Reversal of fortune:
$1.45 billion verdict vacated for lack of proper valuation
When Morgan Stanley was ordered to pay $1.45 billion to investor Ronald O. Perelman for fraudulently inducing his purchase of Sunbeam (through his Coleman camping company), it was the largest jury award to an individual plaintiff in 2005 according to Lawyers’ Weekly. The verdict caused a major brouhaha in legal and financial circles—and not just for the numbers, which included $850 million in punitive damages, but also because the jury was permitted to make adverse inferences regarding Morgan Stanley’s hiding over 60 million pages of evidence, including systemic destruction of emails (which the bank attributed to a “computer glitch.”)
But at the end of just last month, the Florida Court of Appeals reversed the verdict. Without mentioning the destroyed emails, the 2-1 panel said that Coleman failed to prove the "fraud-free" value of Sunbeam's stock on the transaction date. Instead, Coleman had said the Sunbeam stock was essentially worthless, given the level of fraud, and produced an expert valuation of Sunbeam asserting an expected value based on its average share price from the time the deal went public until it closed. (Sunbeam’s stock plummeted after the transaction, and within three years the company went bankrupt.)
A strong dissent would have “allow[ed] the deceived victim of fraud to hold a defendant to his lies.” Otherwise, the majority’s holding “will countenance…a perpetuation of fraudulent financial statements.” With so much at stake in the case, a rehearing and appeal to the Florida Supreme Court are all but certain. For a copy of the case, click here.
IASB standards for small to mid-size companies
Last week the International Accounting Standards Board (IASB) issued a staff overview of the exposure draft of International Financial Reporting Standard (IFRS) for Small and Medium-Sized Entities (SMEs). While the Board has not yet approved the overview, it constitutes “a high level introduction” to the proposals. The project, initiated over three years ago, is developing an IFRS to meet the particular needs of SMEs, entities that: (1) do not have public accountability; and (2) publish general purpose financial statements for external users such as vendors, creditors, etc.
Among other goals, the IFRS would provide simplified, self-contained standards for SMEs, allowing the Board to shrink its guidance by over 85% (compared to full IFRSs); it would enable users to compare an SME's financial performance, financial condition, and cash flows while reducing the burden of preparing SME financial statements. The standards would also “provide emerging economies with an internationally recognized basis for financial reporting, helping to significantly raise standards in many countries whilst offering a clear upgrade path to full IFRS compliance.” For a copy of the exposure draft, click here. Comments are due by October 1, 2007.
What value applies to buy-out of international PE fund?
An international private equity fund has two classes of stock (A & B): A is located in one continent while B is located in another. Previously, the investment strategy has been a "silo" approach; however, the fund wants to adopt a new strategy merging A and B into a single class of stock (C) that will be tied to investments in both far-flung locales.
An exchange price has been determined (A & B into C) through management's valuation analysis, and all shareholders agree but one—who only disputes the new strategy, not the price. This sole shareholder has asked to be bought out at the exchange price, which requires a fairness opinion because: (1) the company is a 501(c)(3) organization; (2) the dissenting shareholder is selling his shares to another 501(c)(3) organization; and (3) the shareholder is also a member of the Board of Directors (related party).
In this context (fairness opinion versus appraisal rights), a subscriber asks, “is there some Delaware or Tax Court case law that supports the exchange price as fair market value?”
To send your comments or analysis, please email the editor; we’ll publish the responses in an upcoming edition of the ‘Wire.
Entrepreneurs signaling slowdown in M&A
Owners and senior managers of mid-market private companies indicate that 2006 could be the year the M&A bubble burst, according to the just-released 2007 DAK Group/Columbia Business School Study. For the first time since 2002, responding managers say they expected their company revenues to decline, and the number planning to sell in the coming year dropped to 27% (from a high of 33% in 2005). “Ironically, this trend shift comes on the heels of the best year in M&A since 2000,” says New York Business Journal, “and it contradicts the general belief by experts and practitioners that signs for continued M&A growth remain positive.”
Other downward indicators: More than half of respondents cited general economic conditions as the primary obstacle to growth, and the number expecting to decrease 2007 capital expenditures more than quadrupled, from 4% in 2006 to 19% now. Less than three-fourths believe their businesses increased in value in 2006 (compared to 79% in 2005), while only 75% believe that this year will boost their business values (down from 87%).
Industry research to boost business plans
“It's easy [for entrepreneurs] to miss financing opportunities by not including such details as a thorough market analysis, the sales volumes necessary to meet projections, an industry trends analysis, or a thorough accounting for what's happening within competing companies” on their business plans, says a current Inc.com posting.
Business appraisers, too, can boost the reliability of their reports by including reliable and informative industry/economic analysis sources that will hold up in court. By using Integra’s 5-Year Industry Data Reports and First Research, Inc.’s Industry Profiles, business valuators can provide comprehensive industry and market coverage spanning a vast array of industries. These tools can also supply growth rates, benchmarking data, business trends, and industry forecasts. To stay on the cutting edge of industry and economic research, go to BVMarketData.com.
New appointment at the FASB
Lawrence W. Smith has just been appointed to the Financial Accounting Standards Board for a five-year term beginning July 1, 2007. Smith will succeed Edward W. Trott, who retires on June 30, 2007. Currently serving as Director of Technical Application and Implementation Activities and Chairman of its Emerging Issues Task Force, Smith joined the FASB in 2002; for more on his new appointment, click here.
Mercer Capital launches new and improved website
Mercer Capital (Memphis, TN) has just revamped its website, complete with better navigation, new features—such as a valuation “Toolbox” specifically designed for attorneys, business owners, and financiers—and easier accessibility. Check out the online improvements from one of the more technologically savvy members of the BV community at www.mercercapital.com.
2007 symposium to support women in accounting
Although the event focuses on female accounting professionals, including BV partners and practitioners, it also welcomes chief operations officers, human resource professionals and firm program leaders—in short, anyone interested or involved in building a culture conducive to advancing female members. It’s the 2007 Forum of Women in Accounting, and this year its agenda includes several sessions on developing specialty niche practices and brands, and how women can take (or others can support their efforts to take) a leadership role in the firm and the profession. This year’s forum meets on May 15-17 in Las Vegas, and is sponsored by Crosley + Company (see BVWire # 54-4), the AWCPA (American Woman’s Society of Certified Public Accountants), and The Advisory Board. For more information, click here.