BVWire Issue #146-2 | November 12, 2014

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DLOM bounces back in big NY fair value case

Only a week after a New York trial court issued its contentious ruling that KO’d DLOM in Zelouf, a different court pronounced on the issue in another pot-stirring fair value proceeding that featured an “extremely successful company,” extremely contentious business partners, and extremely well-known valuators.

The successful company is AriZona (of iced tea fame), founded in 1992 by the plaintiff and the defendant and now the largest privately owned beverage company in the United States. Both partners were equal shareholders but after a few years into the business venture, they started to have a falling out. For the good of the business, they decided that the defendant should take control of the day-to-day decisions. They also signed an owners’ agreement limiting the transfer of shares in AriZona to a designated class of transferees.

Two prominent suitors: At one time or another, two industry giants expressed an interest in acquiring part or all of AriZona. One was Tata, a global conglomerate and the second largest tea manufacturer in the world. In 2005, Tata estimated AriZona might be worth as much as $4.5 billion, and it came up with similar estimates over the next 10 years. But Tata never performed due diligence on AriZona and never obtained board approval for pursuing an acquisition.

The other suitor was Nestlé. In July 2010, it expressed interest in buying the plaintiff’s 50% interest for $1.3 billion conditioned on Nestlé’s ability to conduct due diligence, to eventually acquire the defendant’s shares, and to reach an agreement with both partners to control the company. After the plaintiff rejected the proposal, Nestlé increased the offer to $1.45 billion. Ultimately, discussions foundered. Nestlé’s board of directors never authorized any acquisition of AriZona. Nestlé said it was unable to obtain “good financial data” from AriZona.

A few months later, the plaintiff, frustrated by the transfer restriction in the owners’ agreement and the failed attempts to sell his shares, sued for the dissolution of the company. In return, the defendant decided to pursue a buyout. The court’s valuation of the plaintiff’s 50% interest drew on elements from both sides. No expert’s analysis was the clear winner.

As to the valuation method, both sides agreed to use a discounted cash flow (DCF) analysis and rejected the net asset value (NAV) approach. But the plaintiff’s experts also advocated in favor of using a comparable transaction analysis, albeit weighting the resulting value at only 20% and assigning the remaining 80% to the DCF value.

The defendant objected that the proposed comparables were not sufficiently similar in size, timing, and products and were “synergistic market transactions” that the controlling case law did not recognize. The court agreed. AriZona, it said, was “truly sui generis, and thus any attempts to find comparable companies are truly lacking.” Also, the expressions of interest from Tata or Nestlé were unreliable indicators of the value of AriZona. Neither company had access to audited financials or was able to do due diligence, and neither company’s board of directors had approved an acquisition. The only method resulting in a reliable value calculation was the DCF, the court decided.

Liquidity risk? The parties’ experts differed on a number of DCF components, including DLOM. The defendant’s expert proposed a 35% rate. The owners’ agreement was proof that the partners could not easily liquidate their shares. The plaintiff’s expert maintained there was no justification for a DLOM. The company had been successful and major companies had expressed an interest in buying part or all of it.

The court sided with the defendant. It quickly distinguished this case from Zelouf, in which the court ruled against the use of a DLOM since there was no real liquidity risk because the business at issue probably would never be for sale. The liquidity risk in this case was real, the court said. The stalled Nestlé negotiations exemplified the plaintiff’s difficulty of liquidating his shares. At the same time, the defendant’s own expert, a recognized authority on valuations, allowed that “smaller discounts are often appropriate for large and growing companies.” This described AriZona, the court said, reducing the DLOM to 25%. The court’s “back of the envelope” calculation suggested AriZona was worth about $2 billion on the valuation date.

Takeaway: Expressions of interest in a company are not bona fide offers and, by extension, are not reliable indicators of value. Also, New York courts continue to find a rationale for applying a DLOM in fair value proceedings despite the questions the recent Zelouf decision raised about the theoretical underpinnings of DLOM.

Find an extended discussion of Ferolito v. AriZona Beverages USA LLC, 2014 N.Y. Misc. LEXIS 4709 (Oct. 14, 2014), in the January issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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More takeaways from the ASA-CICBV conference

Last week’s BVWire included some interesting pieces of information we collected during the ASA-CICBV Business Valuation Conference in Toronto. Here are a few more:

Courts are steering valuation experts toward quantitative methods and away from qualitative analysis, observes David Margules (Ballard Spahr), an attorney in Delaware. Judges are leery of experts using too much judgment and veering into an advocacy role.

Prof. Lawrence Hamermesh (Widener Univ. School of Law) says that plaintiffs in Delaware are doing well at getting awards due to the value of deals being higher than the deal prices. He says don’t ignore market evidence in valuation disputes. In the Huff Fund case, the Chancery rejected the valuation expert’s analysis in favor of an actual merger price involving the subject entity—this is something that the courts just can’t ignore.

William F. Pittock (Ernst & Young LLP) says that since the 1987 crash, the 2008 housing collapse is the only stock market correction that materially impacted control premiums. 

“Interesting premiums” are being seen in tech company acquisitions due “acqui-hiring,” observes Dan Knappenberger (Deloitte). Buyers are paying high prices to get good tech people at the target firms. But these high premiums are not being seen in Canada, says Duncan Stewart of Deloitte in Toronto. The speakers also say that the days of large IP and patent portfolios being the be-all and end-all of tech companies are over. Now, getting revenues and customers to help value trademarks is more important than IP.

Speaking of IP, during the cocktail reception we heard about a new database available to help value trademarks. The database, Markables, contains over 5,000 trademark valuations published in financial reporting documents of listed companies from all over the world. Supposedly, the database reports value solely for the use of trademarks (not bundled with other rights). It also contains trademark assets that have longer lives than is typical. 

John Borrowman (Borrowman Baker LLC), a recruiter who works exclusively in the BV profession, tells us firms have a high demand for BV people in the two- to five-year experience range. Reason: Their experience relative to their low cost makes them very productive employees. Trouble is, they’re in short supply and hard to find.

Aswath Damodaran (NYU Stern School of Business) says that confusion over the concepts of "value” vs. “price” leads valuators to use the wrong toolkit 80% of the time. His next book will be devoted to this topic.

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First-ever guide to private company multiples in the UK

Looking for a source for the latest transaction multiples being paid for UK private companies? A new guide, BVB Insights: Data and Analysis on UK Private Company Multiples, 2014 Edition, has this information in over 50 industry categories.

Key insights: The highest multiples paid were in the telecommunications, healthcare, and IT sectors, according to the guide. The consumer discretionary and consumer staples sectors also show relatively high multiples paid. Some of the key drivers of multiples in this space include: private equity firms acquiring strong branded companies, North American buyers in the private education space, and consolidation in retail automotive by the UK’s three largest players. The lowest multiples were paid in the materials sectors (mainly UK manufacturers), “largely due to the relatively low margins in this sector (5.6%), being the lowest amongst the 11 industry categories,” says the guide.

The guide, compiled by Business Valuation Benchmarks Ltd., is available from BVR. Click here for details and how to order. 

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Supreme Court to hear key ACA case on insurance subsidies

Valuation experts in the healthcare arena have been following the ongoing soap opera concerning the Affordable Care Act’s provision that provides subsidies to individuals who buy health insurance through the new insurance exchanges. The outcome could have a huge impact on the financial picture of healthcare providers.

Showdown: The U.S. Supreme Court just announced it will hear King v. Burwell, a case that could leave millions of Americans uninsured and less likely to buy healthcare services. The key issue is whether individuals are entitled to the subsidy regardless of whether they buy insurance from a state-sponsored insurance exchange or federally sponsored exchange. The Obama administration feels the subsidy should apply to insurance purchased from either type of exchange.

Earlier this year, in Halbig v. Burwell, the U.S. Court of Appeals for the D.C. Circuit ruled that individuals who buy the insurance through a federal exchange are not entitled to the subsidy. But that decision was vacated in September when the D.C. Circuit Court decided to hear the case “en banc” (before the entire bench). That case is still pending. The 4th Circuit, in King v. Burwell, issued a contradictory ruling saying an individual who qualifies can receive the subsidy regardless of whether the insurance is purchased from a state-sponsored or federal exchange. The plaintiffs in the King case appealed to the Supreme Court.

Under the ACA, each state must establish a healthcare insurance exchange. States have the option to either form their own state-run exchange or partner with the exchange run by the federal government. To date, only 17 states have set up their own exchanges. Some experts feel that if the subsidy ends up not applying to federal exchanges, more states will set up their own.

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Public service recognition from Appraisal Foundation

The Appraisal Foundation (TAF) recently selected Jay E. Fishman and Elliott B. Adler as the recipients of the Chairman’s Public Service Award, presented by the board of trustees’ immediate past chair, Steven G. Elliott. The award was established in 2005 to recognize individuals who have worked with the foundation for the benefit of the appraisal profession and who, in the process, have gone above and beyond the call of duty.

Fishman is an expert in business valuation and a former member of the board of trustees, a past member of the Appraisal Standards Board, and currently vice chair of TAF’s Appraisal Practices Board. He is also on the editorial advisory board of BVR’s Business Valuation Update. Adler is principal of Elliott Adler LLC Law Offices and has served as outside general counsel to TAF since its inception.

BVWire offers its congratulations to these two very distinguished individuals.

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IVSC appoints new board members

The International Valuation Standards Council (IVSC) has appointed new members to its three boards. Joining the Standards Board are: Leigh Miller, national director and Americas director of EY LLP’s Valuation & Business Modelling Practice in New York City; Andreas Ohl, Transaction Services Valuation Measurement leader at PwC in New York City; and Andrew Renshaw, lead director of Valuation and Advisory Services at JLL in London. Joining the Professional Board are: Eleanor Joy, former chair of CICBV and associate partner at PwC in Vancouver; C K Lau, director at JLL in Hong Kong; Eric Teo, executive director, Transaction Advisory Services at EY, and CEO, Institute of Valuers and Appraisers in Singapore. Joining the Board of Trustees are: Mark Gerold, chair of RICS Global Valuation Board and EY director, Valuation and Business Modelling, in London; Christian Mouillon, global vice chair, Risk Management, EY in Paris; and Tatsumi Yamada, partner, KPMG AZSA, and head of IFRS, KPMG Asia Pacific.

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Wanted: Financial damages pros

Meyers, Harrison & Pia LLC is seeking seasoned financial damages professionals to join its growing litigation support practice. Particular expertise in cases involving contracts and torts, infringement of intellectual property, or securities is required. Experts must have at least 10 years of experience, including providing testimony at deposition or trial.

MHP’s business valuation and damages group performs work at a national level from its offices in New Haven, Conn., New York City, and Portland, Maine. Positions are available at any of its locations. For the right individual or group to join their team, the firm may consider opening new locations.

For details, click on the ad at right. Send your CV and a summary of your qualifications to Erica Marcantonio, PHR.

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BV movers

People: Steven Elliott joins GBH CPAs of Houston as a tax manager serving publicly traded and privately held clients … Steven L. Gerard will retire as CEO of CBIZ in March 2016 and will be succeeded by president and COO Jerome P. Grisko Jr. … Craig Jacobson joins GlassRatner Advisory & Capital Group LLC as senior managing director in the NYC office … Helene Jacobson has been named senior managing director of CBRE Group Inc.’s valuation and advisory services group. She will be responsible for valuation and advisory services both in the New York tri-state area and nationally … Joshua Lefcowitz has been promoted to managing director of valuation and business analytics at the Pittsburgh office of BDO Consulting … Sam Martin, Chris Meineke, and Patricia Walker are new partners in the St. Helena, California-based Brotemarkle Davis & Co. LLP, an accounting and advisory firm specializing in the wine and hospitality industries … Michael McGinley has been promoted to director at Prairie Capital Advisors Inc.’s Atlanta office … Philip Ratliff joins the Atlanta-based firm Habif, Arogeti & Wynne LLP as partner in charge of Dispute Resolution Services … Russell Romanelli, managing partner of Wolf & Co., will join BKD as managing partner of the Chicago office … Peter Thacker joins as director of the Richmond, Va., office of Elliot Davis, LLC … Emmanuel Vignal joins EY’s assurance, tax, transaction, and advisory services firm as a partner in its fraud investigation and dispute services (FIDS) practice and will be based in Shanghai. He will serve as Greater China managing partner of the FIDS practice, leading a team of over 140 working in Shanghai, Beijing, Taipei and Hong Kong … Jason Zeman joins BDO Consulting in Boston as a director of its Valuation and Business Analytics practice. 

Firms: BDO USA will acquire the Akron-based firm SS&G Inc. next January and will retain all 375 employees. BDO USA stated that SS&G’s national restaurant niche was a particularly appealing aspect of the deal … BKD LLP and Chicago-based accounting firm Wolf & Co. have merged, increasing BKD’s footprint to 34 offices in 15 states … Taqeem, the Saudi Authority for Accredited Valuers, is the newest organization to join the International Institute of Business Valuators’ (IIBV) global network … Moody, Famiglietti & Andronico LLP created MFA Capital Advisors LLC, a business consulting and transactional services firm to support middle market companies … Wipfli LLP has acquired the Minneapolis-based firm Assurity River Group in order to increase its risk advisory and forensics services practice.

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CPE events

Guide to Industry Cost of Capital: The Latest in the Duff & Phelps Trilogy (November 13), featuring James Harrington (Duff & Phelps). In this free one-hour presentation, James Harrington, a leading member of the brain trust behind Duff & Phelps Valuation Handbooks, joins BVR for an in-depth look at what's included in the new 2014 Valuation Handbook - Industry Cost of Capital, and how appraisers can put it to work.

The Stark Law & Anti-Kickback Statute: Implications on Healthcare Valuations (November 18), featuring James Pinna and Matthew Jenkins (both Hunton & Williams). In part 11 of BVR's 2014 Online Symposium on Healthcare Valuation, attorneys Pinna and Jenkins discuss how the long-standing Stark and AKS fit with the new healthcare economy and what every appraiser should know before their next healthcare assignment.

Why Your Multiple May Be Wrong: Forgotten Statistical Concepts and Their Invaluable Application (November 19), featuring Robert Dohmeyer (Dohmeyer Valuation Corp.) and Herbert Kierulff (Seattle Pacific University). In the November issue of Business Valuation Update, Dohmeyer and Kierulff posited that "many appraisers have missed the statistical and causal subtleties inherent in both luck and skill, adhering to conventional wisdom that says 'companies with superior margins deserve a premium multiple.'" Learn more in this expanded live presentation of their article.

Comparing Fair Value Measurements Under GAAP and IFRS (December 2), featuring Mauro Bini and Mark Zyla (Acuitas Inc.). The Online Symposium on Fair Value Measurement concludes with an examination of how best to navigate the standards set forth in U.S. GAAP, IFRS, and the FASB amendment seeking to join the two together.

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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:

NY DLOM case

More ASA takeaways

UK multiples

Healthcare alert

TAF awards

IVSC appointments

BV movers

CPE events








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