BVWire Issue #145-3 | October 15, 2014


‘Absurd’ CAPM model is target of new paper

A new paper skewers the capital asset pricing model (CAPM) as “an absurd (having no rational or orderly relationship to human life; contrary to all reason or common sense) model because its assumptions and its predictions/conclusions have no basis in the real world.”

No common sense: The paper, CAPM: An Absurd Model, by Pablo Fernandez (University of Navarra, IESE Business School), goes on to say that many professionals are raking in big fees because of the use of “CAPM instead of common sense to calculate the required return to equity.” CAPM users are making “many illogical errors valuing companies, accepting/rejecting investment projects, evaluating fund performance, pricing goods and services in regulated markets, calculating value creation,” and so on, the paper says.

What do you think? The new paper has sparked a lively discussion in the LinkedIn Business Valuation and Advisory Network group.

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Court digs into inconsistency of appraiser’s prior statements

There should be a Miranda warning for valuation analysts: “Your prior statements may be held against you and jeopardize your valuation.” This was the court’s message to a major financial advisory firm in a recent bankruptcy decision.

Unique industry: The debtor, one of the world’s largest dry bulk shippers, was overleveraged and sought to implement a consensual debt conversion restructuring that most of its lenders supported. But the equity committee objected because under the plan the existing equity holders would receive warrants in exchange for the surrender or cancellation of their equity interests. The warrants covered 6% of the new equity. Consequently, the debtors sought confirmation under the Bankruptcy Code’s “cramdown” provision, arguing the plan was “fair and equitable.” The issue was whether the company’s total enterprise value exceeded $1.48 billion. This amount represented the payments due for claims that had to be paid before the equity holders could recover. To value the company, the debtors’ experts used the three traditional methods—discounted cash flow, comparable companies, and precedent transactions—but urged the court to adopt an NAV analysis given the nature of the industry. It was, they explained, extremely competitive, highly fragmented, and had low barriers of entry. There were hardly any change-in-control transactions in recent years; most of them were in the form of vessel sales. The NAV produced a range of values below $1.48 billion. In contrast, the equity committee’s financial advisor wanted to assign most of the weight to the values resulting from the DCF and comparable companies analyses. The expert’s DCF produced results that were significantly higher than those from the other methods, ranging from a low $1.66 billion to a high $1.97 billion.

‘Forgone conclusion’? The court gave substantial weight to the NAV. At the same time, it said the comparable companies analysis was “equally useful,” and there even was “limited utility” to the precedent transaction method. But the court found “many good reasons” to reject the DCF in this case. For one, there were no accurate projections. All parties agreed that dry bulk shipping rates were extremely volatile and difficult to predict. Also, in discussing the future of the industry, the equity committee’s expert relied on a survey of 13 equity analysts, only five of whom relied on the DCF for their assessment, the court pointed out. More problematic still was the financial advisory firm’s prior record. For example, the firm had presented written materials to an equity holder in which it noted that financial experts in two recent shipping cases rejected the traditional methodologies in favor of fleet valuation and market indicators of value. Also, in making a pitch to serve as the debtors’ financial advisor prior to the bankruptcy filing, the equity committee’s appraiser allowed for a shortfall in collateral value based on the appraiser’s preliminary analysis. When it did not get the job, the appraiser changed its viewpoint. There was evidence that the valuation fight was part of a strategy the appraiser had proposed to an equity holder for gaining leverage and taking control of the restructuring process without actually contributing money to the restructuring. This record, the court said, “creates a troubling impression” that the equity committee’s appraiser was tied to the strategy and its valuation was a “forgone conclusion.” Ultimately, the court found that the debtor’s plan was fair and equitable and approved it.

Takeaway: Experts need to keep track of their records in a case and of public statements in general and should know that inconsistent positions can come back to haunt them.

Find an expanded discussion of In re Genco Shipping & Trading Ltd., 2014 Bankr. LEXIS 2854 (July 2, 2014), in the November issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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FMV develops two-year equivalent discounts for DLOM Calculator

The FMV DLOM Calculator has been modified to render current restricted stock data meaningfully comparable to private companies. FMV has developed two-year equivalent discounts, which makes current restricted stock data (six-month holding period and six-month holding period with registration rights) meaningful in the determination of the appropriate discounts for lack of marketability (DLOM) for private companies.

More comparable: FMV has developed a solution to the holding period issue by successfully analyzing transactions with generally similar characteristics occurring in typical conditions and isolating the incremental discount adjustments—thus, developing the two-year equivalent discount. Valuation professionals are able to derive meaningful DLOMs utilizing up-to-date and relevant information and maintaining comparability to private companies.

Lance Hall and David Bertucci (both with FMV Opinions Inc.) provide a full explanation of the modification in the October issue of Business Valuation Update (subscription required). The FMV DLOM Calculator is available exclusively through BVR at

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CICBV joins debate over a global BV designation

Pierre Maille (PwC, Montreal), vice chair of the Canadian Institute of Chartered Business Valuators, has joined the panel of global BV educators who will debate the issues and challenges in the design of a global BV designation and accreditation system. The “Lively Debate on Global Business Valuation Education” will take place on October 23 immediately following the annual general meeting of the International Valuation Standards Council (IVSC) in Toronto, Canada.

Other panel members include April Mackenzie, CEO of the 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.

Hosted by the International Institute of Business Valuators (IIBV) and Business Valuation Resources (BVR), 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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In the November issue of Business Valuation Update

Here’s what you’ll see in the November 2014 issue of Business Valuation Update:

  • A Forgotten Statistical Concept Tells Why Your Multiple May Be Wrong (Bob Dohmeyer, ASA, and Dr. Herbert Kierulff). Conventional wisdom says that companies with superior margins deserve a premium multiple. Conversely, companies with inferior margins must deserve inferior multiples. However, new analysis tells a different story.
  • Personal Injury Cases: Opportunity for Appraisers? (Stuart Weiss, CPA/ABV). An example of how to calculate damages in a personal injury case, plus an interview with a leading expert.
  • BVU Profiles: The Challenges of Bringing a New BV Methodology Into Acceptance (BVR Editor). Interview with Peter J. Butler, CFA, ASA (Valtrend), a developer of the Butler-Pinkerton Calculator and the new implied capital pricing model (IPCPM).
  • Damodaran’s Warning Signs That a ‘Valuer’ Is Becoming a ‘Pricer’ (BVR Editor).There’s a growing difference between price and value, which leads appraisers to use the wrong valuation toolkit 80% of the time.
  • Preview of the New Benchmark Resource for Industry Cost of Capital (BVR Editor). Jim Harrington (Duff & Phelps) gives BVU readers the skinny on the new 2014 Valuation Handbook – Industry Cost of Capital.

To read these articles—as well as digests of the latest court cases—see the November issue of Business Valuation Update (subscription required).

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Firm seeks financial damages pros

Meyers, Harrison & Pia LLC is seeking experienced financial damages professionals to join the firm, which performs work on a national level. The company may consider opening new locations so the right individual or group can join its team. For details, see the ad at right. Send your curriculum vitae and a summary of your qualifications to Erica Marcantonio, PHR.

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BV movers . . .

People: Andrew Bostian has joined BlumShapiro’s Newton, Mass., office as a manager in the firm’s consulting group … Bruce Darkes has joined the Pennsylvania-based firm, Reinsel Kuntz Lesher (RKL), as partner as a result of the recent merger with the firm he founded, Darkes, Peachey & Wilbert … Sean Denham has been promoted to office managing partner for Grant Thornton LLP’s Philadelphia practice … Jeff Faust and Irina Plevako, formerly with the accounting firm Berger Lewis, have joined the San Francisco firm Abbott, Stringham & Lynch … Steven Goldberg has joined Berdon LLP as a principal in its Financial Services Advisory practice in New York City … Jean Han has been named partner at Baker Tilly Virchow Krause’s New York City office … Alice Hilton has joined The Hancock Firm LLC based in Houston as its director of litigation … Sara Elizabeth Hyre will succeed Rob Wheeler as shareholder-in-charge of Clark Nuber’s tax department in Seattle … Garrett Shinn, Christine Yekel, and Christy Cardillo have been named partners at the Florida-based firm Shinn & Co.

Firms: SiliconIndia Magazine named Aranca, a financial research and analytics company in India, as the “2014 Company of the Year for IP and Valuation Services” … Florida Trend magazine has named Cross, Fernandez & Riley LLP one of the “Top Accounting Firms” in Florida … Seattle-based firm Clark Nuber PS was bestowed the 2014 Human Resources Innovation Award from the Leading Edge Alliance (LEA).

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What’s MPAP? It’s first up in the roster of latest CPE events

The Market Participant Acquisition Premium (October 16), featuring Travis Harms (Mercer Capital). Created to "distinguish … from the more general (and occasionally controversial) notion of the control premium," the market participant acquisition premium (MPAP) is the newest term to be introduced to the fair value canon. Learn about its purpose, creation, and use from a member of the working group whose discussion draft generated the term.

Valuing Covenants Not To Compete in Healthcare (October 21), featuring Jason Ruchaber (Berkeley Research Group). Though not uncommon in healthcare transactions, noncompete clauses can exacerbate the already difficult task of analyzing the incomes of professional staff. In Part 10 of BVR's Online Symposium on Healthcare Valuation, Ruchaber addresses how covenants not to compete are created and what this means for their valuation.

Appraisals (USPAP), Valuations (SSVS1), and Calculations in Litigation (October 23), featuring R. James Alerding (Alerding Consulting) and Jay Fishman (Financial Research Corp.). Learn how to effectively communicate the process and conclusion of an appraisal for any legal setting in any context with the foremost experts on the standards that govern how appraisers draft and deliver their work.

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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:

'Absurd' CAPM

Expert trips up

DLOM Calculator tweak

Global BV debate

Preview of Nov. BVU

Damages experts needed

BV movers

CPE events








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