Largest-ever ASA BV confab
tracks progress of profession

Congratulations to the American Society of Appraisers, which enjoyed its largest-ever, standalone national business valuation conference this week in San Diego.  Over 500 attendees gathered to review, in the words of general-session presenter Jay Fishman, how BV has grown from a “gypsy” existence to a recognized, reputable profession, with all its attendant privileges and responsibilities.  “Clients are not willing to pay for an appraiser's learning curve as a generalist," he said.  The clear trend is toward more specialization in each of the particular valuation “worlds,” where the profession and individual practitioners will continue to have far-reaching influence.

Most notable among these brave new frontiers: fair value for financial reporting.  “No topic has so dominated the BV world or had such an impact,” said Bruce Bingham, in his introductory remarks (see next item for more from the FASB speaker).  BVResources sent a full team to cover “one of the biggest and more important conferences we’ve ever had,” according to ASA BV Committee Chair Terry Allen.  As is our practice, we’ve dedicated most of this BVWire™ to reporting the event’s news, information, and inside tips.

FASB declines to defer SFAS 157, and 141R ‘due any day’

Since the release last year of the FASB’s “signature” Statement, SFAS 157, Fair Value Measurements, the Board received requests to defer the effective date—currently scheduled for fiscal years beginning after November 15, 2007.  At a meeting two weeks ago (see BVWire # 61-3), the Board declined to adopt a “blanket” deferral, according to former Board member Ed Trott, who addressed a standing-room-only session at the ASA conference.  However, the Board did ask its staff to review ways to issue partial deferrals.  “Public companies present one possible area,” he said, as do intangible assets, but financial instruments most likely will not support deferral.  “I think it would be a shame to the user community to take away the dispersion of fair value measurements,” Trott added, but the Board will meet again in the next few weeks to discuss the possibility of “slicing” the effective date through partial deferrals.  For a calendar of open meetings, click here.

In the meantime, the final version of SFAS 141R, Business Combinations—Applying the Acquisition Method, a joint effort by the FASB and the IASB, is “due any day now,” Trott said. But in another session devoted exclusively to application of 141R, Gerald Mehm indicated that the long-awaited release, originally scheduled for the beginning of November, may yet be delayed.  “There are still some troubling areas,” he said, including measurement of non-controlling interests and intangibles.  “The latest rumblings from the FASB suggest that there is such a thing as 'defensive value,'” Mehm added, “and the Board will be issuing guidance.”  For a current project update, click here.

When can appraisers rely on Wikipedia?

In her session on “Extreme Googling“ (Internet research and “I still haven’t found what I’m looking for”), presenter Eva Lang ( took a practical look at the wealth of web-based information, which is often “disorganized and jumbled.”  Nearly 600 million web searches take place daily—comprising up to 25% of the average employee’s workday, but recent studies say that half of these are unsuccessful.  “In most businesses, this is merely frustrating,” Lang said, “but in litigation, not finding information that the opposing expert finds can lose cases.”

Adding to the confusion is the recent statement by the U.S. Court of Claims that “materials culled from the Internet do not—at least on their face—meet standards of reliability.”   But few other courts share this concern.  For instance, a recent New York Times article revealed that more than 100 judicial rulings have relied on Wikipedia, the web-based, collaborative encyclopedia which currently ranks 13th among Internet destinations.  “But in citing concern for the site’s accuracy,” Lang pointed out, “the same Court of Federal Claims relied on an article called ‘Researching With Wikipedia’ found—guess where?—on Wikipedia.”

“Think of [these sites] as the web-equivalent of your library reference shelf,” Lang said. Among the top-ranked databases for business appraisers and litigation experts: Dialog Select Open Access, which allows users to search and pay for discrete articles without paying the high subscription price for the entire site; and Alacra, which offers economic data, business news, investment and market research. 

And of course there’s BVR:  BVMarketdata is still the number-one “gateway” for financial and transactional data related to the sales of public and private companies, control premiums, minority and marketability discounts (our opinion, not Lang’s).  Its sister site, BVLibrary, offers the most current and comprehensive searchable database of BV articles, legal cases, valuation reports—and all back issues of the BVWire.  The new, state-of-the-art search engine uses a key word or phrase and then sorts results by date, product, or ranking; it also allows purchase of single articles as well as database subscriptions.  Try the free BVR search engine today.

SEC accelerates approval of amended Rule 2290

The Securities and Exchange Commission just published its approval of amended Rule 2290, concerning fairness opinions, in a recent Federal Register (October 17, 2007).  Originally proposed by NASD (since reincorporated as FINRA, the Financial Industry Regulatory Authority), the new Rule 2290 addresses disclosures and procedures related the issuance of “independent” fairness opinions.  

“The Commission believes that [the amended rule] clarifies the obligations of FINRA member firms…and believes that approving [the amended rule] will provide greater clarity and simplify compliance, thus furthering the public interest and the investor protection goals of the Exchange Act,” the Federal Register reads.  “[T]he Commission finds that it is in the public interest to approve the proposed rule change as soon as possible to expedite its implementation… on an accelerated basis.”  The proposal is open to public comment, by electronic or paper delivery, as outlined in the announcement.  But time is short: “All submissions should refer to File Number SR–NASD–2005–080 and should be submitted on or before November 8, 2007.”

Fairness opinions to be worth more than just peanuts?

The days of “one- to two-page” fairness opinions are limited, according to Jeff Tarbell (Houlihan Lokey, San Francisco), who spoke on “Advanced Issues in Transaction Fairness Opinions” at the ASA BV in San Diego.  FINRA’s new rule 2290 requires several new elements.  “Nine out of ten problems with fairness opinions come from using management projections, so the new rule requires that appraisers start verifying documents independently,” Tarbell said.   Another change: Any compensation packages put in place after the deal begins must now be disclosed.   “Your fairness opinion needs to comment on ‘stay bonuses’ and other deal-related compensation.”   Appraisers should also make sure to document what they do from the time they start the engagement until they close the file.  Tarbell told attendees of a New York securities lawyer who (prior to the new rules) argued to the Delaware Chancery Court that the situation was like Lucy in the booth with a sign saying “Fairness Opinions: 5¢.”  “Those days are ending,” Tarbell said.

Models now available:  Tarbell recommended two “model” fairness opinions that incorporate the longer-form disclosure required by the new rules.  The first, issued just last week, is from the acquisition of Boise Cascade, and is more “normal,” he said.  (The Houlihan Lokey opinion begins on page 95.)  The second, “interesting more for its unusual aspects,”—including 20 years of management projections—concerns the proposed Sirius Satellite /XM merger (the Morgan Stanley opinion begins on p. 26 and Annex B; JP Morgan opinion begins on page 35 and Annex C).

Del. court accepts study on backdating stock options

In the context of a Section 220 action (by a shareholder to gain access to company books and records), the Delaware Chancery Court just considered a unique statistical methodology for testing the likelihood that a company has manipulated stock option grants, a practice known as “backdating.”  (See BVWire #53-3).  In LAMPERS v. Countrywide Financial (October 2, 2007), a major shareholder sought to investigate possible backdating by Countrywide Financial and submitted the so-called “Goldberg Test,” named after its developer, Richard Goldberg (The Battle Group, San Francisco), who was also the shareholder’s expert.

“One of the challenges in identifying stock option manipulation (prior to getting access to books, records, and other internal company information) is distinguishing cases of honest good luck from cases where something was rigged,” Goldberg tells the BVWire.  “Our statistical test starts out by assuming that the company granted options as disclosed, looks at how the stock price normally behaves, and then calculates how likely it was that stock price behavior that followed the grants happened due to luck.  If we find a highly unlikely pattern of stock price increases following option grants,” he says, “it suggests that the grants should be investigated further to see if they were somehow manipulated.”   Dr. Goldberg’s article, co-authored with James Read, "Just Lucky? A Statistical Test for Option Backdating," (March 27, 2007), is available at Social Science Research network (here).  An abstract of the LAMPERS case will appear in next month’s Business Valuation Update.

If you missed seeing (and being seen) in San Diego. . . 

There’s still time to register for the AICPA’s National Business Valuation conference in New Orleans December 2-4, 2007; go here.  Or why not set your sights for next year’s joint AICPA/ASA National BV Conference, November 10-12, 2008 in Las Vegas.  Register by December 31, 2007 and receive a $100 discount.  For more information, log on here.

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Copyright © 2007 by Business Valuation Resources, LLC
BVWire™ (ISSN 1933-9364) is published weekly by Business Valuation Resources, LLC

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