BVWire Issue #143-3 | August 20, 2014


Clippers deal is a BV ‘wild card’

How do you value the emotion or ego that comes into play when someone wants to buy a business they absolutely have to own? You can’t—it’s not quantifiable. That’s the “wild card” in business valuation and it appears to have shown up recently in the Los Angeles Clippers deal.

Done deal: Forbes reports that the deal for Steve Ballmer to buy the Clippers has been finalized at $2 billion. Earlier this year, Forbes valued the team at $575 million. A confidential Bank of America valuation report (disguised as “Project Claret” and available here) valued the team much higher primarily due to projected increases in media revenue. But BoA’s estimated value is still a far cry from the price.

In a blog, Donald Erickson (Erickson Partners Inc.) analyzed the BoA report and estimated the team’s value to be $1.37 billion, assuming a multiple of five times revenue (the high end of prevailing multiples). That leaves a difference of $630 million—a lot of money to pay for the privilege of drinking champagne in a locker room after a big win!

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Watch out for the price-value gap

The difference between price and value is apparent when a company sells at a price much higher than its appraised value. But this gap can exist at any time, and it poses a problem for valuation analysts if they do not understand the exact nature of their engagement.

“I believe that there is a gap between price and value, and I also believe that the entire valuation profession is built on that assumption,” says Dr. Aswath Damodaran (Stern School of Business, New York University) in a recent interview with Business Valuation Update. “After all, if markets were efficient, we would not need the thousands of analysts and portfolio managers out there, right? I also believe that if you mistake your mission (doing pricing when you should be doing valuation, or vice versa), you can make some serious mistakes.”

In-person event: Dr. Damodaran will join BVR for an exclusive special event, Price and Value: Discerning the Difference, an Advanced Workshop, on September 10 in New York City. He will give his overview of the valuation process and how it differs from the pricing process. Exclusive premium seating is available on a limited basis for a select group to attend this presentation live in New York while it’s being webcast worldwide. For those who attend the live event, there will be a pre-event luncheon with Dr. Damodaran and an extended 30-minute live Q&A session. You’ll also receive a complete recording and transcript of the event as well as a copy of the book Damodaran on Valuation, 2nd Edition.

To reserve your spot to attend in-person, contact BVR today:; (503) 291-7963 ext. 2.

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Court clarifies Panduit test’s role in lost profits calculation

What’s the interplay between “but for” causation, the Panduit test, and the concept of reconstructing the market? In a recent patent case, a court sorted out this issue when it reviewed an expert’s lost profits calculation.

The plaintiff owned a patent for a motor used in an electric tarp system. The defendant used these motors in its “Series 3500” tarp system. But when it kept experiencing problems with the motors, the defendant stopped buying them and designed and built a similar motor for its new “Series 4500” tarp system. The plaintiff sued, claiming patent infringement, and the plaintiff’s expert performed a lost profits analysis under the Panduit test.

Cover story: The expert used the Panduit test to reconstruct the market and show causation and determined that the plaintiff had a right to 100% of the defendant's sales of the Series 4500 product. The plaintiff’s past success in selling its motors showed there was demand for its product. Also, the expert said, there were no noninfringing alternatives; the plaintiff sold 100% of its motors, and, absent infringement, the hypothetical sales of the Series 3500 would be equal to the actual sales of the Series 4500.

The defendant challenged the expert’s report under Daubert, claiming that he did not accurately reconstruct the market and failed to establish the Panduit factors that served to show causation. In terms of demand, the plaintiff’s expert did not investigate why customers bought the Series 4500 Series tarp systems, which included many components besides the plaintiff’s motor. Any one of these parts might have prompted the consumer to buy. As for alternatives, the plaintiff’s expert failed to consider the advantages the Series 4500 offered over the Series 3500. Given the defects in the plaintiff’s motors, the defendant “had no choice” but to abandon the plaintiff’s products and develop its own version. Therefore, the expert report was unreliable.

Can’t separate issues: The court disagreed, noting that the defendant “incorrectly separates the question of whether [the expert] reconstructed the hypothetical market from the question of whether the Panduit factors are satisfied.” The Panduit test is itself a method of reconstructing the market. Therefore, the two issues must be addressed together. The court found the plaintiff’s expert’s report met all of the Panduit requirements. The defendant’s “demand” argument had no traction because Panduit does not require an analysis of a consumer’s reasons for purchasing. Moreover, the defendant’s claim that it had to design around the patented technology supported the expert’s conclusion that there were no acceptable substitutes for the plaintiff’s motors. The court admitted the report.

Find an extended discussion of Roll-Rite, LLC v. Shur-Co, LLC, 2014 U.S. Dist. LEXIS 73026 (May 29, 2014), in the September issue of Business Valuation Update; the court’s opinion is available at BVLaw.

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Insights into hospital transaction multiples

The Affordable Care Act has been the primary driver of transaction activity in healthcare, which is having its effects on hospital price multiples.

Speaking during a recent BVR webinar, “Valuing Hospitals,” Don Barbo (Deloitte Financial Advisory Services LLP) and Robert Mundy (Pershing Yoakley & Associates PC) gave their observations on the hospital transaction multiples recently published in the Health Care Services Acquisition Report, 20th Edition, 2014 (Irving Levin Associates).

The median price-to-revenue multiple has declined to a level now of around 0.56 of net revenue. Mundy points out that some of the decline from 2011 could be the result of more financially stable hospitals buying up some smaller or financially distressed hospitals. “Healthcare reform pressures affecting smaller rural hospitals could be putting downward pressure on the price-to-revenue multiple,” he says. Barbo agrees: “Yes, some hospitals could now be feeling the ‘teeth of health reform’ and experiencing a deterioration of performance, so they may be selling now at a lower price.”

The median price-to-EBITDA multiple has been on a roller coaster ride on its way to a current level of 9.2. Barbo observes that one of the reasons for this is that the Levin data use the last one to two years of historic EBITDA, while buyers are using more current information. In some cases, they may be using pro forma information to drive the deal price.

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New historical industry, state, and province profiles

BVR’s offering of the First Research profiles just got a major upgrade. In addition to time-sensitive and valuable up-to-date data, BVR is now offering a U.S. and Canadian subscription to the First Research products. Subscribers can access historical U.S. industry, U.S. state, and Canadian province profiles dating back to January 2010 to be compatible with historical valuation dates. And, for the first time ever, subscribers can access Canadian industry profiles in addition to U.S. industry profiles, as well as Canadian province reports dating back to January 2010. All these benefits are now available through cost-effective one-year subscriptions exclusively offered by BVR … and they include unlimited access. Visit BVR’s First Research profiles page to learn more and take advantage of these new offerings.

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In the September issue of Business Valuation Update

Here’s what you’ll see in the September 2014 issue of Business Valuation Update:

  • Damodaran Discusses Value Versus Price and His View of the BV World (BVR Editor). You may be surprised over what Dr. Aswath Damodaran (Stern School of Business, New York University) says about some topics that he has very definite opinions about.

  • How Do You Value a Business That Also Owns Real Estate? (BVR Editor). Where does the value of the business stop and the value of the real estate begin? The article presents a simple model for allocating value between a business and its real estate—along with where to get the data inputs.
  • An In-Depth Look at the New D&P Valuation Handbook (Ronald L. Seigneur, CPA/ABV, CFF, ASA, CVA, CGMA, and Stacey Udell, CPA/ABV/CFF, CVA). A chapter-by-chapter analysis of the resource that replaces the discontinued SBBI Valuation Edition and the Duff & Phelps Risk Premium Report.
  • Book Review: Cost of Capital, Fifth Edition: A True Must-Have (Ted Israel, CPA/ABV/CFF, CVA).The new edition of the landmark book by Pratt and Grabowski covers so many other areas in addition to cost of capital that it could easily be referred to as a comprehensive valuation text.

To read these articles—plus a digest of the latest court cases—see the September issue of Business Valuation Update (subscription required).

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BV movers . . .

People: Joe Brusuelas, formerly of Bloomberg LLP, has joined McGladrey LLP as the firm’s chief economist and will be based in New York City … Keith Denham is the new managing principal and national director of CohnReznick Advisory Group and succeeds Anthony Zecca, who plans to retire in December after a 30-year career leading the advisory services arm of the firm … Plante Moran announced the promotions of Matthew Fegan to manager and Mandy Chardoul, Jeremy Louters, and Nicole Meade to senior associates … Ted Felix, formerly managing partner at Lazar Levin & Felix LLP, has joined Marks Paneth LLP of New York City as senior director of its Litigation and Corporate Financial Advisory Services Group.

Pittsburgh-based CPA firm Schneider Downs has named Timothy Hammer and Steven Thompson as co-managing shareholders, effective immediately. President and CEO of the firm for 30 years, Raymond Buehler Jr. has been named chairman of the board … Jules Reich joins New York City-based WeiserMazars as a partner within the Transaction Advisory Services Group.

Firms: Herbein + Co. Inc. has acquired Braund Eiler & Vasko, which will be the firm’s seventh office in Pennsylvania.

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Latest legal cases, goodwill impairment featured in CPE events

Two excellent BV webinars are on tap:

  • BVLaw Case Update: A One Hour Briefing (August 21), featuring Sylvia Golden (BVR) and R. James Alerding (Alerding Consulting). Join Golden, BVR’s legal editor, and expert Alerding as they explore six noteworthy cases that have come out this year, including the statutory appraisal that introduced the Delaware Chancery to the DCCF method, the bankruptcy court's solvency determination in a notorious fraud case, and a New York court's stock valuation involving a family-owned specialty foods distributor.
  • The Latest With Goodwill Impairments (September 9), featuring Mark Edwards (Grant Thornton). A cursory search for goodwill guidance from the FASB uncovers a litany of changes just during the past few years. Edwards will cover where this guidance stands and how appraisers can best comply during this session, which is Part 9 of BVR’s Online Symposium on Fair Value Measurement.

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We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963
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In this issue:

BV 'wild card'

Damodaran warning

Panduit case

Hospital multiples

First Research upgrade

September BVU preview

BV movers

CPE events







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