February 9, 2011 | Issue #101-2 | Printer Friendly Version - Click Here Forward to a Friend

Be there for the Duff & Phelps Risk Premium Calculator debut

No doubt you’ve heard the buzz about the Calculator and its imminent arrival on the valuation scene.  As a special launch event BVR will host Jim Harrington, co-creator (with Roger Grabowski) of the Duff & Phelps Risk Premium Calculator on Friday, February 18 for a free, one-hour webinar tour and tutorial.  View Harrington’s live desktop as he demos this game-changing tool and showcases the 1-18 user inputs, the automatic risk free rate lookup and the robust output reports.  He will also, of course, address audience questions.  Attendees earn one CPE credit, too. To learn more and register for free click here.

Since we’re celebrating, we’d like to note that Roger and Jim were featured on Feb. 2nd by CFO.com, as lead analysts on the loss of value in Egypt as the country faces new political change.  Roger points out how exposed investment capital is, in particular, in the CFO.com analysis:

“Buying a company, expanding a plant, adding new product lines — capital expenditures are not like buying stock, where two days later you can flip it if things don’t work,” says Grabowski. “The real issue in emerging markets is that you’re committing money for long-term investments, but the risk mitigation — like currency hedging — is available only for the short term.”

Any one responsible for financial reporting faces another risk with international investments also needs to adapt their asset pricing, yield spread, or credit rating models to the individual situation. “One of the problems we see is that CFOs adopt one model that may not be appropriate for the circumstances in a specific country or for a specific investment,” Grabrowski told CFO.com.

CFO.com offers the following example of this problem:

Many cost-of-capital models require historical data on bond and stock market returns, which is used to get an idea of the returns investors demand in different markets. But some emerging countries don’t have stock markets, or their stock markets are not as diverse as those in developed countries, so one industry or company can have an inordinate impact on returns…One example is South Africa, where mining and minerals companies predominate.

“If I’m a food company in South Africa, the stock market data doesn’t help me see how my industry risks are being assessed in that country’s market,” Grabowski said.

How to explain the need for a 409A valuation

Petra Loer and Kurtis Handa (WTAS Valuation Services) recently wrote on VentureBlog “some entrepreneurs consider 409A valuations a necessary evil.” Some of their most common questions include:

  • How do I select an appraiser and why does it cost so much?
  • Why is my common stock worth so much?

So how do you explain to business owners that they may need a 409A valuation? Read their detailed answers to these questions here

Financial experts may be required before plaintiffs file a securities fraud allegation

In the fall-out of subprime fiasco, securities fraud cases are focusing on whether companies accurately wrote-down these “toxic” assets according to then-applicable fair value accounting standards (FAS 157 and 115). As BV analysts and fair value experts know, these fair value determinations are especially complex due to the lack of an observable market. Now a federal district court decision recognizes the “extreme technical difficulty” of these asset valuations. As a result, it is not enough for plaintiffs to merely list the asset values and then assert they were not reported at fair value. Instead, the complaint must explain why the listed values show the defendant failed to comply with applicable accounting principles and/or were beyond the range of reasonable values. In other words, a plaintiff “must take the pleaded facts, run them through the fair-value machinery, and show that one could not reasonably come up with the values that the defendants reported,” the court held.

For example, in this case the plaintiffs pointed to certain “red flags” of fraud—a decline in the ABX index, for example, and over $145 million of margin calls by secured lenders during the month of July 2007, alone. “The problem is that none of it tells me anything about whether the [reported] values . . . were justifiable,” the court observed. A “confidential witness” was ready to testify that the values were overstated, but the complaint failed to indicate that his opinion was competent, “or that his understanding of ‘value’ was in any way similar to the accounting concept of fair value,” the court said, in dismissing the case. The decision may prompt more securities fraud plaintiffs to enlist sufficient technical expertise at the earliest stages of litigation, including drafting an adequate complaint. Read the complete digest of Fulton Co. Employees’ Retirement System v. MGIC Investment Corp., 2010 WL 5095294 (E. D. Wis.)(Dec. 8, 2010) in the March 2011 Business Valuation Update; the court’s decision will be posted soon at BVLaw.

Reminder:  OPM workshop with Mark Zyla approaching

To learn more about OPM, join Mark Zyla (Acuitas, Inc.) on February 24 for the Advanced Workshop on Option Pricing Modeling teleconference. This intensive, four-hour event is the perfect opportunity to for any appraiser to hone their skills with these now-ubiquitous valuation techniques.  Join Zyla from anywhere via a live, interactive webcast as he leads attendees through discussion, case-studies, and hands-on examples.  For more information or to register, click here.

Rand Curtiss discusses the concept of “material change” for IBA

Last week on the IBA blog Rand Curtiss (Loveman-Curtiss Inc.) wrote that one of the most frequent questions he gets from business professionals is “how long does a valuation last?” His summarized answer is: “Valuations last as long as there are no material changes in their underlying assumptions and the implied value conclusion.”  Curtiss also provides a definition of “a material change:”

“A material change” has to be big enough (and sustainable) to affect the value conclusion significantly. For example, if we are valuing a business as of December 31, 2010 and using an equity discount rate build-up, the 20-year Treasury bond yield on the valuation date was 4.1%. One week later, it rose to 4.2%. If nothing else had changed regarding the business or its financial position in that short period of time, the increase in the discount rate of 0.1% (which I round off to the nearest percentage point anyhow) would have no effect on my value conclusion, and I would conclude the same one as of one week later. If the rate had risen a full point (which is rare) in that period, I would at least check to see if that made a big enough difference in the value conclusion to merit a change (if a revaluation was actually necessary).”

Read the rest of Curtiss’ article for a discussion of what could change a value conclusion.

Beware of relying on industry trend figures when valuing a community bank

Dwight Larsen and Matthew Becker (BankValue Advisory Services) told the audience at last week’s 21st  Annual Minnesota BV Conference that bank earnings are on the mend.

  • The banking industry reported an aggregate net income of $53.6B thru 9/30/10 ($1.3B in 2009,, $4.5B in 2008; $100B in 2007)
  • Industry ROA in 2010 3Q equaled 0.44%, up from 0.06% one year prior
  • 18.9% of institutions lost money in 2010 3Q, down from 27% last year
  • 63% of institutions reported year-over-year improvement in net income

However, “most of the improvement in aggregate earnings was concentrated among the largest banks,” Larsen says. “Community banks (less than $1 billion in assets) account for 91% of the total banks outstanding, but only 11% of industry assets and 10% of industry income.” As a result, take caution when looking at industry trend figures.

If you’ve likely to be doing any bank valuations soon, join expert appraiser Andrew Gibbs (Mercer Capital) and attorney Chip MacDonald (Jones Day) next week (February 17) for BVR’s webinar “Valuing Banks,” the latest installment of BVR’s Industry Spotlight Series. Through their 100-minute presentation Gibbs and MacDonald will address both classic considerations and emerging issues.  For more information or to register, click here.

The newest source for market data: eBay???

Forget Pratt's Stats.   Forget the IBA database.  Forget RoyaltySource.   Now there's a new way to find out what intellectual property is worth!

Traffic Sports USA, the Miami-based extension of Traffic Group, a Brazilian company, announced last week that they had acquired the rights to the Carolina RailHawks brand.  The RailHawks are a professional soccer team that will play in the North American Soccer League (NASL) in 2011.

What intrigues us is that the purchase of the team’s trademark (and logos, symbols, designs, etc.) and domain (www.carolinarailhawks.com) was accomplished over eBay, a public auction site, which lends some validity to the value established. The auction closed January 30, with a selling price of $14,999.

The four factors that impact the valuation of healthcare entities

Last week’s snow and ice in St. Louis didn’t stop Robert Cimasi (Health Capital Consultants) from presenting to the 21st  Annual Minnesota BV Conference attendees
on “Valuation in the Era of Healthcare Reform.”  Via a live telecast, Cimasi explained that not only the recent historical healthcare reform legislation and current economic conditions affect the valuation of healthcare enterprises, but also the “Four Pillars” of the healthcare industry: Regulatory, reimbursement, competition and technology.  All four pillars are in constant flux, and must be considered in all healthcare valuations.

Next week, BVR continues the dialog on healthcare valuation with its teleconference “Imaging Centers: Lessons from an Industry Expert,” part two of the twelve-part series Online Symposium on Healthcare Valuation.  On February 15, Douglas G. Smith (Barrington Lakes Group) will share his expertise on the valuation of diagnostic imaging centers, including insight on the complexity of payment schemes, organization structures, and regulatory oversight.  Click here for more information or to register.

Two resources for valuing A/E/P firms now available

ZweigWhite just published 2011 Valuation Survey of Architecture, Engineering, Planning & Environmental Consulting Firms. “How firms value their enterprises has far-reaching implications that impact both the firms and their shareholders on a financial, organizational and cultural level and is, according to ZweigWhite Valuation Consultant Tracey Jeffers, one of the most confounding decisions faced by privately held A/E/P and environmental consulting firms.” 

In addition, BVR’s training pack: Valuing Architecture & Engineering Firms, featuring featuring Ian Rusk and Michael O’Brien (Rusk O’Brien Gido + Partners) share their expertise on the unique valuation challenges inherent in valuing A/E/P firms.

Appraisers as fiduciaries? The ESOP Association submits comments to the DOL

Last week the ESOP Association submitted comments to the DOL on why the proposed regulation, “Definition of the Term Fiduciary” would harm private company ESOPs. The comments consisted of the following five main points:

  • Mandating any and all valuators of private company stock be fiduciaries will increase the cost of the valuation substantially
  • Establishing more efficient, less economically burdensome ways to ensure valuations are done properly without reducing ESOP companies’ profits is doable
  • This regulation will create potential lack of trustee prudent actions if the valuator services provider has an equal fiduciary role as a trustee
  • It will confuse the law on trustee decisions; and
  • It will create a big cost for ESOP companies arising from more private parties suing ESOP companies and their trustees in cases that currently Federal courts dismiss.

The ESOP Association’s comments are available hereBVWire will cover comments from some of the valuation associations next week.

Control premium data definitions available

During the recent BVR teleconference “The Use and Application of Data for Control Premiums and Discounts” Linda Trugman (Trugman Valuation Associates) emphasized the need to understand the sources of control premium data. BVR offers a free resource, “Difference between the Factset Mergerstat / BVR Control Premium Study™ and the Mergerstat Review,”  that helps outline most of these issues.

Business Valuation Wire expands coverage of CFAI and ACG this spring

BVWire will be covering the annual meeting of the Certified Financial Analyst Institute (CFAI) in May in Edinburgh…and also the Association of Corporate Growth InterGrowth 2011 meeting (ACG) in San Diego in March. Our goal of this expanded coverage is to make sure all our readers are kept apprised of professional trends in valuation at these large and key groups. Incidentally, about 16,000 people worldwide found out they passed the Level I CFA exam in December this week–congrats to our readers who are among those new CFAs!

Of course, we’ll continue our coverage of our core professional groups–the ASA, NACVA, IBA, CICBV, the AICPA’s FVS Section–and the new international IIBV effort, and much more.


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Copyright © 2011 by Business Valuation Resources, LLC
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View Complete Calendar

Imaging Centers: Lessons from an Industry Expert
February 15, 2011
10:00am - 11:00am PT
Featuring: Douglas G. Smith

Valuing Banks
February 17, 2011
10:00am - 11:40am PT
Featuring: Andrew Gibbs and Chip MacDonald


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