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April 23, 2013 | Issue #127-4  

TAF issues new discussion draft on control premiums

As part of its ongoing efforts to develop best practices for the appraisal profession, the Appraisal Foundation has issued a new discussion draft, The Measurement and Application of Market Participant Acquisition Premiums. This draft is from TAF’s Third Working Group, focusing on premiums in fair value for financial reporting purposes.
New acronym: The title of the draft incorporates the new term developed by the working group for what has been known as the “control premium”: the market participant acquisition premium. MPAP is the premium paid by market participants to acquire a controlling interest in an enterprise. It represents the enhanced value that market participants expect to realize as a result of gaining control through, for example, enhanced cash flows and/or reduced risk. In that regard, MPAP is equal to the difference between: 1) the price that these market participants would pay for subject controlling interest (fair value); and 2) the fair value of the marketable noncontrolling interest in the subject enterprise.

The draft recognizes the need for a benchmark control premium analysis (such as the FactSet Mergerstat/BVR Control Premium Study), but this should be used as a secondary or corroborating analysis. The text of the draft includes the following statement: “Exclusive reliance on observed transaction premiums without careful analysis of the subject entity’s relative financial performance, valuation multiples and other metrics can result in an unreliable fair value measurement.”

Written comments on the draft are due by June 14.

Small audit firms trip up on fair value, impairment

Audit firms that handle 100 public companies or fewer are having trouble verifying fair value measurements and the impairment of intangible and long-lived assets, reveals a new report from the Public Company Accounting Oversight Board.

Overall, 44% of the audit firms inspected during the 2007-2010 period had at least one "significant audit performance deficiency" compared with 61% in the 2004-2006 period. While the rate of deficiencies declined, it held steady during 2011.

Slipups: In one instance, an audit firm failed to substantiate the way a company valued restricted common stock issued to execs as part of their compensation packages, according to the report. In another case, an auditor fell short in testing the reasonableness of the fair value estimate for a defined contribution plan's investments. Another audit firm did not look beyond the client’s own documentation concerning the impairment of long-lived assets. It should have tested the assumptions and methodology used by the client and also corroborated the valuation using independent sources, says the report.

Not only small audit firms have trouble with these issues. In a previous report, the PCAOB found that three of the largest audit and accounting firms are also having trouble testing for fair value measurements (see the January 3 BVWire).

Court validates expert’s ‘aggressively skeptical’ disaggregation analysis

In a post-trial bid to upset the outcome, Vivendi argued to the U.S. District Court for the Southern District of New York that no jury “should have been permitted to base a verdict” on the unreliable loss causation and damages testimony Liberty’s expert gave. In particular, Vivendi took aim at the expert’s disaggregation analysis.

Liberty sued Vivendi, alleging Section 10(b) securities violations and breaches of warranties related to a merger agreement. Vivendi, it claimed, had inflated the value of its stock, which it used in 2001 to acquire USA Networks from Liberty. Subsequent revelations showed that Vivendi was in a liquidity crisis, causing its stock to fall in value. In June 2012, a jury found Vivendi liable on all claims and awarded Liberty 765 million euros ($999 million).

In its motion, Vivendi claimed Liberty’s expert had failed to prove loss causation—the cornerstone of proving damages in complex securities claims. Under this principle, Liberty could only claim damages for declines in Vivendi’s stock price that resulted from Vivendi’s misconduct.

The expert’s disaggregation analysis separated the effects the fraud (“materialization” events) had on the stock price from the effects that non-fraud-related factors (“confounding” events) produced. He examined 166 trading days between the date the merger agreement was signed and the date of the final alleged materialization event to isolate the effects of the fraud. After reviewing 16,000 news releases and thousands of analyst reports, he carved out nine days during which “everything had to do with the fraud,” he said.

Vivendi criticized the expert for ignoring what it said were several items of negative nonfraud-related news during those nine days that should have been figured into his damages calculation. But the expert had testified that he didn’t consider those news items to be material.

The court said that just because the expert “took an aggressively skeptical view of the significance of nonfraud-related news” on the nine days did not render his testimony unreliable. Also, the jury could have found that none of the confounding events Vivendi proposed were non-fraud-related and also affected Vivendi’s share price. The court let the award stand.

Find a complete discussion of the court’s decision on Liberty Media Corp. v. Vivendi Universal, S.A., 2013 U.S. Dist. LEXIS 19485 (Feb. 12, 2013), in the May Business Valuation Update; the opinion and a digest related to the parties’ pre-trial challenges are also available at BVLaw.

M&As in healthcare services are on the rise

Deal activity in the healthcare sector was strong in 2012, according to a new study from Irving Levin Associates, which covers eight sectors of the healthcare services merger and acquisition market. The Health Care Services Acquisition Report, 19th Edition, reports an 11.9% increase in deal volume from 2011 to 2012, as economic growth continued. The new report provides detailed transaction sheets plus a discussion of market trends, size and composition of the market, and prices paid. Sectors include hospitals, managed care companies, physician medical groups, behavioral health companies and labs, MRI and dialysis centers, and more. Download a free abstract here.

CPA firms eye more valuation services

In the face of anemic growth, CPA firms will likely move more into ancillary services, including business valuation.

Annual revenue growth for the U.S. accounting services industry, including CPA firms, is expected to be 1.3%, to a total of $72.9 billion, according to a report from research firm IBISWorld. Over the next five years, annual growth is estimated at 1.9%.

To counter this tepid growth, accounting professionals have several options. One is to branch off into areas that require accounting expertise, such as business valuation, litigation support, and forensic accounting. Another option is to develop a niche market—focus on a specific industry and expand into consulting services to help clients boost profitability. In the area of valuation, CPA firms can also help business buyers and sellers determine values. Another area where valuation can come into play is dispute resolution services, valuing property in divorce settlements. Valuation of property or businesses in a decedent’s estate is another area CPA firms can target.

Hot valuation topics at ASA’s May 3 Philly confab

Normalization adjustments, international cost of capital, and what’s new with transaction data resources are the topics of focus at the annual Business Valuation Seminar of the Philadelphia Chapter of the American Society of Appraisers (ASA) on May 3. This one-day seminar will earn attendees eight continuing education credit hours and includes networking refreshment breaks as well as a buffet lunch.

May issue of Business Valuation Update available now

A number of thought-provoking articles are in the May issue of Business Valuation Update:

  • “Beware of Distortions of Market Multiples During a Recession” (Alina Niculita). A mini case study based on an actual valuation of a closely held firm in the midst of the recession and a market collapse.
  • “Unique Factors That Affect the Valuation of Home Healthcare Service Firms.” Caught up in the frenzy of change in the healthcare industry and a massive regulatory framework, home healthcare service firms are a challenge to valuation experts. Alan B. Simons (CliftonLarsonAllen) sorts through all this and reveals the distinctive elements that affect the valuation of these firms the most.
  • “Despite Flaws, the Excess Earnings Method Is Alive and Kicking.” Jim Alerding (Alerding Consulting), who successfully relied on the excess earnings method in the recent Burnett v. Burnett case in Indiana, explains the method and addresses lingering questions about its usage.
  • “Where to Dig for the Value of an Oilfield Services Company” (Brad Edwards). Key value drivers are examined for the oilfield services industry, a bright spot amid a somewhat bleak global economic landscape. These firms are expected to see strong growth over the next five years.
  • “BV Firms Thriving Despite Slowdown From Heady Growth.” Preliminary results from BVR’s exclusive new survey reveals areas of growth at business valuation firms. However, several indicators suggest slower expansion going forward.

To read these articles—plus a digest of the latest court cases—see the May issue of Business Valuation Update.

Latest crop of CPE events

In Challenges in Estimating Cost of Capital in Healthcare, Part 4 of BVR’s 2013 Online Symposium on Healthcare Valuation, taking place April 30, experts Carol Carden (PYA GatesMoore) and Don Barbo (Deloitte Financial Services) examine the numerous and evolving challenges to estimating income streams and assessing risks in the healthcare industry.
On May 2, BVR welcomes Dennis Webb (Primus Valuations) for Valuing Real Estate Holding Companies: What to Do When Real Property Is the Business, an in-depth look at the intersection of real property and business appraisal. Among other topics, attendees will learn best practices for assessing tiered and fractional interests in these entities.

Date change: Valuing Professional Practices, featuring Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) has been moved to Wednesday, May 8 (previously April 25).
Do you know how recent market activity affects the cost of capital? Attendees at the May 16 Advanced Workshop on Cost of Capital, featuring Kevin Yeanoplos and Ron Seigneur (Seigneur Gustafson), will learn how current financial and economic events are impacting cost of capital determination. For a full agenda of the emerging topics covered in this intensive, four-hour workshop, click here.

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Copyright © 2013 by Business Valuation Resources, LLC
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