August 7, 2013 | Issue #131-1  

Looking for the elusive value of synergy in M&A

Synergy is an M&A phenomenon that looks great on paper but is usually a different story in practice. So valuation analysts need to be careful not to overvalue it.

Very slippery: “Typically, in the transactions we look at there is an overly inflated view of synergies,” says Jeff Litvak (FTI Consulting). “You may think that combining administrative departments and deriving synergies from complementary clientele would be easy,” he says, speaking at a recent BVR webinar. “But what you find is that they take time to realize, and sometimes they just never come to fruition—yet you paid for them.”

How much is paid? Buyers pay, on average, 31% of the average capitalized value of expected synergies to the sellers, according to recent research from the Boston Consulting Group.

Why not keep quiet about synergies and pay nothing to the seller? Because sellers anticipate the buyers’ synergies and demand to be paid for them. In addition, when cost synergies are announced, the market reacts favorably and boosts the value of the acquirer. Of course, this increase in value may vanish if the synergies don’t materialize, as is often the case.

The bottom line is that the value that is actually realized from synergy is most often much less than expected. Says Litvak: “The idea here is for buyers not to overpay for synergies.”

TAF proposal on control premium sparks
lively debate

On the BVR LinkedIn page, there’s a spirited discussion surrounding The Appraisal Foundation’s recent discussion draft on control premiums. “Control premiums for most [publicly traded] companies either do not exist or are quite small,” says the draft, The Measurement and Application of Market Participant Acquisition Premium, which is available on TAF’s website.

“I disagree emphatically,” says Lance Hall (FMV Opinions), who started the LinkedIn discussion thread. He’s written a 5,000-word rebuttal in the form of a letter to TAF, which can be accessed from the BVR LinkedIn page.

A slew of comments have rained down from those who agree with Hall and those who don’t. “Your letter is well crafted and loaded with clearly stated rebuttals,” says one commenter. But another says: “Do you have any evidence or rigorous logic to support your theory?” Another commenter pointed to Dr. Aswath Damodaran’s paper on the subject, which states the value of control in and of itself (apart from ability to improve NPV) is "zero or negligible." Hall responds: “Unfortunately, Dr. Damodaran has it very, very wrong.”

Read for yourself: Valuation professionals should read Hall’s letter and join in the discussion. We also are interested in hearing how TAF responds. The organization solicited comments on the discussion draft and announced that it would respond accordingly.

AICPA backs bills to shield appraisers from
ERISA liability

The AICPA has come out in support of legislation introduced in the House (H.R. 2041) and Senate (S. 273) that would prohibit the Department of Labor (DOL) from changing its definition of “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA) to include appraisers of employee stock ownership plans (ESOPs). The legislation was proposed because the DOL’s pending reissuance of its 2010 proposal is likely to include a fiduciary duty for appraisers of employee benefit plans.

Wrong approach: The AICPA says that, instead of the DOL expanding the definition of “fiduciary,” rules should be implemented to ensure that only qualified individuals prepare valuations for benefit plans—and that they follow recognized valuation standards. That’s the approach other agencies have taken regarding the regulation of appraisers.

“The DOL proposal is a draconian response to a very small number of deficient ESOP appraisals,” writes AICPA president and CEO Barry C. Melancon in a letter to the relevant House and Senate committees.

Learn more: The DOL proposal, along with other factors, has made pension and ESOP valuations a minefield for appraisers. Listen to the recording of a recent BVR webinar, Valuation and ERISA Fiduciary Liability: Traps for the Unwary Appraiser.

Don’t get too creative in court

New approaches and methodology in business valuation should be encouraged to advance the profession. But be careful about bringing a new idea into a court setting. A judge may not be so receptive.

Too off-beat: An expert valuing goodwill explained to a court that the methodology he used was “self-designed” and that he knew of no other economist or business valuation expert who had ever used it. The court, while acknowledging that the expert was otherwise qualified, ruled that the method was “too innovative and new to be given any weight.”

Read the digest of In re: American Suzuki Motor Corporation, 2013 Bankr., LEXIS 2276 (June 4, 2013) in the September issue of Business Valuation Update. The full opinion of the case will be available soon at BVLaw.

Hospitals on shopping spree for physician practices

More than 50% of hospitals plan to acquire a physician practice this year, compared to 44% last year, according to a new worldwide survey from healthcare staffing company Jackson Healthcare. Driving the decision to acquire practices is the need to build, or maintain, a competitive advantage and attract physician recruits. Specific targets for acquisition include family practice, general internal medicine, ob-gyn, and other primary care providers, according to the survey.

Understanding value: A recent special report, Physician Practices: Key Value Drivers in a Changing Environment, discusses the drivers of physician practice value, poses critical questions to ask and analyses to undertake for a successful acquisition, and shares lessons learned from industry peers.

Cost of capital: things are changing

Practitioners, academics, courts, and the economy are changing long-standing views on how to determine and use the cost of capital. Find out more on August 8 in the  Advanced Workshop on Cost of Capital with BV “hall of famers” Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) and Ron Seigneur (Seigneur Gustafson). Beginning with the intriguing statement “Cost of capital: the more you know, the more you know you don’t know,” they will present an intensive, four-hour, 176-slide masterpiece of a discussion of all things cost of capital.

Lattice model mystery solved

Despite their many uses, lattice models remain a neglected and misused tool in the appraisal process. In the August 15 webinar, Lattice Modeling for Equity Solutions, experts David Dufendach and Candice Bassell (both Grant Thornton) will remove the mystery from how to apply these powerful analytical methods to equity analysis. Through a review of lattice models in general, and equity-based models in particular, Dufendach and Bassell will show attendees how to apply these techniques properly to arrive at a sound and defensible conclusion.



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Copyright © 2013 by Business Valuation Resources, LLC
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