BVWire Issue #145-1 | October 1, 2014


Lively debate over a global BV designation

The business valuation profession is at a crucial point in its relatively young life. Has the time come for a global BV designation or accreditation? What would it look like? What are the alternatives? How would key issues be handled: education, certification process, experience, continuing education, discipline? What would the interplay be with this new setup and current designations from existing players?

The International Institute of Business Valuators (IIBV) and Business Valuation Resources (BVR) are hosting a “Lively Debate on Global Business Valuation Education” on October 23 in Toronto, Canada. It will take place immediately following the IVSC’s annual general meeting. A panel of global BV educators will debate the issues and challenges in the design of a global BV designation and accreditation system.

Mary Jane Andrews, chair of the IIBV, will introduce the event. The moderator of the panel is Andy Dzamba, BVR’s executive editor. The panelists include:

  • April Mackenzie—chief executive officer of IVSC;
  • Ben Elder—global director of RICS Valuation and EQS;
  • Bob Morrison—chair of ASA Business Valuation Committee and chair of IIBV Education Committee; and
  • Doug McPhee—global head of KPMG BV education.

This event is free. If you can’t make it in person, the event will be webcast live. For details, click here.

In the meantime, join the discussion of this topic on BVR’s LinkedIn page.

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Apple KOs opposing expert’s reasonable royalty theories

Apple has created lots of news lately, not only because of the new iPhone, but also because of its successful attack in the Federal Circuit on a major patent infringement award to VirnetX. The court’s ruling clarifies the connection between the entire market value rule and the smallest salable unit approach.

In 2010, VirnetX Inc. sued multiple leading technology companies, including Cisco and Apple. Against Apple, it alleged that Apple’s FaceTime and VPN On Demand products violated four of VirnetX’s patents." Apple servers run FaceTime on iOS devices such as the iPhone, iPod, and iPad and on Mac computers. FaceTime allows secure video calling between select Apple devices. VPN On Demand is a feature in the iPhone, iPad, and iPod Touch allowing users to establish secure virtual private networks. At trial, VirnetX’s expert proposed three approaches to calculating a reasonable royalty. Apple challenged the testimony in a Daubert motion but was not successful.

EMVR swallows apportionment: Under one approach, the expert used the lowest sales price of each device containing the accused features—ranging from $199 for the iPod Touch to $649 for the iPhone 4S—to establish the royalty base. For the use of FaceTime on Mac computers, he determined a royalty base of only $29, which was the cost of the software upgrade. But since Apple did not charge separately for FaceTime on other iOS products, he said he could not come up with a lower price. He applied a 1% royalty rate to the base. Under two separate approaches, he computed damages for FaceTime alone relying on the Nash Bargaining Solution (NBS). The various theories produced a range of damages from $708 million to $588 million. The jury found Apple liable and awarded VirnetX approximately $368 million in reasonable royalty. The district court subsequently denied Apple’s post-trial motions and upheld the award.

Apple appealed the verdict in the Federal Circuit. A principal objection was that, in determining the royalty base, VirnetX’s expert violated the entire market value rule (EMVR). He relied on the sales price of iOS devices without showing that FaceTime drove customer demand and without apportioning a smaller per-unit figure for FaceTime. Apple also claimed the district court gave an incorrect jury instruction that effectively allowed the patent holder to use the entire value of a multicomponent product as long as that product was the smallest salable unit containing the patented feature. Whereas under the controlling case law EMVR is the exception, the court’s instruction essentially created another exception, Apple contended.

The Federal Circuit sided with Apple. The purpose behind the smallest-salable-unit concept is to determine a royalty base that is much more closely related to the claimed invention than the entire value of an accused product, the court explained. Determining the smallest salable unit is only a step toward meeting the apportionment requirement. However difficult, when the smallest salable unit is a multicomponent product that has numerous noninfringing features that have no relation to the patented feature, the patent holder must attempt to identify the portion of value that is attributable to the patented feature. Under the district court’s jury instruction, VirnetX’s expert could simply claim the iOS devices were the smallest salable unit. The instruction was legally erroneous, the Federal Circuit said. “To hold otherwise would permit the entire market value exception to swallow the rule of apportionment.” The court also disapproved of the expert’s calculations invoking NBS, finding that none of the theories created a reliable basis for the jury’s award. The court vacated the damages award and "remand[ed] for further proceedings consistent with this opinion."

Takeaway: The Federal Circuit confirmed what various district courts have said: Using the smallest salable unit does not necessarily satisfy the apportionment requirement. The court said it appreciated the difficulty of assigning value to a feature that is not sold individually and, therefore, did not expect “absolute precision in this task” but accepted “some degree of approximation and uncertainty.”

An expanded discussion of VirnetX, Inc. v. Cisco Systems, Inc., 2014 U.S. LEXIS 17748 (Sept. 16, 2014) will appear in the November issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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Healthcare services sector trading performance and multiples

The S&P Healthcare Services Index “has increased by 11.1% over the last three months [May 2014-July 2014], significantly outperforming the S&P 500,” according to the August 2014 Healthcare Sector Update from Duff & Phelps. The best-performing sectors were acute care hospitals (up 25.7%) and home care/hospice (up 17.7%); the worst performing sectors were emergency services (down 5.9%) and other services (down 4.6%), says the report.

Latest multiples: The current median LTM revenue and LTM EBITDA multiples for the healthcare services industry overall are 1.67x and 11.0x, respectively. The sectors with the highest valuation multiples include: consumer directed health & wellness (4.57x LTM revenue, 26.7x LTM EBITDA) and HCIT (3.55x LTM revenue, 16.0x LTM EBITDA).

The report also provides data on the pharmaceutical/medical devices/life sciences sectors.

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New IASB exposure draft on measuring certain investments at fair value

The IASB published for public comment an exposure draft proposing amendments to IFRS 10, Consolidated Financial Statements; IFRS 12, Disclosure of Interests in Other Entities; IAS 27, Separate Financial Statements; IAS 28, Investments in Associates and Joint Ventures; IAS 36, Impairment of Assets; and Illustrative Examples for IFRS 13, Fair Value Measurement.

This exposure draft addresses: (1) the unit of account for investments in subsidiaries, joint ventures, and associates and their fair value measurement when those investments are quoted in an active market; and (2) the measurement of the recoverable amount of cash-generating units (CGUs) on the basis of fair value less costs of disposal when they correspond to entities that are quoted in an active market. The proposed amendments clarify that an entity should measure the fair value of quoted investments and quoted CGUs as the product of the quoted price for the individual financial instruments that make up the investments held by the entity and the quantity of financial instruments.

The exposure draft also includes a proposed new illustrative example on fair value measurement of an entity’s net exposure to market risks arising from a group of financial assets and financial liabilities whose market risks are substantially the same and whose fair value measurement is categorized within Level 1 in the fair value hierarchy.

Comments are requested by Jan. 16, 2015.

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Comments due soon on additional
USPAP changes

Feedback is due October 10 on the third exposure draft of proposed changes to the 2016-17 edition of the Uniform Standards of Professional Appraisal Practice (USPAP).

Among the proposed changes is an adjustment to the definition of “report,” which currently is defined as “any communication, written or oral, of an appraisal or appraisal review that is transmitted to the client upon completion of an assignment.” The proposed definition would read: “any communication, transmitted to the client or to a party authorized by the client, of an appraisal or appraisal review that includes a signed certification.”

Other changes proposed by the Appraisal Foundation’s Appraisal Standards Board include a modified recordkeeping rule, the effective date of an appraisal review, and confidentiality.

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New industry cost of capital book analyzes over 200 U.S. industries

Duff & Phelps is introducing a new cost of capital resource this month: the 2014 Valuation Handbook ‒ Industry Cost of Capital. This new publication is designed to provide the same rigorous industry-level analysis as that previously published in the green-cover Morningstar/Ibbotson Cost of Capital Yearbook.

The 2014 Valuation Handbook  ‒ Industry Cost of Capital includes cost of capital estimates (equity capital, debt capital, and WACC) for over 200 U.S. industries, plus a host of detailed statistics that can be used for benchmarking purposes.

New and noteworthy will be the inclusion of: (i) additional methods to calculate cost of equity capital; (ii) a separate analysis of "off-balance-sheet" debt by industry (capitalized operating leases and unfunded pension liabilities); and (iii) a separate analysis of "high-financial-risk" companies by industry.

Off-balance-sheet debt: One of the best new features in the upcoming 2014 Valuation Handbook ‒ Industry Cost of Capital is capital structure analysis that examines off-balance-sheet liabilities. “Debt-equivalent liabilities, specifically, capitalized operating leases and unfunded pension liabilities, are not only taken into account by credit rating agencies when assigning a debt rating for a company, but should likely be considered when ascertaining the true financial (and equity) risk of the subject company as well,” says James Harrington of Duff & Phelps, the book’s publisher.

“We replicated the type of analysis the credit rating agencies use in this regard,” says Harrington. “These off-balance-sheet items can be significant, so we do the calculations both ways—with and without these off-balance-sheet liabilities included. This is then shown side by side so that the reader can readily gauge the impact of these off-balance-sheet liabilities on the capital structure of the subject industry. This side-by-side analysis also identifies whether the largest driver of the impact of off-balance-sheet liabilities on capital structure is capitalized operating leases or unfunded pension liabilities. This is reported for each of the 200-plus U.S. industries presented in the book.”

Quarterly updates (June, September, and December) are also available for $250 per year, but they are an optional add-on and not sold separately.

Discount expires soon: The preorder price expires soon for the 2014 Valuation Handbook ‒ Industry Cost of Capital. Place your preorder here and pay just $350 per book plus shipping and handling (versus the list price of $395). Print copies are expected to ship in October.

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Online option for attending the AICPA FVS conference

Not able to make it to New Orleans for the AICPA Forensic & Valuation Services Conference 2014 November 9-11? No problem! You can attend no matter where you are. The sessions can be streamed direct to your PC—and you can earn CPE credits just as though you were there in person. This way, you won’t miss out on the brand-new tracks and cutting-edge topics that make this conference a must-attend event.

Customize it: Different online options are available. You can choose from:

  • Main Conference: Attend all general sessions and choose from concurrent sessions;
  • Conference 9-Pack: Maximize your time by choosing nine sessions from the main conference lineup that interest you;
  • Preconference Workshop 101: Computer Forensics Boot Camp for Fraud Investigators; and
  • Preconference Workshop 102: Fair Value Measurements in Financial Reporting.

To qualify for CPE credits, you’ll have to click on special markers that will pop up randomly during the online sessions.

For full details and to register, go to the AICPA’s online conference Web page.

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BV movers . . .

People: Janae Castell, certified valuation analyst at Woodrum, Tate, & Associates PLLC, is honored by NACVA with the 40 Under Forty award … Sherry Cefali, business valuation and corporate finance advisor at Duff & Phelps in Los Angeles, is the recipient of the Century City Chamber of Commerce Women’s Business Council annual Woman of Achievement award … Robert E. Cronin joins the Illinois-based firm Mueller Consulting as director of the business valuation group … Jamie Fowler is the new office managing partner at Grant Thornton LLP’s Mid-Atlantic practice and will lead the firm’s Baltimore and McLean, Va., offices … Ted Israel of Eckhoff Accountancy Corp. of Calif. and a member of the editorial advisory board of Business Valuation Update, is now a member of the AICPA’s Business Valuation Committee … Hill Johnson joins BDO Consulting’s Dallas office as a director of the Valuation & Business Analytics practice … Marc List is the new senior manager at CBIZ MHM’s Boca Raton, Fla., office … Steven A. Wolf joins Cherry Bekaert’s Fort Lauderdale, Fla., office as a director with the firm’s Litigation Support Services practice.

Firms: CohnReznick says it will combine forces with Maryland-based firm Watkins Meegan LLC by November 1 … Friedman LLP of New Jersey will acquire the Philadelphia-based firm Executive Sounding Board Associates LLC by Jan. 1, 2015 … Grassi & Co. is expanding its New York City presence by joining forces with The Hochman Practice Group (formerly part of Rosen Seymour Shapss Martin & Co. LLP) … McGladrey LLP will acquire the Ohio practice Battelle Rippe Kingston LLP by Nov. 1, 2014.

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Global cost of capital; MPAP—hot topics
of CPE events

International Cost of Capital: Practical Applications (October 9), featuring Nancy Czaplinski and Linda Sweet (both American Appraisal). International cost of capital is changing. Learn its derivation, construction, and analysis through examples that include U.S.- and non-U.S.-based currency examples and high-inflation countries.

The Market Participant Acquisition Premium (October 16), featuring Travis Harms (Mercer Capital). In the April 2013 discussion draft “The Measurement and Application of Market Participant Acquisition Premiums,” the Appraisal Foundation introduced the market participant acquisition premium (MPAP) to the world. In Part 10 of the Online Symposium on Fair Value Measurement, Harms, a member of the working group that created the MPAP, discusses its creation, use, and implementation.

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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:

Global BV designation

Apple wins on royalties

Healthcare multiples

IASB proposal on FV

USPAP changes

Industry cost of capital

AICPA FVS online

BV movers

CPE events








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