Damodaran praises BV experts for focus on the processes

It’s no secret that our coverage of Professor Aswath Damodaran’s well-attended session at last November’s AICPA/ASA conference in Las Vegas elicited passionate response from BV experts. During the course of his address, Damodaran said, “Appraisers often have a value in mind before they start the process and try to back into it.” Given the level of discussion, it only seemed fair to ask the esteemed professor to elaborate on and clarify his statement. Damodaran’s unedited  response:

“I was guilty of both hyperbole and overstatement and I apologize. What I was trying to say—and said badly—is that we spend a lot of time in classroom, conferences, and books talking about valuation techniques, tools, and models and too little time talking about processes. However, flawed processes lead not only to flawed valuations, but also to the abandonment of first principles and common sense along the way. Let me offer three examples:

  1. Sell-side equity research. In 25 years of teaching, hundreds of my students have become equity research analysts and most understand valuation fundamentals very well. They go to work, are told to value the companies in their sector, and to prepare buy and sell recommendations on those companies. However, the very first sell recommendations that they turn out creates a backlash. The company shuts them out of future analyst meetings, portfolio managers within their own firm berate them, and investment bankers who hoped to get business with the company beat them up. Little wonder that even at the start of this bear market last year, buy recommendations outnumbered sell recommendations 8 to 1.
  2. The legal process. It is true: I have grown cynical with legal valuations. The court system, when faced with dueling expert witnesses, seems more often than not to want to split the difference rather than go with the witness who is more credible. Hence, if one expert witness is unbiased and the other is not, the system rewards the latter by taking the average. (One fix may be for the court to appoint a single expert witness to provide advice to the court, rather than to the two sides. Still, I do not know whether that is a practical solution.)
  3. The regulatory process. A few years ago, I was invited to talk to people involved in the utility regulatory process. As you well know, public utilities can set prices for their products based on earning a reasonable rate of return, which then leaves open the question of what a reasonable rate of return is. The audience contained analysts who worked for the utilities and analysts who worked for the regulatory authorities. I surveyed the two groups about the “right equity risk premium” before I started. What I found is that the analysts who worked for the utilities came up with 7% as the appropriate number, whereas the regulatory agency analysts felt that 5% would be more reasonable. Each group backed up their number with studies, statistics, and experts. However, the die was cast when they chose a side.

Bad processes that feed into the bias (as these do) subvert the best intentions of appraisers. I do not believe that appraisers and analysts start with the intent of skewing the numbers, but bias is insidious and it will find its way into value. Thus, the appraiser working for the IRS in an estate-tax valuation will find a way to justify a lower illiquidity discount than the appraiser working for the taxpayer, and both sides will believe that they are justified.

“Admittedly, I have the luxury of speaking about this in the abstract; I am not dependent upon doing valuations for a living. Indeed, tenure is a luxury that most people do not have. However, as someone who truly and passionately believes in valuation as a science—and holds the utmost respect for BV professionals—I will continue to speak out against flawed processes and practices.”

Free Pratt’s Stats® analysis: Did private company multiples decrease in 2008?

The year 2008 was a challenging period for mergers and acquisitions (M&A) in the United States as many deals were hampered by an ever-dwindling credit market. If current conditions continue into 2009 and financing remains limited, then M&A activity in 2009 will be on the light side with a few positive aspects. The deal landscape will be dominated by distressed investments across sectors including financial services, automotive, consumer products, and retail, according to insiders with the Transaction Services Group of PricewaterhouseCoopers.

Yet it is important to note that 2007 and 2006 set record highs in terms of the volume of deals. A catalyst to these record years was the debt financing at generous (read: cheap) terms buyers had access to—not so much a reality now. Because of the miserable economy and the decrease in deal volume, many have hastily concluded that multiples should also have been down for 2008. Some sources have even reported non-dramatic decreases in multiples (such as a 0.3% decline in selling price to revenue multiples), though the substantial finding remains the drop in deal activity. Using the Pratt’s Stats® database, we performed a rough test of the decreasing multiple theory—a quick “sanity check,” if you will. Some basic results are below, and the full chart is available at our Free Downloads page. You be the judge.

 

Median Pricing Multiples
From the Pratt's Stats® Database
Asset Sales
2006
2007
2008
Industry
SIC Codes
MVIC/Sales
MVIC/Sales
MVIC/Sales
Manufacturing 
2000-3999
0.63
0.72
0.74
Services
7000-8999
0.60
0.63
0.57
Stock Sales
2006
2007
2008
Industry
SIC Codes
MVIC/Sales
MVIC/Sales
MVIC/Sales
Manufacturing 
2000-3999
1.26
1.89
1.45
Services
7000-8999
2.16
1.92
2.15
There was significantly more than 20 data points available for each multiple.
Researched 1/8/2009

 

Deloitte’s Nicholas sees new opportunities in 141(R)

Thankfully, most BV experts have long been gearing up for Financial Accounting Standards Board Statement No. 141( R), which took effect last month and possibly created more challenges and volatility for valuing assets and liabilities during mergers, acquisitions, and other transactions than ever before. 

As business appraisers well know, 141(R) and the current financial crisis will prompt many companies to alter their fiscal planning and require their reporting to be more transparent in demonstrating the value of assets and liabilities. According to Stamos Nicholas, principal and national Business Valuation leader, Deloitte Financial Advisory Services LLP, “The turbulent financial markets have already significantly impacted transactions. Understanding the intricacies of implementing Statement No 141(R) will be critical for companies as they consider their deal strategies for 2009 and beyond.” 

Nicholas—who will share more of his expert insights at our much-anticipated 2nd Annual Summit on Fair Value for Financial Reporting on February 2-3 in New York City—is slated to join Ernst & Young ’s Anthony Aaron for an informative discussion of “Impairment Testing in Today's Market Environment.” Nicholas will also address attendees’ questions along with Aaron, Mike Mard, Tony Matt Pinson, and Howard Scribner, during a Summit on Fair Value for Financial Reporting session, “Big 4 Panel: Get Your Questions Answered BEFORE the review!”

In the interim, Nicholas fielded a couple of queries from BVWire™ on SFAS 141(R) and what BV experts are and should be doing to help clients (and auditors) work with the new merger accounting rules: 

Q: Are BV professionals already seeing some preparation among auditors, CFOs, etc., and not as much pushback?

A: Companies are recognizing that Statement 141(R) may require much more upfront planning in terms of due diligence, scenario analysis, and, potentially, negotiations. Recognizing that the valuation issues related to Statement 141(R) may be especially challenging, many companies are working to address issues prior to a business combination event and are taking steps to involve professionals from various areas of their businesses, including tax, accounting, and mergers and acquisitions. Communication and teaming across internal groups will be particularly important now that there will be pressure to complete the valuation exercise subsequent to the transaction within the quarter that the transaction occurs.

Q: Do you have any suggestions for BV analysts on what they should be doing to get clients ready for 141(R)?

A: Statement 141(R) will compel companies to more fully understand the dimensions of a proposed transaction early in the process and support the valuation and accounting treatments applied to it. Valuation professionals should be helping companies take steps now to meet these new regulatory demands. Companies can benefit from careful forethought to changes the new standard will bring as they develop and pursue their mergers and acquisition strategy. Areas of focus for valuation professionals to provide insight into include: measurement date for securities issued, contingent consideration, acquisition costs, acquisition of less than 100 percent, pre-acquisition contingences, selling and exiting costs, in-process research and development, and negative goodwill.

Everything you need to know about healthcare valuation

Healthcare is the single largest segment of the U.S. economy, and its growth continues despite larger economic woes. The financial aspects of this industry are perhaps the least understood, and continue to present challenges to business appraisers of all stripes called to value the many forms of companies comprising the healthcare field.

Join us as we launch our recently released 2009 edition of BVR’s Guide to Healthcare Valuation with this special teleconference featuring four of the Guide’s distinguished contributors. The first of a three part series, Guide co-editor Mark Dietrich will host BV experts Todd Sorensen, Alan Simons, and attorney James Pinna for a discussion on referral valuation, ambulatory surgery centers, home healthcare, and much more.

Best of all: You can save $100 off the teleconference price by purchasing BVR’s Guide to Healthcare Valuation­—co-edited by Dietrich and Cindy Eddins Collier—when you register.

For business appraisers tasked with valuing any aspect of this industry, the combination of the Guide and BVR’s Teleconference on Healthcare Valuation will provide valuable insights into some of the most perplexing healthcare valuation issues. This 100-minute session begins at 10 am PDT / 1 pm EDT, Friday, January 30, 2009; listeners will earn 2 CPE credits. Register here.

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Copyright © 2009 by Business Valuation Resources, LLC
BVWire™ (ISSN 1933-9364) is published weekly by Business Valuation Resources, LLC



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