Attractive values and improved liquidity will resurrect global M&A in late 2009, KPMG survey predicts
The Global M&A Predictor from KPMG Corporate Finance forecasts that the remainder of 2009 will see a continued fall in global mergers and acquisitions (M&A). The good news: This same survey also suggests that deal activity should slowly return late in the year as liquidity improves and investors recognize attractive value in certain sectors. KPMG’s findings—based on a forward looking survey of 1,000 leading companies’ estimated net debt to EBITDA ratios and prospective Price Earnings ratios (PEs)—reveal a significant fall in 12-month forward corporate valuations and therefore appetites to do deals (down globally 22.2% from 15.3x end May 2008 to 11.9x t the end of November 2008). Forecast Net Debt to EBITDA ratios have moved from 0.93 times to 1.06 times (a 13.5% deterioration) indicating a decreasing capacity to do deals.
A global perspective: the Predictor indicates a declining valuation trend in all regions of the world, a result of the global decline in M&A activity. Africa and the Middle East saw the largest drop in valuation; PEs went down 31.6% from 13.3x to 9.1x. Latin America had the second largest fall (28.7% from 16.1x to 11.5x), followed by North America (24.6% down from 15.9x to 12.0x). In contrast to the last Predictor in which Europe experienced the second largest fall, six months into this study period, Europe saw the second smallest fall (21% from 13.5x to 10.7x) behind Asia Pacific down 19.9% from 17.0x to 13.6x.
Although the capacity to do deals has decreased with the global forecast Net Debt to EBITDA ratios moving from 0.93x to 1.06x, some regions have seen an improvement in their balance sheets. Latin America, Africa, and the Middle East bucked the trend and all saw improvements of 3.2% and 35.7%, respectively, with Africa and the Middle East ratio of 0.33x the most modest of all. Europe maintains its position as having the highest regional ratio of 1.15x, having moved from 0.97x, a deterioration of 19.0%. The ratio that saw the greatest decline was Asia Pacific at 28.1%, now standing at 1.14x. North America saw the smallest decline from 0.94x to 0.95x.
Employee stock ownership plans: key legal, business, and governmental valuation strategies
The shaky economy continues to alter the landscape for employee stock ownership plans (ESOPs) and make valuations of this retirement plan even more difficult. Tomorrow, BVR will tackle many of the issues that experts encounter with ESOP valuations in a webinar conference featuring presentations and a panel discussion with Mike Hartman, a principle with Willamette Management Associates; attorney Stephen Smith, with Krieg DeVault LLP; and Indiana state treasurer, the Honorable Richard Mourdock. This thought-provoking and informative program will deliver invaluable insights on the ins-and-outs of ESOPs, their past, their future, and what everyone involved needs to know. This 100-minute webinar begins at 10:00am Pacific/1:00pm Eastern on Thursday, February 19, 2009. Attendees can earn 2 CPE and 1.5 CLE credits. Click here to register.
Global accounting group mounts a defense of Fair Value Accounting
Last December, the president and CEO of the American Institute of Certified Public Accountants (AICPA) issued a statement applauding the SEC staff recommendation against the suspension of fair value accounting rules. A new position paper from the Association of Chartered Certified Accountants takes a similar stance. How Should the EU Respond to the Financial Crisis? notes: “In response to political criticisms that fair value accounting rules caused some of the market volatility, the International Accounting Standards Board has revised its rules on fair value accounting. Some countries now want the EU to seek exemptions from the international standards. This would be a serious step backwards.”
Chamber of Commerce proposes a 'makeover' for the SEC
In a report outlining 23 changes to certain core operations of the U.S. Securities and Exchange Commission (SEC) aimed at improving the agency’s regulatory oversight process, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness concedes, “the SEC became the target of widespread criticism, to an extent that is virtually unprecedented in its history… Serious consideration will be given to a comprehensive restructuring of the federal regulatory structure.” Six of the report’s recommendations address overarching issues related to the organizational structure and management shortcomings of the agency. The report, for instance, recommends realigning key operating divisions, establishing a chief operating officer for the SEC, as well as forming a new Coordinating Council to ensure better coordination and more uniform regulation across the SEC’s divisions.
Among other things, Examining the Efficiency and Effectiveness of the U.S. Securities and Exchange Commission outlines improvements that can be made to three core SEC functions (staff no-action letters, exemptive orders, and self-regulatory organization rule orders) with the goal of clarifying review standards, instituting firm statutory response deadlines, and increasing the transparency of these processes. The study findings are based on more than 60 interviews with a broad range of experts, including Chamber members, securities law practitioners, and current and former SEC staff.
Making sense of the wild machinations of the 4th Quarter of 2008: Consider findings in our Economic Outlook Update™
The recently released Economic Outlook Update (EOU), incorporating 4th quarter 2008 data, is a must-see for BV experts in need of the latest insights on the state of the economy, an overview of key economic factors, and more. A subscriber recently wanted to know why the summary information often changes from quarter to quarter. For those of you wondering the same thing, you should know that differences in the EOU from one quarter to another are due to the timeframe of the data used. In some instances, preliminary data are used, but after the most recent quarter, the report includes data that are final, since information that is more concrete has come in from that previous quarter.
For example: The September 2008 issue reports that the second quarter 2008 GDP increased 2.8%, while the June 2008 issue says the second quarter 2008 GDP increased 1.9%. Why the difference and how can analysts explain the difference in their valuation reports? The answer: To compile the EOU, we use data from the Bureau of Economic Analysis (BEA). The initial publication of the EOU cites preliminary figures, because it falls only one month after the quarter has ended. In the next quarter’s EOU, there will be more data about that previous quarter and the BEA may change their data figures, which is often the case. The bottom line: The report includes the most accurate data available, which may be subject to change several months later, hence the difference from one quarter to the next. Want to take a look at the latest findings? BVWire™ readers can access a Free Download of this important 4th quarter data.
After losing battle over discounts at divorce, wife tries to win the war on appeal
The Greliers spent the last two years of their 12-year marriage litigating their divorce, fighting primarily over the husband’s 25% interest in a closely held real estate development company (owned with his father, his brother, and a family friend). In response to the wife’s request, the trial judge appointed a special master to determine the “fair market value” of the minority interest. After his audit and examination, the special master concluded that the husband’s interests were worth just over $1 million, without application of any marketability or minority discounts.
Each of the parties contested the valuation. The wife’s financial expert testified that the special master had “seriously” undervalued the interests by relying on outdated real estate appraisals, but he agreed that discounts were not appropriate in this case. In contrast, the husband’s expert said that discounts should apply—25% for lack of marketability and 25% for the minority interest, which, when combined, would reduce the value of the husband’s interest to just over $350,000. Moreover, he said that by neglecting to apply discounts, the special master failed to comply with his court-ordered directive to determine fair market value. The trial judge agreed, and applied a combined discount of 40% to the special master’s value.
The wife appealed the application of discounts, arguing that they were inappropriate when valuing business interests in the context of a divorce. But in Grelier v. Grelier (December 19, 2008), the Alabama Civil Court of Appeals held that it needn’t decide which standard—fair market value or statutory fair value—applied in divorce cases. Instead, it found that after having instructed the special master to determine fair market value at trial, the wife could not assert on appeal that the trial court should have applied a different standard. In other words, a party may not win a reversal based on an error it invited the trial court to make, the court said, and upheld the lower court’s valuation.
Look for a complete abstract of Grelier v. Grelier in the March 2009 Business Valuation Update™. The opinion will also join the nearly 1,500 matrimonial cases posted to the BVLaw™ database—the single largest compilation of BV-specific case law available to legal researchers, financial analysts, and attorneys.
IRS territory engineer, Michael Gregory, offers the following corrections with regard to our recent article, IRS continues outreach efforts with BV while gearing up for 409A oversight:
We noted: The IRS is currently beefing up its team of engineers and appraisers, adding two territory managers in the west and two more in the east. Gregory responds: “We are not adding two territory mangers. We realigned ourselves on October 1. We no longer have a national engineering program manager and four engineering territory managers. Under the prior organization, the engineering program manager reported to the Director and Deputy Director of Field Specialists. Effective October 1, 2008, we have a Director and two Directors of Field Operations (West and East). Two engineering territory managers report to DFO West and two engineering territory managers report to DFO West.”
We noted: Managers network every month, talking about “what [they] can do to strengthen partnerships with the private sector.” Gregory responds: only the 409A valuation team networks every month. Not all engineering managers network every month.
We noted: Gregory chairs the team on 409A appraisals. Gregory responds: “I am the champion of the 409A valuation team. Note the IRS has a 409A team that is run through the employment tax program. This is the lead in this area. One small part of this is the 409A valuation team. I champion that 409A valuation team with a project manager and support team of various disciplines and participants.”
Haven’t had enough of Bernie Madoff?
Law firms representing institutional clients who dealt directly with Madoff are now gearing up for potential litigation. Those looking for the chance to learn everything about the ultimate Ponzi scheme will not want to miss the Madoff Litigation Conference, hosted by HB Litigation Conferences—formerly Mealey’s Conferences. The event, also available by Webcast, takes place on Wednesday, February 25th from 1:00-5:30pm (followed by a networking reception) at The Harvard Club of New York at 35 West 44th Street. Harry Susman, a partner with the law firm of Susman Godfrey, will chair the event.
Topics covered will include: Overview of the Investment Fraud: The parties, the SEC, and litigation targets; The Securities Investor Protection Corporation’s role: Its powers, its operation, the role of receivers; Clawback Litigation: Lessons from Bayou, possible investor targets; Indirect Investors: Fund managers, auditors, class actions, foreign investors; Tax Issues: When to claim a loss, loss deduction limits, phantom profits; and Offshore Funds: Their role, liquidation, use in onshore litigation.
Speakers will include: Anthony Paccione of KattenMuchin Rosenman; Timothy Mungovan of Nixon Peabody; Philp Bentley of Kramer Levin Naftalis & Frankel; Jeff Marwil of Winston & Strawn; Scott Berman of Friedman Kaplan Seiler & Adelman; Barry Herzog of Kramer Levin Naftalis & Frankel; and Geoff Varga of Kinetic Partners. To register for the live event or for the Webcast, call 484-324-2755 x208 or click here. Use promo code MADCON9917 when you register and receive the BVR discount—$50 off!