December 4, 2013 | Issue #135-1  

Step Zero surprise in new Duff & Phelps study

When Step Zero was introduced in 2011, it was expected that many companies would adopt its simplified approach to testing for goodwill impairment. That hasn’t happened. Over 70% of companies are not using Step Zero, but are opting to use the traditional Step One. That’s according to the newly released 2013 Goodwill Impairment Study from Duff & Phelps and the Financial Executives Research Foundation.

Step Zero is a qualitative assessment to determine whether there is impairment to goodwill that gives companies the chance to sidestep the more onerous Step One and Step Two processes of traditional impairment testing.

“Counter to industry predictions, the majority of our clients continue to perform the quantitative test [Step One],” said Greg Franceschi, Duff & Phelps’ managing director, in a release.

Other key findings in the study:

  • U.S. companies recorded $51 billion of goodwill impairment in 2012, a 76% increase from the $29 billion reported in 2011 (highest impairment level since those reported as a result of the financial crisis in 2008);
  • Just three industries—information technology, industrials, and healthcare—booked two-thirds (67%) of the goodwill impairment recorded in 2012;
  • Goodwill impairments were heavily concentrated, with 47% attributable to the three largest impairment events reported in 2012; and
  • While overall deal volume declined in 2012, deal value increased 30%, leading to $211 billion in additional goodwill recorded on balance sheets.

How to optimize the attorney-expert relationship

Attorneys and valuation experts need each other, but that kind of dependency doesn’t necessarily make for a successful relationship. Attorneys at the recent AICPA Forensic & Valuation Services Conference in Las Vegas provided tips for turning the collaboration into a win-win situation for both sides—and their clients.

Read the documents. Make sure you read all of the documents the attorney provides. At deposition, an expert’s apparent unfamiliarity with a document he or she received, and should know, embarrasses expert and attorney alike.

Know Fed. R. Evidence 26. Broadly speaking, it limits disclosure to any “facts or data” the expert considered in preparing his or her report. It also prevents the opposing attorney from requesting draft reports or other disclosures made in the preparation for trial, with the exception of information related to the expert’s compensation, to facts, or to data that the attorney provided to the expert, as well as assumptions on which the expert actually relied in formulating his or her opinion.

A useful paper discussing the scope of Rule 26 (as amended in 2010) from the American Bar Association cautions that this degree of protection still leaves wide room for inquiry, which a skillful opposing attorney will want to exploit.

States have their own discovery rules, making it critical that the expert know whether the matter is a federal or state court case.

Disclose the information. An expert’s timely disclosure to the attorney of all prior expert testimony and all prior publications enables the attorney to ensure that the expert did not previously testify in a manner that contradicts the theories underlying the current case.

Put your best foot forward in deposition. The way an expert performs at a deposition may make or break the attorney’s case. Knowing that a convincing performance may assist in reaching a settlement should guide the expert in how to prepare the report. Consider yourself an educator.

To help the expert succeed, and strengthen the case, the attorney would do well to prepare—not coach—the expert for deposition.

Seek and find lost profits. Attorneys expect damages experts to dig deep. Just because a client company (plaintiff) is still profitable following the defendant’s wrongdoing doesn’t mean it has no claim to lost profits. It’s the expert’s job to talk to the company’s key financial people and explore whether there could have been more growth “but for” the defendant’s conduct.

Conversely, if you are working on the defendant’s case, make sure to account for all outside factors that figured into the plaintiff’s loss.

Mention causation. A plaintiff’s damages expert expressly needs to tie the defendant’s wrongdoing to the loss the plaintiff sustained, even if the attorney will present the legal theory of causation. Readers may remember that Nancy Fannon (Meyers, Harrison & Pia) made the same point here in BVWire earlier this year.

Oil and gas M&A activity to heat up

In the energy sector, the international oil and gas market remains primed for ongoing merger and acquisition activity, according to a new white paper from Merrill DataSite (free registration required). It says: “As existing fields mature and decline, growing demand is spurring ongoing exploration and development in locations throughout the world.” The paper also covers global M&A hotspots, how the North American expansion is sparking M&A activity across industries, and how worldwide reserves may fuel a future boom.

In terms of valuation, see the new BVR special report, Guidance From the Experts: Valuing Oil and Gas Entities, which digs into the unique characteristics and considerations for valuing companies in this industry.

Mock trial puts valuation experts in the hot seat

At the recent 2013 IRS Valuation Summit, a mock trial was presided over by Judge Mark Holmes, of the real U.S. Tax Court, reports David M. Rosenthal (Curtis-Rosenthal Inc.), who co-chaired the conference. The idea was to present in a dramatic and entertaining way the wrong way and the right way to conduct oneself as an appraiser expert witness.

Bob Dietrich (Navigant Capital Advisors), co-chair of the conference, prepared the mock trial presentation. In an initial presentation of the valuation experts in the hot seat at the trial, Stephen Roach (Jones, Roach & Caringella Inc.) did everything wrong as the inept appraisal expert witness presented by the taxpayer’s attorney, David Holtz (Holtz, Slavett & Drabkin). After a brutal cross-examination, the IRS’s attorney, Gary Slavett (Holtz, Slavett & Drabkin), made a motion for the “court” to strike the appraisal report from evidence based on a Daubert challenge. Judge Holmes deliberated and ruled in favor of the IRS, granting the Daubert challenge and striking the faulty appraisal report.

In a second presentation of the same trial, a much better prepared (and better dressed) Roach showed how a professional appraiser prepares an appraisal and testifies before U.S. Tax Court. This time around, the taxpayer’s attorney was able to find fault with the appraisal prepared by the IRS’s appraisal expert, Frank Molinari (Internal Revenue Service), while the taxpayer’s expert held up very well under cross-examination. After thorough consideration of the evidence and testimony, this time Judge Holmes ruled in favor of the taxpayer, demonstrating the importance of having a professional and well-prepared expert appraiser.

The December issue of Business Valuation Update has additional coverage of the 2013 IRS Valuation Summit, which was presented by the Southern California Chapter of the Appraisal Institute and the CFA Society.

Updated Pratt's Stats Analyzer has better granularity

In response to input from subscribers, BVR has updated the Pratt's Stats Analyzer to create better granularity in the data population. A new percentile option gives users the ability to view or select a statistical measure above or below the median. Also, the 10th, 25th, median (50th), 75th, and 90th percentile values are calculated for the other summary financial figures (including income statement values, balance sheet values, and financial ratios). This is designed to give users better insight into the population of transactions in their comparable group and also allows users to compare their subject’s financial ratios to the population.

This new update follows on the heels of Pratt’s Stats surpassing 20,000 transactions, which further cements its position as the leading private company merger and acquisition (M&A) transaction database. For more information, click here.

Reminder: Help out with a survey about goodwill impairment

BVWire announced in the last issue that researchers at the Albers School of Business and Economics at Seattle University are conducting a research project on the important issue of fair value judgments. Please put aside about 20 minutes of your time to take a survey that entails reading a brief case and responding to questions. This project is a valuable contribution to existing research, and the researchers intend to share the results with the business valuation community as well as publish the results in an internationally recognized academic journal. To participate, click here. Thanks for your help!

Seeking Alpha in divorce valuations

Equitable distribution in divorce requires apportioning active and passive appreciation in marital estate value during the course of the marriage. Ashok Abbott, Ph.D., will present a session, Seeking Alpha: Apportioning Active and Passive Appreciation in Equitable Distribution Actions in Divorce, at NACVA’s 2013 Advanced Matrimonial Litigation Symposium in Las Vegas December 13-14. This presentation analyzes the current practices and introduces a statistically rigorous measure (Jensen’s Alpha) that has been used in attribution of fund-manager performance to financial analysis in divorce.

Upcoming CPE events

Although winter’s on its way, there are hot valuation topics in upcoming webinars:

The Relief From Royalty Method (December 5): Learn how to harness the awesome power of the much maligned and misunderstood relief from royalty method. Featuring: Brent Sloan (Alvarez & Marsal).

Advanced Workshop on Fractional Interest Valuation (December 12): This intensive four-hour event features in-depth case studies and live examples exploring how to properly assess divided and undivided interests in a variety of asset classes. Featuring: Dennis Webb (Primus Valuations).

The Use and Misuse of MGMA Data in Healthcare Valuation (December 17): In data provided by the Medical Group Management Association (MGMA), appraisers have a powerful tool for assessing the compensation, performance, and reimbursement of medical practices. Find out how to put it to proper and effective use. Featuring: Timothy Smith (American Appraisal) and Meghan Wong (MGMA). Part 12 of BVR’s 2013 Online Symposium on Healthcare Valuation.


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