February 8, 2012 | Issue #113-2  

Arcstone Equity Research values Facebook at $134 billion

“We believe Facebook is worth $134 billion or approximately $57.50 per share based on 2.332 billion pro forma diluted shares outstanding,” says a new e-mail blast from Arcstone Equity Research (AER):

We value Facebook using a discounted cash flow approach. We employ a 3.0x terminal revenue multiple and 8.5x terminal EBITDA multiple on 2020 forecast results. After discounts and other adjustments, we arrive at a valuation of $134 billion equity value, or approximately $57.50 per share based upon 2.332 billion pro‐forma diluted shares outstanding. This implies a forward P/E of 85x, a forward P/EBITDA of 41x, and a forward P/S of 20x.

Review all the details in AER’s investment research newsletter.

Business owners ‘somewhat’ bullish on economy

“Last year business owners more accurately forecasted GDP than Wall Street consensus, the feds, the White House, or the Congressional Budget Office,” says John Paglia, who—in conjunction with Pepperdine University’s Private Capital Markets Project—just released the 2012 Economic Forecast: Insights from Small and Mid-Sized Business Owners.

In this year’s survey, based on responses from over 3,000 business owners, a clear majority (52%) said they were “somewhat more confident” today in the country’s business growth prospects compared to one year ago. Nearly a quarter (22%) are confident that the U.S. will see better financial times in the year ahead, while just about the same number (27%) are on the fence. At the same time, almost half of responding business owners are not planning on hiring any new employees next year (43%), but the same percentage reported that, in the past 12 months, they had raised pay for current employees, and just about the same number (42%) will raise workers’ salaries in the coming year. Nearly two-thirds said their own incomes had stayed flat in 2011, but 50% expect to earn more in 2012.

Kudos to Paglia and Slee. After tallying the votes in the 3rd annual Middle Market Thought Leader Award, sponsored by AM&AA and Grant Thornton, Paglia tied for first place with Robert Slee (Robertson Foley)—and so the two finalists each received the honor. “Rob Slee was recognized for his seminal book, Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests (2d Ed.),” says the recent Grant Thornton release. “Dr. John Paglia was honored for his ground breaking research at Pepperdine University to understand the true cost of private capital across market types and the investment expectations of privately held business owners.”

For a 360-degree view of the expanded Pepperdine project and its evolving private capital database, don’t miss BVR’s webinar on Thursday March 15, “Point/Counterpoint: Debating the Private Capital Markets Project,” with Paglia and Kevin Yeanoplos (Breuggeman and Johnson Yeanoplos P.C.).

FASB likely to adopt ASU on indefinite-lived intangibles

Following up on the FASB’s recent release of ASU 2012-12, Brad Pursel (Brown Smith Wallace) says that the introduction of a qualitative assessment option “may help reduce costs for indefinite-lived intangible assets that are difficult to value, such as in-process research and development.” Given the board’s recent adoption of a similar qualitative assessment option in connection with goodwill impairment, Pursel believes the proposed ASU “will be adopted with minimal changes.”

By establishing a qualitative framework similar to that used in assessing goodwill impairment, the proposed ASU should permit financial statement preparers to follow “a similar analytical and documentation process,” Pursel adds. “However, any time the unit of valuation is reduced (in this case from business unit to individual intangible asset), the likelihood of impairment exists.” Pursel provides this example:

Take a reporting unit with goodwill and two identifiable intangible assets, Brand A and Brand B, on its balance sheet. The success of the reporting unit’s Brand A product can offset problems faced by its Brand B product. As a result, although a qualitative assessment may indicate that the reporting unit’s goodwill does not require a quantitative impairment test, the same conclusion would not likely be true for Brand B.

Get a complete update on the AICPA IPR&D aid: On Thursday, February 9, join David Dufendach (Grant Thornton) for The State of IPR&D: Examining the AICPA Exposure Draft. Dufendach, a member of the task force that developed the proposed AICPA practice aid, Assets Acquired to Be Used in Research and Development Activities, will discuss its contents, current feedback, and how practitioners can participate in finalizing the guidelines.

PE deals stays steady in ’11, says a new PitchBook report

Despite a slower second half of the year, PE deal activity “held relatively steady from 2010 to 2011,” says a new update from PitchBook (BVR's partner on the PitchBook/BVR Guideline Public Company Comps Tool):

Deal flow in the business products and services industry fell only slightly during the fourth quarter of 2011 with 140 completed deals, compared to the 151 deals in the third quarter. Consumer products and services saw 381 completed private equity deals in 2011, while the IT industry saw 223 closed deals, making these industries the second and third most active industries. The healthcare industry accounted for 12 percent of the overall 2011 U.S. PE deal flow with 218 completed deals.

For more details about the performance in each of these industries, check out the Private Equity Deal Flow Profiles (published with McGladrey). The reports include deal flow performance for each year since 2006, deal activity by subsector and deal type, and trends among active sector investors.

What’s the difference between a forecast and a projection?

“We appraisers love our terms of art,” writes Rod Burkert (Burkert Valuation Advisors), but what you don’t know about the nuances of a particular term may get you into trouble, especially when preparing valuations in litigation contexts. Take the fine distinction between a “forecast” and a “projection” (for which none of the BV professional standards or even the International Glossary of BV Terms provides an express definition). “Sometimes the two words are used interchangeably in a [DCF] report—in one paragraph it’s a projection, in the next it’s a forecast,” Burkert says. “And sometimes I see the more mangled expressions of ‘projected forecast’ or ‘forecasted projection.’”

What’s the correct usage? “I believe it is fair to say that a forecast is what is expected to happen while a projection is what might happen given certain hypothetical assumptions,” Burkert explains. “From a CPA attestation perspective, you can examine a forecast, but only compile a projection.” Read Burkert’s complete discussion of the terms, their nuances and correct applications, in his new article, “When Is a ‘Projection’ a ‘Forecast’?” in the current (February 2012) Business Valuation Update.

BV marketing: moving from the ‘shotgun’ to rifle approach

“Marketing tactics and best practices don’t really change much over time,” writes Barbara Price (Mercer Capital), in a recent article for the ASA members’ weekly BV E-letter. “What does change is how and where we apply them. Twenty years ago, this profession was much smaller than it is today and it was much harder to communicate with your market(s). Many firms, mine included, used a shotgun approach and relied upon senior leadership to set the goals and direction for business development and marketing.”

But “today, our profession has grown dramatically and web and social media have removed barriers to communication,” Price says. “This means that it is harder to be heard over the noise. What do you do? You focus on a niche. You expect, allow, and support all professionals in your firm in building their practices by encouraging them to take an active role in business development and marketing activities. You track progress. You adjust where necessary. Then, you keep at it.” For more advice on how to move toward smart, pinpointed marketing, Price suggests the article by Bruce W. Marcus, "Why Professional Services Marketing 3.0 Matters for Your Future and What To Do About It.”

Expect the IRS to ‘rattle Giustina like a saber’

In the recent Estate of Giustina v. Commissioner, the Tax Court applied a 25% marketability discount to the taxpayer’s closely held timber company, but only to its DCF value and not to its asset-based result, since the latter already reflected a 40% discount for the time it would take to sell off so much timberland. This rule against double-counting “isn’t new,” says Prof. Jack Bogdanski (Lewis and Clark Law School), “but I worry that IRS agents are going to rattle this case like a saber in future battles over discounts.” In an exclusive interview with the BVUpdate, Bogdanski adds:

You’ve got to admit, it’s a case in which a limited partner’s interest got no minority discount, and only a watered-down marketability discount. The lack-of-control discount percentage was zero. Of course, that’s because of the way the base value was computed, but you can just hear the IRS saying “no discount” and citing Giustina, even in cases involving other valuation approaches—especially if timber companies are involved.

Read the complete interview, including Bogdanski’s belief that the Giusitina case could constitute yet another blow to tax affecting, in the February Business Valuation Update.

BVR’s industry series turns the spotlight on: radio stations

On Thursday, February 23, BVR’s Industry Spotlight series returns with Valuing Radio Stations. Join Peter Bowman (Bowman Valuation) and Paul Fink (St. Clair Company Inc.), an expert in radio station management and operations, for a complete discussion of how to value radio stations in the information age, including the treatment of FCC licenses, bandwidth, and adaptations to the digital/paperless world, including Internet streaming or news and online chat services.

FASB and IASB still can’t agree on financial instruments

At their monthly joint meeting in January, the FASB and IASB discussed whether they could reduce the differences between their respective models for the classification and measurement of financial instruments. The boards ultimately decided to jointly re-deliberate selected aspects of their models, including:

  • The contractual cash flow characteristics of an instrument;
  • The need for bifurcation of financial assets and, if pursued, the basis for bifurcation;
  • The basis for and scope of a possible third classification category (debt instruments measured at fair value through one comprehensive income); and,
  • Any knock-on effects from the above (e.g., disclosures or the model for financial liabilities in light of the financial asset decisions).

The IASB has just published its complete January 2012 Update, which summarizes all the discussions at the boards’ joint meeting as well as the IASB’s most recent sessions on the effective dates of IFRS 10, 11, and 12, the current feedback on IFRS 1, and other topics.

‘Unconventional resources’ will drive oil and gas industry in 2012

Oil and gas exploration and production (E&P) companies “are increasingly diversifying their businesses by making unconventional resources part of their production strategy,” says the 4th annual BDO 2012 Energy Outlook (executive summary). Of the 100 CFOs polled in the survey, the majority expect the “discovery of significant new resource plays to be one of the major drivers of overall industry growth in 2012.” In particular:

CFOs believe that both global and domestic demand for natural gas will outweigh the demand for oil in the coming year. Investment plans for 2012 reflect the push to natural gas. Forty percent of CFOs plan to increase their capital investment in unconventional resources, such as shale plays, compared to the 10% who will increase investment in domestic and foreign offshore exploration operations. The greatest number of survey respondents (29%) also note that they will focus on unconventional resources as a way to increase value for stakeholders. Foreign investment in U.S. shale drilling operations will play a growing role in the demand for natural gas.


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Copyright © 2012 by Business Valuation Resources, LLC
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