BVWire Issue #142-1 | July 9, 2014


Delaware Chancery delves into M&A price adjustment claims

At the recent NACVA conference in Las Vegas, Roger Grabowski (Duff & Phelps) urged attendees to read the Delaware Court of Chancery's opinions. Reason: They provide comprehensive discussions of BV-related technical and legal issues. Here’s the latest example:

Cost savings—a synergistic value? Readers may remember the Huff Fund case involving a dissenting shareholder and a company that owned unique entertainment assets, including the rights to “American Idol.” The Chancery rejected the appraisal experts’ reliance on discounted cash flow, guideline company, and guideline transaction analyses. Instead, it determined the fair value based on the actual merger price. That price, it said, resulted from “an arm’s-length, disinterested transaction after an adequate market canvas and auction.”

At the time, Vice Chancellor Glasscock acknowledged that certain adjustments might be necessary to reflect the value of the company as a going concern. Recently, in the same case, the court ruled on the parties' arguments for adjustments related to synergies and business opportunities not reflected in the merger price. The company claimed the price should be lowered from $5.50 per share to $5.21 per share because it contained “synergistic elements of value.” Specifically, prior to the merger, the acquirer identified some $4.6 million in cost savings it hoped to realize by converting the subject from a publicly held corporation to a privately held firm. The court declined to answer the “theoretical” question as to when, if ever, cost savings might represent excludable synergies. Instead, it found that in this case there was no evidence that the acquirer arrived at its bid based on cost savings that the subject might not have realized if it had continued as a going concern.

The petitioners wanted an upward adjustment to account for the value resulting from a post-merger acquisition and “unexploited revenue opportunities,” which, they claimed, were part of the subject’s “operative reality” at the time of the merger but whose value was not captured in the merger price.

No adjustment: According to the court, since a market-derived sales price was the method of valuation in this case, the issue was whether market participants were aware of the opportunities the acquirer and the company identified such that the merger price reflected the value of these opportunities. What was available to the acquirer was available to the market at large, the court said. Consequently, it declined to make any adjustments to the $5.50-per-share merger price.

A detailed discussion of Huff Fund Inv. P’ship v. CKx, Inc. (Huff Fund II), 2014 Del. Ch. LEXIS 82 (May 19, 2014), will appear in the August edition of Business Valuation Update; the court's opinion will be available soon at BVLaw. The earlier decision, Huff Fund Investment Partnership v. CKx, Inc., 2013 Del. Ch. LEXIS 262 (Oct. 31, 2013), is available at BVLaw.

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Opportunity for valuation experts
re: small biz capital

In his keynote address at the recent NACVA conference in Las Vegas, John Paglia (Graziadio School of Business and Management, Pepperdine University) notes that business owners aren’t very good at raising capital—and they could use some help. This is a “real market opportunity for valuation experts,” he says. Not only will this be helpful to business owners, but it also can give appraisers additional perspectives on cost of capital determinations. This “should translate into a strategic advantage in what is becoming an increasingly competitive profession,” he says.

Paglia also revealed results from a special survey conducted with NACVA in May concerning institutional debt and equity for private companies.

Regarding institutional debt:

  • Appraisers believe most business don’t qualify for institutional debt;
  • Most appraisers don’t check to see whether they would qualify for institutional debt; and
  • Because they use public debt issues as a foundation for the cost of debt, most appraisers implicitly assume businesses qualify for institutional debt (even though they acknowledge that most businesses don't qualify).

Regarding institutional equity:

  • Most appraisers say fewer than 1% of businesses could go public if they tried;
  • Most say fewer than 10% of businesses qualify for institutional equity of any type; and
  • Just 15% of appraisers fully evaluate whether a company has access to institutional equity.

Paglia is the founder of the Pepperdine Private Capital Markets Project, an ongoing investigation of the major private capital market segments.

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Consolidation on the horizon for urgent care centers

During their webinar presentation, Fair Value Market Trends for Urgent Care Centers, on June 24, Elliott Jeter and Corey Palasota (both VMG Health) shared their observations about valuing such centers:

  • The market is becoming more competitive because of low barriers to entry;
  • Buyers are interested in platform acquisitions (e.g., the top facilities in an area that has a corporate infrastructure) - multiples are high for these acquisitions;
  • Infrastructure and accreditation are important;
  • Typical buyer will be increasingly strategic; and
  • Hospitals will become bigger players.

“Urgent care centers are going to be a hot segment going forward. Hospitals are interested in partnering with honest qualified physicians,” says Palasota. For more information about the webinar, click here.

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Hotel’s property tax bill inflated with value of intangibles

Here’s an interesting case that could signal an opportunity that valuation experts should know about. An appellate court in California has ruled that a county assessment of a luxury hotel improperly inflated its value by $2.8 million by using a flawed income approach that included nontaxable intangible assets.

Padded bill: According to court documents, the hotel, the Ritz-Carlton Half Moon Bay, was purchased in 2004 for $124 million. The tax assessor in San Mateo County used the purchase price amount and deducted the value of the hotel’s management and franchise fee to come up with a value of $116.9 million. The hotel challenged the property tax assessment, claiming that it included $16.8 million in nontaxable intangible assets. A valuation expert broke out the valuation of these intangibles as follows: (1) the hotel’s workforce ($1 million); (2) the hotel’s leasehold interest in the employee parking lot ($200,000); (3) the hotel’s agreement with its golf course operator ($1.5 million); and (4) goodwill ($14 million).

The hotel claimed that the income approach used by the assessor was “not appropriate for California property tax purposes.” It said that the proper method to exclude intangible assets from the assessment was not to simply deduct the hotel’s management and franchise fee, but to also identify, value, and deduct specific categories of assets in accordance with the state assessor’s handbook.

After the San Mateo County Assessment Board upheld the tax assessment, the hotel filed suit, seeking a refund of taxes paid and a remand to the board for a redetermination of property value.

But the trial court sided with the county and said there was substantial evidence supporting the conclusion that the assessment excluded the nontaxable value of the intangibles. The hotel appealed.

Decision reversed: “We conclude the income approach used by the assessor and approved by the board to assess the hotel violated California law,” the opinion says. However, the appeals court agreed with the county that the assessor had accounted for goodwill as an intangible value by deducting the management and franchise fee from the value. Therefore, the court said that only $2.8 million was improperly charged. It ordered the trial court to remand the matter to the board to recalculate the value of the property using the appropriate methodology.

Interestingly, the appellate court pointed to the assessor’s own expert, who conceded that the assessor’s approach did not remove all intangible assets and rights. His report stated “the majority of the property’s business value has been removed through the deduction of the management fee.” At a hearing before the county board, the expert admitted that “other components” such as “labor in place” “should be deducted” in addition to the management and franchise fee.

Find a full discussion of SHC Half Moon Bay, LLC v. County of San Mateo, 2014 Cal. App. LEXIS 446 (May 22, 2014), in the August edition of Business Valuation Update; the court's opinion will appear soon at BVLaw.

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U.S. Supreme Court gives nod to changing view on efficient market theory

Valuation experts working and testifying in securities cases take note: The Supreme Court has acknowledged that the efficient market theory has come under attack from economists.

Experts involved in private securities fraud litigation (Rule 10b-5 lawsuits) know how central the efficient market theory has been to class action suits. The theory says that the price of stock reflects all the public, material information, including material misstatements. But the theory has become a target of criticism, and the Supreme Court has acknowledged this in a freshly minted decision.

Presumption under attack: The case arose from a putative class action an investor brought against Halliburton, alleging the company made misrepresentations to inflate the company's stock price. Once the company issued correctives, the stock price dropped and the investors lost money. Investors can recover damages only if they prove reliance on the defendant's misrepresentation when deciding to buy or sell a company's stock. Until now, they have been able to invoke a presumption that, whenever an investor buys or sells stock at the market price, he or she relied on the misrepresentation. In petitioning the Supreme Court, Halliburton challenged the presumption, arguing that developments in economic theory show that many investors no longer rely on the integrity of the market price. If you take this presumption away, class certification becomes inappropriate. Therefore, investors should have to prove their reliance on an individual basis.

The Supreme Court did not go that far, but it went far enough to make class certification more difficult for investors. It upheld the right of investors to invoke the presumption to form class-action groups, but it gave corporate defendants the right to rebut the presumption with evidence that the misrepresentation had no impact on price early in the suit, at the class certification stage.

The court's decision aligns with its earlier rulings making it harder for plaintiffs to bring class actions. Whether it will expand or contract opportunities for experts working in this area remains to be seen. The case is Halliburton Co. v. Erica P. John Fund, Inc., 2014 U.S. LEXIS 4305 (June 23, 2014).

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Free trial of new DLOM Calculator

Subscribers to Business Valuation Update can take a test drive of a new DLOM Calculator designed by Marc Vianello (Vianello Forensic Consulting). The July issue of BVU contains an article by Vianello,How Probability Affects Discounts for Lack of Marketability.” This article presents a methodology for determining DLOM that combines probability-based time and price volatility variables in conjunction with the formula put forward by Francis Longstaff, Ph.D. The new DLOM Calculator embodies this methodology.

Limited time only: The article contains a promotional code that allows for free access to the Calculator for the month of July. If you are not a BVU subscriber, you can subscribe by clicking here.

We welcome reader feedback on this new methodology and tool, so please email your comments to the BVU editor at

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BV movers . . .

People: Tim Good, a partner at Windes, is the new chairman, and Peter Iannone, the CFO of CTS Engines, is the new president of the California Society of CPAs The American Institute of Certified Public Accountants and the Alabama Society of Certified Public Accountants recognized Allison Guice, manager at the Montgomery-based firm Jackson Thornton & Co., as an emerging leader among Alabama's female CPAs … New Jersey Society of Certified Public Accountants elected Edward Guttenplan, a managing shareholder at Wilkin & Guttenplan PC, for a one-year term as secretary … The Florida Institute of CPAs honored Allison Harrell, a director at Thomas Howell Ferguson P.A., and Sheri Schultz, director at Fiske and Co., with the 2014 Women to WatchawardJay Loudermilk joins McGladrey LLP as business valuation director in the Indianapolis office … The National Association of Certified Valuators and Analysts (NACVA) and the Consultants’ Training Institute (CTI) named Matt Stelzman of Henderson, Hutcherson & McCullough, PLLC, based in Chattanooga, Tenn., to their inaugural 40 Under 40” list.

Firms: Citrin Cooperman has added partners and staff of MGI Repetti to their New York City office … Gallina LLC has announced that it is acquiring the Ontario, Calif.-based firm, Mellon Johnson Reardon LLP … Fort Collins, Colo.-based Sample & Bailey CPAs PC is merging on August 4 with Eide Bailly.

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Sizzling summer of CPE events

During July, in the Advanced Webinar Series on Valuations for Business Transactions, BVR features four can’t-miss webinars relating to the opportunities, challenges, and changing landscape found in private market transactions. Curated by Craig Jacobson (Citrin Cooperman), these webinars will form the most critical and authoritative collection of presentations to date on these critical issues. It all starts Wednesday, July 9, and continues each Wednesday throughout July.

The month of August kicks off with the Advanced Workshop on Determining Volatility and Market Yield: Developing Inputs for the Valuation of Options and Debt Securities (August 7), featuring David Dufendach and Oksana Westerbeke (both Grant Thornton). In valuing both options and debt securities, appraisers face the challenge of providing a valuation that will account for market changes. BVR’s latest Advanced Workshop addresses these issues and presents appraisers with the knowledge and skill to accurately determine volatility and market yield measures when valuing options and debt securities, respectively.

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We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963
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In this issue:

M&A Case

Private capital markets

Urgent care centers

BV and property taxes

High Court on market theory

Free trial on DLOM tool

BV movers

Hot CPE events







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