BVWire Issue #180-3 | September 27, 2017


Insolvency case turns on reasonableness of management projections

Management projections have attracted extra scrutiny in a number of recent court opinions, particularly in the appraisal context. But recently questions as to the reasonableness and reliability of management projections were at the heart of a complex bankruptcy case in which the trustee argued constructive fraud related to a merger that led to a company that filed for Chapter 11 bankruptcy just one year after its formation.

Refreshed projections: In 2007, Basell, a Europe-based petrochemicals company worth billions of dollars, moved to acquire an American refining company, Lyondell, to create a global petrochemical and refining company. Lyondell was the largest U.S. producer of ethylene and recently had acquired full ownership of a large oil refinery in Houston. Lyondell typically prepared a bottoms-up long-range plan, but, during the merger discussion, its CEO ordered “refreshed” projections that included an additional $1.6 billion in terminal EBITDA for the company’s refining business. Ostensibly, the promising performance of the Houston refinery prompted the change. Lyondell provided the refreshed projections and other nonpublic due diligence material to the buyer entities, their advisors, and a group of major-league banks for analysis and financing. The banks, performing a series of valuations, committed to financing the merger.

Although it became clear in fall 2007 that Lyondell would miss its third- and fourth-quarter earnings projections by a wide margin, the merger closed on the original terms in December 2007. Throughout 2008, unplanned events confronted LBI, including volatility in the price of oil, a huge crane collapse at the Houston refinery that caused fatalities and prolonged outages, and two hurricanes. Also, in fall 2008, the national and global economies began to crumple. In January 2008, LBI filed for Chapter 11 bankruptcy.

The litigation trustee sought to claw back about $12 billion paid as merger consideration by advancing a host of legal theories. He “threw the kitchen sink at the Defendants,” the court said. The crux of the trustee’s argument was that the refreshed projections were manufactured to extract a higher sales price for Lyondell. On key dates, the merged entity was insolvent under the applicable financial condition tests.

The court rejected the trustee’s argument in an 80-page decision. It found the projections aligned with the relevant entities’ historical performance, contemporary industry studies, as well as extensive financial analyses by the banks that funded the merger. The latter institutions were “sophisticated investors with the most intimate knowledge of [LBI’s] business plan and capitalization” and their support showed they “had confidence in the company’s future.” Further, defense expert testimony confirmed that the company was viable on the merger date. LBI’s “titanic collapse” was the result of unforeseen events, the court concluded.

A digest of Weisfelner v. Blavatnik (In re Lyondell Chem. Co.), 2017 Bankr. LEXIS 1097, and the court’s opinion will be available soon at BVLaw

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Discounts and premiums vex report writers the most

Valuation experts say that the area of the valuation report that discusses discounts and premiums is the one they struggle with the most, according to an ongoing survey by Rod Burkert (Burkert Valuation Advisors). Four out of 10 (42%) respondents cite this area as the most problematic for them, followed by the economic overview/industry outlook section, cited by 24% of respondents. Other areas respondents struggle with are the sections that deal with valuation approaches (14%), company background (10%), and synthesis/conclusion (10%). “On one hand, the large discounts and premiums percentage is not surprising,” says Burkert. “On the other hand, given all of the articles, books, and CPE sessions discussing this topic, people aren’t getting it.”

Burkert has been conducting this survey over the past four years by polling attendees in the report writing webinar series he has been conducting for the National Association of Certified Valuators and Analysts (NACVA). The full results of his survey along with his commentary are in the October issue of Business Valuation Update.

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Section 2704 cliffhanger

The deadline has passed (September 18) for the Treasury to report to the president its recommendations on significant tax regulations, which includes the controversial proposed regs under Section 2704. But a Treasury official says that there is no set date for when the report will be released to the public. She did confirm, however, that it will be made public at some point, according to EY’s Tax Insights.

Back in April, President Trump signed an executive order calling for the Treasury to review all “significant tax regulations” issued on or after Jan. 1, 2016, to identify those regs that impose an undue financial burden, add undue complexity, or exceed statutory authority and to recommend specific actions to mitigate the burden the regulations impose. The proposed Section 2704 regs, which are designed to curb estate valuation discounts, are included in this group and may be modified or withdrawn.

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Monkey selfie copyright lawsuit settled

A photographer will pay 25% of future royalties on selfies a monkey took to animal welfare charities. This is in a settlement between David Slater, the photographer/copyright owner, and PETA, which brought a lawsuit on behalf of the monkey. The animal rights group was seeking to extend copyright ownership to monkeys and all other nonhuman creatures.

Bananas: PETA sued on behalf of the monkey in 2015, seeking financial control of the photographs for the benefit of the monkey named Naruto that snapped the photos with the photographer’s camera. A district court ruled that an animal could not own a copyright, and PETA appealed to the 9th Circuit, which was in the process of considering the appeal.

“PETA and David Slater agree that this case raises important, cutting-edge issues about expanding legal rights for nonhuman animals, a goal that they both support, and they will continue their respective work to achieve this goal,” say PETA and Slater in a joint statement.

BVWire could not locate any public statement from the monkey.

Workshop today: Join us today and go beyond the theory of the valuation of intangibles in a special four-hour workshop that will present an illustrative case study that shows the diversity and complexity of this asset. This special workshop will be conducted by experts who practice daily in the field: Michael Pellegrino (Pellegrino & Associates LLC), R. Christopher Rosenthal (Ellin & Tucker), Ron Laurie (Inflexion Point Strategy LLC), and Edgar Baum (Strata Insights). The workshop is Understanding Intangibles: Classification, Identification and Valuation—A BVR Web Workshoptoday, September 27, at 10:00 a.m.-2:00 p.m. PT/1:00 p.m.-5:00 p.m. ET.

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Finalists for M&A valuation firm of the year

The M&A Advisor has announced the finalists of the 16th Annual M&A Advisor Awards. Six firms have been named as finalists for Valuation Firm of the Year: Generational Equity, VRC/Valuation Research, Berkeley Research Group, Withum, CohnReznick, and MPI. Winners will be announced at the 16th Annual M&A Advisor Awards Gala on Monday, November 13, at the Metropolitan Club in New York City. For a detailed list of the award finalists, please click here.

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A new source provides a slew of transactions to Pratt’s Stats

BVR is excited to announce that one of the largest business brokerage firms will contribute its private-company transaction data to the Pratt’s Stats database. Some of the data have already been reviewed, processed, and are currently online for users.

Murphy Business & Financial Corp., one of the largest and most successful business brokerage firms in the United States and Canada, has contributed information on approximately 2,000 sold private businesses to Pratt’s Stats, of which about 600 have already been processed. The processed data have an average revenue figure of about $900,000 and an average selling price of around $500,000, though the data contain some multimillion-dollar transactions. About 38% of the transactions are in the services sector, while about 30% are in retail, and about 10% and 7% are in construction and manufacturing, respectively. In addition to the historical closed deal data, Murphy will provide biannual updates in the future.

“This truly is a win-win for everyone involved,” says Adam Manson, director of valuation data at BVR. “Pratt’s Stats users will receive access to additional data sets not previously included in the database, and Murphy offices now receive unfettered access to Pratt’s Stats. Murphy is a respected professional business brokerage firm that provides a wealth of value to its clients. We look forward to continuing this partnership for years to come.”

If you are an intermediary and would like to contribute transaction data to Pratt’s Stats, please visit our Contributor Network page. If you are a multioffice intermediary firm or association and would like to contribute transaction data in exchange for enterprisewide access, please contact

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New resource helps unravel the mystery of cost of capital

At the core of the concept of cost of capital is the pricing of risk. It is still a relative mystery as to how the market prices risk, so estimating the cost of capital remains a major challenge. Fortunately, research continues on this matter to give us a better understanding of this complex topic. This is the focus of the new Cost of Capital Reader, 2017-2018 edition: to give you the most recent discussions and advances in estimating cost of capital. If you check out the Table of Contents, you’ll see the most recent information BVR has from publications such as the Business Valuation Update, Duff & Phelps Update, and more. Did you miss any new research papers or other publications? A bibliography highlights the current thinking and controversies on cost of capital. There’s also a news roundup to make sure you haven’t missed any new developments.

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Global BV News

IVSC meeting in Mexico City will be held

The Annual General Meeting of the International Valuation Standards Council (IVSC) will go on as planned in Mexico City October 1-4. In the wake of the tragic earthquake in Mexico, the word is that the city is getting back to normal, the airport is operational, and the venue for the meeting is unaffected. For those individuals who are unable to attend, the IVSC will provide updates following the meeting. Continuing with the event as planned helps the area return to normal and demonstrates solidarity. Of course, everyone’s thoughts are with the victims of the tragedy.

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Step-by-step way to estimate a global WACC

At a recent free BVR webinar, Jim Harrington and Carla Nunes (both with Duff & Phelps) went through an international case study using data and models in the 2017 Valuation Handbook: International Guide to Cost of Capital. They are co-authors (with Roger Grabowski) of the Duff & Phelps Valuation Handbook series.

One of the first decisions a valuation analyst needs to make is whether to reflect country risk in the projected cash flows or in the discount rate (or a mixture of both). Ideally, incremental country risks should be incorporated directly into the projected cash flows. But the reality is that it can be very difficult to develop projections in an international setting due to a lack of reliable data, the speakers say. That’s why most analysts end up adjusting the discount rate when attempting to capture country risk.

Several international cost of capital models are available, but it can be challenging for practitioners to find the appropriate underlying inputs. Developing robust inputs can be time-consuming and cost prohibitive for many valuation practitioners, and simply selecting an ad hoc country risk premium to the discount rate is no longer acceptable, they say. Your valuation conclusions will be more defensible if you can corroborate your estimated country risk premium with third-party sources, they say.

Duff & Phelps team members conducted a two-day free webinar series for BVR: Day 1 was on a U.S. case study on developing a WACC, and Day 2 presented a case study from the perspective of a U.S. firm acquiring a firm in Brazil.

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BV movers . . .

People: Michael J. Garibaldi has formed a new firm, the Garibaldi Group, an accounting and financial management firm that offers business and professional practice valuations. The firm is located in Garden City, N.Y. … Mark S. Warshavsky, partner-in-charge of the Business Valuation & Litigation Services Group at Gettry Marcus (Woodbury, N.Y.) has been admitted as an arbitrator/mediator to the American Arbitration Association’s (AAA) National Roster of Arbitrators … April Harry is the new chief operating officer of Warren Averett CPAs and Advisors, a top 35 accounting firm with offices across the Southeast … Jana Cinnamon has been promoted to chief operating officer of Abdo, Eick & Meyers LLP; the firm is in the Twin Cities (Edina) and Mankato, Minn. At Dixon Hughes Goodman (DHG), Dennis McLister has been promoted to director in the DHG Private Equity and Transaction Advisory practice; he’s in the Tysons, Va., office.

Firms: Seattle-based Moss Adams LLP deepens its healthcare consulting practice by merging with Rona Consulting Group (RCG), a virtual firm with 28 healthcare consulting professionals across the country … Valuation Research Group (VRG), the international affiliate of Valuation Research Corp. (VRC), announced an affiliate agreement with Tanizawa Sogo Appraisal Co. Ltd. to offer global valuation and real estate services in Japan … Mauldin & Jenkins LLP expands its presence in the Southeast by merging with Derrick, Stubbs & Stith, a firm based in Columbia, S.C., effective October 1 … Apple Growth Partners (AGP) has been named one of Northeast Ohio’s 99 best places to work for the 10th consecutive year … Protegrity Advisors (Ronkonkoma, N.Y.) took home rookie of the year honors from the HIA-LI’s Business Achievement Awards event. The firm provides M&A advisory and business valuation services … Crowe Horwath LLP will combine with San Francisco-based Rowbotham International, a tax boutique with an international focus, effective October 30; four partners and 20 professionals will join Crowe.

Please send your professional and firm news to us at

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CPE events

Understanding Intangibles: Classification, Identification and Valuation- A BVR Web Workshop (September 27), with Michael Pellegrino (Pellegrino & Associates LLC), R. Christopher Rosenthal (Ellin & Tucker), Ron Laurie (Inflexion Point Strategy LLC), and Edgar Baum (Strata Insights).

Go beyond the theory of the valuation of intangibles with an illustrative case study that shows the diversity and complexity of this asset. This special workshop is conducted by experts who practice daily in the field.

Business Prenups, Relationship Counseling, and Corporate Divorce: Business Lifecycles and their Impact on Valuation (September 28), with Mark Zyla (Acuitas Inc.) and William Piercy (Berman Fink VanHorn).

This is a discussion on the factors that improve or detract from productive business relationships and the impact of those factors on the value of a business.

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In this issue:

Projection woes

Reporting troubles

2704 suspense

Monkey biz

M&A valuators

Pratt’s Stats boost

Cost of capital help

Global news

BV movers . . .

CPE events

LinkedIn discussions


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