BVWire attended the ASA Advanced Business Valuation Conference in Houston, and we found the sessions to be an excellent mix of theory and practice—ideas that you can use in your practice right away. Here are just a few of the many takeaways:
“Canned gets you canned,” says attorney David Aughtry (Chamberlain Hrdlicka), meaning the opposition will catch you if you lift material from other sources, especially other valuation reports.
A company with excess cash should be worth more than one without an excess, all else being equal; one approach is to value the company using a required level of cash and then add in the excess, advises Trey Stevens (Stevens & Greer).
In a general session, Carla Glass (Marcum) talked about “impact investing” where certain investors accept lower returns from firms that seek to generate a benefit for the public good (e.g., social or environmental impact) as well as a financial return. Of course, this impacts the cost of capital.
Compensation expert Stephen Kirkland (Atlantic Executive Consulting) advises that you ask management about all related parties—both humans and nonhumans (entities)—and get the responses in writing.
In an ESOP session conducted by Jeffrey Tarbell (Houlihan Lokey), an audience member says he uses clawback provisions to avoid legal exposure from an ESOP paying too much for company stock.
In a valuation report, the economy/industry section should not be disproportionately larger than the company information section, advises Michael Paschall (Banister Financial).
Bottom-up and top-down approaches to quantifying personal goodwill are gaining traction in marital dissolution cases, says Bob Morrison (Morrison Valuation & Forensic Services), who uses these approaches in Florida.
Awards: During anawards luncheon, Tony Aaron was designated a Fellow (FASA). He is formerly with Ernst & Young and is now on the faculty at the USC Leventhal School of Accounting. Among other award recipients, Bill Johnston (Empire Valuation Consultants LLC) received the Jerry F. Larkin Award for outstanding volunteer service, particularly with the ASA’s Rising Stars efforts and the new CEIV credentialing program.
BVWire congratulates the conference planning committee for an excellent event: conference chair Bruce Johnson (Monroe, Park & Johnson Inc.), Rosanne Aumiller (Grant Thornton), Jaclyn Burket (SKY Valuation), Jay E. Fishman (Financial Research Associates), George Hawkins (Banister Financial Inc.), and Kevin Janke (Wipfli).
Extra: At the conference, Sharon Desfor, ASA’s international president, announced that the ASA membership approved the merger between the ASA and the National Association of Independent Fee Appraisers (real estate appraisers).
Federal Circuit grapples with Panduit, apportionment, and lost profits
In two related decisions, the Federal Circuit recently dug into a key damages issue specific to lost profits claims in patent infringement cases. Does satisfaction of Panduit obviate the need for a separate apportionment analysis?
No two-step process: Mentor Graphics Corp. (Mentor), a multinational company with headquarters in Oregon, sued Synopsys Inc. and related entities (Synopsys) claiming Synopsys produced an emulation system that unlawfully included features protected by a Mentor patent and that competed directly with Mentor’s emulators. Both parties sold emulators to Intel. Mentor contended that, “but for” Synopsys’ infringement, it would have made the sales Synopsys made. This was a two-supplier market. Mentor used the four-factor Panduit test to show causation. Synopsys did not dispute any of the key facts.
A jury awarded Mentor $36 million in lost profits and another $242,000 in reasonable royalties. Synopsys appealed the decision with the Federal Circuit. The gist of its argument was that there should be a two-step process for calculating lost profits: (1) The patent holder has to calculate the amount of profits lost using the Panduit factors; and (2) the patent holder has to apportion the lost profits to ensure compensation is limited to the contribution the patented features make to a product. Apportionment was particularly important in “this age of complex, multicomponent electronic devices.” Here, the district court mistakenly did not pursue an apportionment analysis, Synopsys said.
A three-judge panel of the Federal Circuit upheld the award. It found that, in this case, “apportionment was properly incorporated into the lost profits analysis and in particular through the Panduit factors.” Further apportionment was not necessary.
No rehearing: Synopsys then asked the Federal Circuit for a rehearing by the entire court (en banc review), but a majority of the court denied the request. However, the majority’s decision triggered a fiery dissent, arguing the panel mistakenly had equated Panduit with apportionment when Panduit merely satisfied the “but for” causation requirement applicable to lost profits claims. Supreme Court and Federal Circuit patent case law required more than a showing of but-for causation to satisfy the apportionment requirement, the dissent said. It found numerous reasons specific to the case that justified en banc review. What’s more, “apportionment is an important issue that will likely arise in every future lost profits case,” the dissent said.
Most valuation experts working in litigation know at least this much about Daubert: It requires expert testimony to be relevant, reliable, and helpful to the jury. But far fewer have read the case or know what it’s about and how it came about. Yet, this case rightly qualifies as a landmark decision, and understanding its importance is a prerequisite to surviving an admissibility challenge.
Also, what about the case preceding Daubert,Frye v. United States, which still sets the standard of admissibility in a handful of states? How do Frye and Daubert differ, and what role does Federal Rule of Evidence 702 play in terms of admissibility of expert testimony?
In an informative article that recently appeared in California Lawyer, Frank A. Wisehart (RGL Forensics), a San Francisco-based forensic accountant and business valuator, provides a concise and eminently readable history of the three key pieces that have come to set down the rules of admissibility of expert testimony in federal court.
The incredible scandal out of Hollywood is reverberating not only throughout Tinsel Town but everywhere. On top of the revelations of egregious conduct, an exclusive report in Variety reveals that The Weinstein Co. may be forced into bankruptcy over this—a stunning collapse of a once-powerful firm. This brings up a few interesting valuation questions.
Ticking time bomb: The behavior of Weinstein has been an “open secret” in the industry for many years. If you’re valuing a company and doing industry research, should you expect to uncover this? To what extent do you take this into account in your valuation? Years ago, the probability of exposure was different than it is now, in the wake of similar scandals such as the Fox News disaster and the evolving Amazon matter. There’s a different environment now, and a time bomb such as this is ticking louder than ever. How do you quantify it? Are you exposed to repercussions for letting the cat out of the bag? If a company is caught up in a marital dissolution case that predates a big scandal, what do you do about subsequent events? The company was flying high at the time of divorce but has since crashed and burned in a short period. Should you have foreseen any of this trouble?
How do you handle scandals, potential scandals, or similar matters in your valuations? Let us know!
Impact of new revenue guidance on healthcare services
The FASB has released an investor podcast on the impact of revenue recognition on entities in the healthcare services industry. Topics discussed include an overview of the new revenue guidance, presentation of bad debt on the income statement, implicit price concessions, disclosures, and transition to the new guidance.
An article in Accounting Today recounts the experience of a small CPA firm being acquired by a larger firm. The owner of the acquired firm gives some advice as to what to consider when approached by a suitor. One tip: Consider hiring a merger consultant. “With so much at stake, I found this to be a wise monetary investment for both my future and my staff’s,” the owner says. “This helped protect me on issues that I might have not otherwise considered.” In the end, everything turned out great.
The Autumn 2017 issue of Insights from Willamette Management Associates is titled “Thought Leadership in Dispute Resolution and Forensic Analysis.” A few of the articles of interest include: “The Valuation Analyst—An Independent Expert or a Client Advocate?” (Terry G. Whitehead), “Perspectives From a Business Governance Attorney Regarding Delaware Fair Value Litigation” (Michael J. Zdeb, Esq., and Kevin Zanni), “Considerations of the Merger Price in Delaware Appraisal Rights Proceedings” (Ben R. Duffy), and “Shareholder/Executive Reasonableness of Compensation—Practical Guidance” (Casey D. Karlsen and Lisa H. Tran).
New study of global industry betas provides a unique perspective
Global betas for 134 industries and "regional" betas for 10 geographical areas—including North America, the EU, and Western Europe—can be found in the Industry Betas study from Salvidio & Partners, a Rome, Italy-based business valuation firm headed by Ascanio Salvidio. His firm has begun producing a quarterly report on levered and unlevered industry betas, and BVWire readers can download the current 3Q 2017 Industry Betas report here for free.
To avoid thinly traded or small companies, Salvidio's beta calculation is based on listed companies: 1) that have had a minimum market capitalization of €50 million in the last five years; and 2) whose shares’ daily traded value was never less than one one-hundredth of their average market capitalization in the same period.
Salvidio & Partners Industry Beta Quarterly Report is unique in combining industry and geographical perspectives and also in featuring two distinct series of levered and unlevered betas. The first series includes levered and unlevered betas estimated for any selected company, regardless of whether its gross debt is higher or lower than its cash and cash equivalents. The second series excludes "net liquidity" to represent companies where “decisions taken by management, all other circumstances being equal, may be different in case of the company’s gross debt being higher or lower than cash and equivalents,” says Salvidio.
Feedback wanted: Salvidio & Partners hopes that its quarterly industry betas study will provide valuers with useful information about industry risk in cost of capital calculation, improving the quality of their analyses around the world. Salvidio welcomes feedback from BVWire readers on how to improve the study, and you can contact him here.
Separating the professional business valuers from the “cowboys” needs to be done before business valuation can be deemed a “profession” worldwide, says Sir David Tweedie, chairman of the International Valuation Standards Council (IVSC) in a video interview. He hopes that this can be accomplished over the next five years by becoming as rigorous as the accounting profession in terms of entry requirements, testing, continuing education, and so on. In the video, Tweedie also addresses globalization, regulation of the profession, international valuation standards, and a global designation. Simon Tay Pit Eu of the Malaysian Institute of Accountants interviewed Tweedie.
People: Dan Bricklin and Bob Frankston, inventors of VisiCalc, the first computer spreadsheet program, will be honored by having their names adorned on the headquarters of Centage, a provider of cloud-based budgeting and forecasting software; there will be a ceremony on National Spreadsheet Day, October 17 … Chad Anschuetz is the new managing shareholder and board chairman of Doeren Mayhew, based in Troy, Mich., and with offices in Florida, North Carolina, Texas, and Zürich, Switzerland … Kirk A. Hesse has joined Cherry Bekaert LLP as a managing director in the firm’s growing Atlanta practice; he’s the national leader of its Transfer Pricing Services … Colorado-based EKS&H promoted two individuals to partners: Josh Billiard, who specializes in contractors and heavy highway firms, and Drew Mattox, who leads the firms automotive practice … Weaver expands its healthcare industry practice by appointing Corey O’Connor as the firm’s healthcare industry director; Anna Stevens also joins Weaver as a manager in assurance services in the healthcare industry; both are in the Houston office.
Firms: Houlihan Lokey Inc. has formally opened its Dubai office that offers clients the full suite of the firm’s services, including M&A, capital markets, valuation services, and restructuring … California-based White Nelson Diehl Evans LLP has merged with Zarrinkelk, Kashefipour & Co., an accounting, tax, and business advisory firm based in Irvine, effective November 1 … Moss, Krusick & Associates LLC, a firm based in Winter Park, Fla., has expanded by merging with Smyth & Hauck, P.A. of North Palm Beach, effective September 16 … Plante Moran opened a new office in Tokyo, Japan, led by Eigo Yamamoto, principal in the firm’s management consulting practice; the office will offer the full range of the firm’s services … Withum has expanded its offices in Manhattan by adding 25,000 square feet to its space on the Great White Way; it also relocated more than 150 employees from New Brunswick, N.J., to East Brunswick, N.J.. We reported in a previous BV movers that Morones Analytics (Portland, Ore.) is expanding its forensic accounting and business valuation services into new markets. We received this information in error and offer the following correction: While Morones Analytics serves clients outside of Portland, Ore., it is not currently opening offices in other markets.
Heidi Gardner is a former McKinsey consultant and Harvard Business School professor who is now a fellow at Harvard Law School. After a decade of study, she finds conclusive proof that collaboration pays—for both employees and their firms—and technology plays a key role.
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