2007 Duff and Phelps data now available at BVResources
“It’s not that the data are wrong,” says Roger Grabowski—who, along with David King, first began developing a response to the perceived shortcomings of Ibbotson’s cost of capital measures, in particular, the data’s exclusive reliance on size/stock price information to characterize a company’s risk. “It’s just not designed for what we were using it for.”
After getting “beaten up” too many times in court for not including alternative, accounting-based measures in the determination of an equity risk premium (ERP), Grabowski and King—aided by the Chicago’s Center for Economic Research and based on Standard & Poor’s Compustat database of public company returns—began about five years ago to publish their annual Risk Premium Report. Many analysts now rely on this report to produce more defensible, credible cost of capital measures, particularly for smaller (less than $10 million annual revenues) target companies.
Just-published by Duff and Phelps, LLC, the 2007 Risk Premium Report is now available at BVResources. Its current 5% ERP more closely mirrors future performance than Ibbotson’s 7.1%, and its 25 size-ranked portfolios (compared to Ibbotson’s 10) are defined not only by market capitalization but also by market value of invested capital, average net income/EBITDA, total assets, number of employees, and more. The 2007 Report is the most reliable information going forward—“but I’m not better than anyone else,” Grabowski insists. “I’ve just spent more time with the data.”
To order the new, 2007 edition, click here.
Is ‘collusion’ the real complexity of transaction valuations?
Speaking as the wrap-up expert at last week’s Buyout Symposium East in New York City, Kevin Conway, Managing Partner of Clayton Dubilier & Rice (Jack Welch’s firm with offices in New York and London) said “the private equity industry is in the inefficient period where limited regulation is being translated into case law.” Andrew Ross Sorkin, financial reporter from the New York Times, agreed that “corporate boards and lawyers don’t always know what’s in the best interest of shareholders” because of the new balance of power favoring financial over strategic buyers.
With so much riding on the outcome—and with uncertainty and vested interests on all sides—it’s no wonder the BV pros who do purchase price allocations often face tense auditors from the Big Four. If that isn’t enough, Sorkin repeated what he’s written in the Times—that the system is creating a version of insider trading he calls “collusion.” But, “I don’t mean that in the legal sense,” he added, “rather in the ‘process’ sense.” Say what?
Liquidity discounts: measuring the cost of buyer’s remorse
“Minority interests in private companies have not benefited from the increased liquidity in the public markets,” says Ashok Abbot, Ph.D. (West Virginia University). “Consequently, the value difference between closely held minority interests and their publicly traded counterparts has widened in recent years.”
But the SEC and restricted stock studies—the empirical basis for development of marketability discounts, “covered larger publicly traded firms during years in which the public markets were less liquid,” Abbot says. Thus the studies may understate the actual discount for lack of marketability and ignore the potential liquidity discount, especially for smaller firms.
The concepts are aligned but distinct: While marketability generally refers to the salability of an asset, liquidity connotes how readily (and completely) you can convert it into cash. Or as noted NYU Professor Aswath Damodaran puts it, the cost of illiquidity is the cost of buyer’s remorse, “where you want to reverse your decision and sell [the stock] you just bought.” His recent study, Marketability and Value: Measuring the Illiquidity Discount, is just one of many resources that registrants will receive for today’s telephone conference: Defining, Measuring & Defending Discounts for Lack of Liquidity, featuring Professor Abbott along with panelists Shannon Pratt and Rob Schlegel. The conference begins at 1:30 p.m. EDT; there’s still time to register here.
Plotting your business in a universe of value
In a world that’s flooded with capital, investors are increasingly putting their money into private companies—which means that owners now want (and need) to know how to price their businesses as well as others in their industry. A valuation can also provide an important progress report, including benchmarks for improvement.
That’s why, for the fourth year in a row, BVR teamed up with Inc.com to create “the ultimate valuation guide,” which appeared in the January 2007 issue and is now available online. As a bonus, we’ve also made the comprehensive chart, “A Universe of Value” available as a free download. In graphic terms, it shows where in the constellation of value your private company might place. Go to BVResources.com and click on the left-hand link, “Free Downloads.”
ASA recommends Appraisal Foundation to FASB
Last week the ASA Business Valuation Committee filed its response to FASB’s Invitation to Comment (ITC) on Valuation Guidance for Financial Reporting. As the first output from the newly revamped BV Standards Subcommittee, it endorsed the standards framework already provided by The Appraisal Foundation (TAF), and offered TAF as the “focal point” for further development. “Specifically, we believe that the best approach for establishing any further valuation guidance for financial reporting is through a separate, independent committee devoted to this topic, under the auspices of TAF.” To read the complete comments, click here.
IVSC membership approves restructuring
At a meeting in San Francisco last week, members of the International Valuation Standards Committee (IVSC) unanimously approved the organization’s restructuring proposal (see BVWire # 52-4). This “overwhelming support” came not only from constituents but also “from valuation and accounting firms, academia, and major users of international valuation services,” according to current Chair, Joe Vella. Key components of reorganization include a non-governmental standard setter, a standards board addressing all valuation issues, and “a place for all stakeholders to have a voice.” IVSC members will vote on new by-laws and regulations at the 2007 annual meeting in London in October, 2007; for more information, visit the IVSC website.
IBA has gathered nearly all ‘masterminds’
In a unique alternative to the “cattle call” of professional conferences, the Institute of Business Appraisers (IBA) has pioneered a two-track, limited registration teaching model at its annual symposium. At this year’s gathering in Denver, Colorado on June 20-23, 2007, only 100 attendees will participate in the sessions on “Common Errors and How to Avoid Them,” including half-day presentations on how to analyze historical earnings, apply transaction data—and not get tripped up (or tricked) on the witness stand.
The “Masterminds” track—also limited to 100 participants—will cover such advanced topics as S Corp valuations, company-specific risk premia, and federal tax practice. But this track is nearly sold out, according to Grace Clark at the IBA, and the intermediate track is filling up fast. The “early bird” registration (save $100) also expires May 9th. For more information, go here.