority of large technology companies, had reached its size through a series of acquisitions undertaken during 1999 and 2000. But as market valuations on technology stocks crashed, so too did the goodwill value of the various purchases it had made.

Analysts at HSBC have now drawn up a list of the companies most likely to follow Nortel's lead, and the prime victims will be those in the beleaguered telecoms sector. "There is a risk that Nortel could prove to be the tip of the iceberg," said HSBC strategist Ben Rudd, "and may only be the first in a long line of companies to announce write-offs to goodwill assets."

In Europe, where telecoms companies were particularly acquisitive in their pursuit of dominant positions, the problem could send the big indices into sharp decline. BT and Vodafone, whose goodwill levels are currently £108bn and £18bn respectively, both have major index weightings, so further falls for them would send the FTSE 100 index into a spin. Other sectors with lots of goodwill, such as pharmaceuticals and oils, are less at risk since the value of their assets has not fallen away.

On the Continent, the story is the same. Topping HSBC's list of companies at risk are Italy's Olivetti, Spain's Telefonica and Deutsche Telekom and E.ON in Germany.

But the picture in the US is still worse. Telecoms groups Sprint, Verizon and AT&T all make it on to the Wall Street table of goodwill write-off candidates. But in the US, a range of other sectors are also in danger. AOL Time Warner, JDS Uniphase, Intel and Walt Disney have been on buying sprees during the boom era, and could soon feel compelled to hit the market with their bad news.