Million-dollar expert gets a dressing down by the Bankruptcy Court
Who says there’s no money in valuation? A recent bankruptcy case raises eyebrows for a number of reasons, not the least of which is the $1.25 million fee paid to a valuation expert for a short-term assignment.
Spectrum of interests: LightSquared, which is in Chapter 11 bankruptcy, owns several satellites and licenses to use a spectrum on the mobile satellite service band, issued by the Federal Communications Commission (FCC). Charles Ergen owns DISH, which is LightSquared’s main competitor. Through a special-purpose entity, known as SPSO, he also acquired nearly $1 billion of the outstanding $1.5 billion in LightSquared prepetition secured debt. The way in which SPSO came to hold the claims fueled litigation where the debtors alleged inequitable conduct, fraud, and tortious interference with prospective economic advantage. Earlier this year, the Bankruptcy Court found that Ergen violated the spirit of a credit agreement when he purchased his debt. The court ruled that some of his debt would be paid after other claims against LightSquared.
Given the connection among SPSO, Ergen, and DISH, the debtors developed a reorganization plan that tried to separate the SPSO claim from other first-lien lender claims. Not surprisingly, SPSO opposed the plan. The debtors argued that, even if the court recognized SPSO’s rejection vote, it should confirm the plan. Further, the treatment of SPSO’s claim was informed by legitimate business reasons, and the plan was fair and equitable because it ensured that SPSO received the “indubitable equivalent” of its claim. A valuation of LightSquared’s spectrum and satellite assets showed that there was sufficient collateral to protect the full principal value of SPSO’s claim, the debtors maintained. The debtors’ valuation expert had “stellar” credentials. His firm had a telecommunications practice, and he had worked on several spectrum deals. He performed extensive research and analysis over the almost two years in which he served as LightSquared's financial advisor. He also showed that his valuation aligned with one Ergen and an outside financial advisor had done in 2013 when Ergen contemplated a low-band acquisition bid for LightSquared’s assets. Critically, the debtor expert’s valuation was premised on the FCC’s approval of LightSquared’s application for augmented spectrum rights.
‘Unimpressive piece of work’: Ergen hired an expert to disprove the debtors’ claim. This expert had three weeks to submit his report and was paid $1.25 million. He had no industry expertise. At his deposition, he admitted he did not become aware of Ergen’s earlier valuations until a day after completing his report. The court called his report “an unimpressive piece of work.” His lack of experience valuing satellites and spectrum was noteworthy, the court said. He applied faulty and arbitrary assumptions in valuing the assets. Although he was not an FCC expert, he reduced the value of LightSquared's spectrum based on his risk assessment. “Simply put, his methodology is all over the place,” the court added. “Paid $1.25 million for his work, [he] delivered a superficial analysis that was not even informed by a review of [Ergen’s valuations.]” But, while the court praised the debtors’ expert, it still found his valuation unreliable because it assumed FCC approval where such an outcome was anything but certain. Ultimately, the court refused to confirm the debtors’ plan. The fight continues.
Takeaway: Don’t take an assignment—however lucrative—for which you lack the necessary expertise. A bad review from the court travels fast and leaves a lasting stain on your reputation.
Find an expanded discussion of In re: LightSquared Inc., 2014 Bankr. LEXIS 2984 (July 11, 2014) in the October issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.
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Damodaran cautions appraisers on pricing vs. valuing
Always an exciting and interesting speaker, Dr. Aswath Damodaran (New York University, Stern School of Business) conducted a special three-hour workshop on price versus value last Wednesday. His key point is that business appraisers should look carefully at their work to clarify the distinction between pricing and valuing a business or asset. Damodaran feels there is a growing difference between price and value, which leads appraisers to use the wrong toolkit 80% of the time, he told the audience (both live and via webcast).
Masquerade: He also points out that many pricing decisions only pretend to be valuations. For example, the bankers recently put a price on Alibaba of $155 billion. The illusion that this price came out of a valuation model creates a great deal of confusion. In reality, says Damodaran, what they did was set an IPO price. Another example is DCF “valuations” that rely on EBITDA multiples at terminal value. He calls these “valuations in drag” and worries that any “valuation” that relies on terminal value calculation is price-oriented.
Dr. Damodaran had a lot more to say, and BVR wants to thank him for an excellent and informative workshop. If you’d like an archived version of the webcast, click here.
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Selling price/SDE multiples in
Business Valuation Resources is excited to share with you our most recent research on the Pratt’s Stats distribution of selling price to seller’s discretionary earnings (SDE) multiples.
The data in the graph below include only private buyer transactions with a selling-price-to-SDE multiple from 2010 to the present. The data were separated by year and then sorted by the selling-price-to-SDE multiple. The general trend is that the majority of transactions have a selling-price-to-SDE multiple between above 1.0 to 3.0.
Stay tuned for more: As business intermediaries continue to submit deal information, we will further analyze the data and publish them here. Please email us your wish list of any specific analyses you’d like to see from Pratt’s Stats, and we’ll address it in future issues of the BVWire.
Note: Data are based on private buyer types. Source: Pratt’s Stats, available at www.BVMarketData.com. Created on Sept. 4, 2014.
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Preorder your Industry Cost of Capital book
Preorders are now being taken for the 2014 Valuation Handbook—Industry Cost of Capital, published by Duff & Phelps. Place your preorder here and take advantage of the preorder price of $350 per book plus shipping and handling (versus the list price of $395). This preorder price expires soon!
The 2014 Valuation Handbook—Industry Cost of Capital is published with data through March 2014. Quarterly updates (June, September, and December) are also available for $250 per year, but they are an optional add-on and not sold separately. Purchase the book with updates here.
This resource replaces the discontinued Morningstar/Ibbotson Cost of Capital Yearbook and will include additional methods to calculate cost of equity capital and new statistics previously unavailable that will allow for a more robust analysis. Over 200 U.S. industries are represented in the 2014 Valuation Handbook—Industry Cost of Capital.
Special report on valuing a business that owns real estate
At some point, every valuation expert will have to deal with a business that owns its real estate. It could be a convenience store, a funeral home, or a hotel, among others. Where does the value of the business end and the value of the real estate begin?
BVR’s special report, Valuing Companies With Real Estate: Appraisal Experts Untangle the Issues, addresses the unique concerns and challenges of valuing a company with real estate. This report, with perspective from both real estate and business appraisers, will help experts sort out this issue and present practical methods to handle this type of valuation.
For more details on this special report, click here.
Extra: U.S. Tax Court Judges Mark V. Holmes and James S. Halpern will be among the panelists at the Appraisal Institute’s 2014 IRS Valuation Summit on October 21 in Washington, D.C., that will focus on real estate valuation. At the top of the agenda is the expiration of the 2010 Tax Act and the permanency of the estate tax enacted in early 2013, which adds uncertainty in the appraisal process and impacts estate planning for many individuals.
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New tracks and educational program highlight AICPA FVS Conference
BVWire looks forward to attending the AICPA Forensic & Valuation Services Conference 2014 in New Orleans November 9-11. Last year’s event was terrific—and this one looks to be even better!
New tracks: A total of seven tracks of sessions will be presented, and four of them are new for this year’s conference: Hands-On Valuation, Hands-On Forensics, Cutting Edge, and Industry. For example, the Cutting Edge track will examine issues such as virtual currencies, and the Industry track will present specialized forensic and valuation techniques. The other tracks are: General Valuation, General Forensics, and Litigation.
New training: The AICPA is kicking off a new educational program for up-and-comers in the field of forensics and business valuation. The NextGen FVS Professionals Program is tailored to individuals with fewer than five years of forensic accounting or BV experience. The program is designed to help junior members of a firm develop core competencies, such as professional development, steps to building credibility, fostering relationships, case management, communications, and more.
Also on November 9 will be three preconference workshops: Computer Forensics Bootcamp for Fraud Investigators, Fair Value Measurements in Financial Reporting, and Growing Your Practice and Balancing It All!
See you there!
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Free Special Feature on IPCPL/IPCPM
At the recent NACVA conference in Las Vegas, there was a session on the implied private company pricing line (IPCPL) and the implied private company pricing model (IPCPM), a new tool designed to estimate the cost of capital for small private companies. Session attendees were given a handout that includes articles, user feedback, Q&A, and other explanatory material on the new model. That handout is now available in BVR’s Cost of Capital Resource Center on the IPCPL page. To download the handout, click here.
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Ready for a challenge? Take the ASA’s BV Challenge Exam
To advance to Accredited Member (AM) and Accredited Senior Appraiser (ASA) under the educational program of the American Society of Appraisers (ASA), one of the requirements is that you must complete four 27-hour Principles of Valuation (POV) courses. Plus, you have to take a three-hour exam at the end of each course. However, many experienced BV professionals have already mastered the competencies taught in the POV courses. Fortunately, these individuals may qualify for advancement without taking the POV courses.
Alternative route: The ASA has relaunched the Business Valuation Challenge Exam for accreditation. It is geared toward those professionals who have more than 10,000 hours (five years) of BV engagement experience who have already mastered the competencies covered in the POV courses and who otherwise would qualify for advancement to AM or ASA. The Challenge Exam has 260 questions and is administered in two four-hour modules to be taken on the same day.
To register or learn more about the Challenge Exam, click here.
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BV movers …
People: Steven M. Egna, who directed the Business Advisory Services division for almost a decade, was upped to partner at Teal, Becker and Chiaramonte, CPAs, P.C. … Erin Durand Hollis, formerly director at Valuation Advisory Services LLC, joins Marshall & Stevens of Chicago as director in the Financial Opinions Group … Johanna Nielsen is a new audit partner in Citrin Cooperman Capital Markets and Private Equity team in New York City … Sam Wright is the new director of Transaction Advisory Services Group for the Private Equity Practice of CBIZ and Mayer Hoffman McCann PC in New York City.
Firms: Averett Warmus Durkee received the Best Companies Award in the midsized category from Florida Trend magazine … Chang & Associates joins the Baker Tilly network in Malaysia, and Norgaard Neale Camden Ltd. joins the Baker Tilly Canadian network, Collins Barrow … Larry E. Nunn & Associates CPAs LLC, with offices in Columbus, Plainfield, and Seymour, Ind., has been acquired by the Kemper CPA Group LLP … McLarty & Co. based in Ottawa, Canada, will merge with MNP LLP by Nov. 1, 2014 … WTAS will rename itself Andersen Tax after acquiring the rights to the iconic brand name Andersen.
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A new structure for valuing private minority interests, ESOP valuation developments, and common traps of valuing physician practices are the topics of upcoming webinars.
Time to Abandon Discounted NAV? Why the Income Approach Should Be the Cornerstone for Valuing All Private Minority Interests (September 18), featuring Eric Nath (Eric Nath & Associates). In this webinar, expert Nath will systematically dismantle the conventional wisdom regarding the value of noncontrolling, illiquid interests down to its foundation and build a new valuation structure that is an integrated, defensible, real-world procedure that may be applied in almost all cases.
ESOP Regulatory Update: The DOL Fiduciary Process Agreement (September 24), featuring Jeffrey Tarbell (Houlihan Lokey), Theodore Becker (DrinkerBiddle), and James Staruck (GreatBanc Trust Company). Earlier this summer, in connection with the settlement of litigation brought by the DOL, an institutional trustee agreed to implement certain policies and procedures that have been commonly referred to as the "DOL Fiduciary Process Agreement." Join this panel of experts, featuring an appraiser (Tarbell), attorney (Becker), and an ESOP trustee (Staruck), for an examination of the current state of ESOP valuations.
Misapplications of Standard Valuation Methods in Valuing Physician Practices (September 30), featuring Timothy Smith (American Appraisal). In the pantheon of business appraisal subjects, physician practices stand alone. Join expert Tim Smith for a discussion on how standard valuation methods are often misused in this ubiquitous valuation assignment and the disastrous consequences of falling into these traps.
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