BVWire Issue #154-3 | July 22, 2015


Study reveals a shift in approach to valuing synergy

The M&A valuation practices of investment banks have undergone a notable shift in recent years with respect to synergies and strategic opportunities, according to a study published in the Journal of Applied Finance.

More scrutiny: All but one of the 11 major investment banks interviewed say they take specific steps to deal with synergies rather than just folding them into the company’s cash flows and discounting all at the same rate. In a similar study done in 1998, only half of the advisors said they made special adjustments to value synergies differently. The authors of the study believe that this trend is due to the increased recognition that planned synergies often don’t pan out.

The purpose of the study was to examine how leading practitioners apply discounted cash flow (DCF) techniques to value companies in an M&A context. The authors found that the application of DCF is far from “routine” and a complex set of judgments is used. The authors write: “Our results serve as yet another reminder that analytic techniques such as DCF do not make decisions but only inform them.”

More details on the study will be in the September issue of Business Valuation Update.

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Fannon comments on recent ‘yardstick’ case

Last week’s BVWire covered a recent case that involved the use of the yardstick method in the context of lost profits damages. The issue was how closely the subject business must resemble a comparable firm to produce a yardstick analysis that meets the Daubert requirements. A federal court’s ruling suggests “not that closely.”

Key point: “If there is one takeaway we have from the many cases involving Daubert and its progeny, it’s that for every case you can find stating one proposition, you'll find another one stating the opposite,” says Nancy Fannon (Harrison, Meyers & Pia). Fannon, the editor of The Comprehensive Guide to Lost Profits and Other Commercial Damages, says that this case shouldn’t give experts the impression that the yardsticks they use don't have to closely match the subject business. “The courts use a flexible bar, to be sure, but that flexibility is borne from the legal aspects of the case. There are many legal aspects that could have a bearing on whether our testimony is allowed or the extent to which our analysis is ultimately deemed to be sufficiently reliable. Our analysis should always be made using the best available proof,” she stresses.

Sylvia Golden, the editor of BVLaw, agrees and comments: “Although the defendant made a strong argument against admitting the yardstick analysis, the court was surprisingly lenient in terms of admitting the testimony under Daubert. But don’t count on other courts showing the same degree of liberality.” An extended discussion of the case, Washington v. Kellwood Co., 2015 U.S. Dist. LEXIS 63457 (April 21, 2015), is in the August issue of Business Valuation Update. The court opinion is available at BVLaw.

For more information, Fannon’s book includes extensive material on Daubert issues in the context of lost profits and commercial damages.

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How an audit committee investigates fair value estimates

PwC has issued a paper describing the role of the audit committee in scrutinizing fair value in the context of its oversight of financial reporting. Because of the complexity and subjectivity of fair value estimates, the audit committee can ask questions regarding the valuation process for assets of material value.

Probing questions: One question the audit committee may ask is whether a third-party valuation specialist was used for fair value estimates. If so, how was the valuator chosen and what are his or her qualifications? The committee can also ask about the process and controls related to the valuations. What valuation models were used? What were the key assumptions?

The regulators (SEC and PCAOB) have made it clear that fair value estimates are an important part of a company’s financial statements and management must develop and maintain internal controls with respect to these valuations.

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New guide to industry cost of capital includes latest model

The recently released 2015 edition of the Valuation Handbook - Industry Cost of Capital includes eight different estimates of the cost of capital for 200 different industries. What’s new in this edition is the replacement of one of the estimates.

Five-factor model: The Fama-French five-factor model has replaced the Fama-French three-factor model. Recent research by Fama and French shows that the degree of a firm’s profitability and reinvestment are two additional factors that have an effect on equity returns and thus have a role in explaining cost of capital. The five-factor model is now included in the book’s eight cost of equity capital estimates, which are:

  • CAPM;
  • CAPM plus size premium (using the CRSP Deciles Size Study);
  • Build-up plus industry risk premium;
  • CAPM plus size premium (using the risk premium report study);
  • Build-up plus risk premium over the risk-free rate (using the risk premium report study);
  • One-stage DCF model;
  • Three-stage DCF model; and
  • Fama-French five-factor model.

The 2015 Valuation Handbook - Industry Cost of Capital is used to determine an industry-level cost of capital and is not a replacement for the individual company cost of capital determined using the 2015 Valuation Handbook - Guide to Cost of Capital. Instead, this book is used as a companion volume to fine-tune company cost of capital with the industry information included in this volume.

For more information on this book, visit BVR’s Cost of Capital Resource Center, where you’ll also find the latest valuation data and analysis—including articles and webinars that are available at no charge.

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Senior care M&A strong in 2Q15

M&A activity in the senior housing and care market, which includes skilled nursing, assisted living, memory care, independent living, and CCRCs, “continues to strengthen after the record-setting year in 2014,” according to the SeniorCare Investor. In the second quarter of 2015, there were 64 publicly announced acquisitions, compared with 62 transactions in the second quarter of 2014 and 70 transactions in the first quarter of 2015. For second-quarter activity, completing 64 deals represents a record and “implies we may be in for another strong second half of the year, much like in 2014.” For the first half of the year, transaction volume is up 5.5% over the first half of 2014.

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Global BV news:
IACVA BV certification training in China

The Seventh ICVS Certification Training will be held in Beijing, China, on December 7-12. The classes will be conducted in English with simultaneous translation into Chinese. The training will last for five days and is in three sections: (1) Best Practice for Business Valuation; (2) Best Practice for Valuing Intangibles; and (3) Report Writing and Case Study. The sixth day will be devoted to—sleep? No, an exam. For more information, please e-mail or call 86-029-8849-8299.

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Trademark values of real estate websites

This month’s brand value snapshot from Markables covers websites that contain ads for renting or selling real estate. Using this type of website, the property owner lists and pays for the ad, but the service is free for the potential buyer or tenant. Typically, the online service does not enable direct transaction between seller and buyer. As these are mostly pay-per-use services as opposed to subscription-based, the brand is an important value driver of these businesses. The peer group includes 14 cases between 2006 and 2014 from seven countries, including and The analysis suggests a median royalty rate for a brand of 10% and a 20% share of enterprise value. Surprisingly, only four of the 14 brands are assigned a finite life, which is a small percentage compared to other online businesses.

Markables has a database of over 6,500 trademark valuations published in financial reporting documents of listed companies from all over the world. The database reports value solely for the use of trademarks (not bundled with other rights).

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When analyzing turnover, check the flavor

Is it apple or prune? That’s what some accounting students think when they hear the word “turnover.” In his 40-plus years as an accounting practitioner and teacher of both undergraduate and graduate accounting students, Charles J. Pendola has heard some crazy definitions of some basic accounting terms.

Say what? Here’s one that valuation practitioners will appreciate: The term “watered down” was not defined as an asset that has been overvalued but, rather, as “what you do after a workout.” Pendola’s favorite was when a student in a graduate accounting course defined the sum-of-the-years’ digits depreciation method this way: "You add up some of the years, but not all, and I don’t know which ones."

Pendola, director of graduate management studies programs at St. Joseph's College (Patchogue, N.Y.), offers a fractured glossary of accounting terms in an article in Accounting Today.

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BV movers . . .

People: Richard Barnes of Barnes Consulting in Sacramento, Calif., received the award for meritorious service from the California Society of CPAs’ education foundation for his contributions to education for CPAs, including his BV instruction for the AICPA and CalCPA … Mark Campbell, partner in BlumShapiro’s litigation services and business valuation group, has been named president of the board of directors of the Association for Corporate Growth’s Connecticut chapter … Bill Johnston, managing director of Empire Valuation Consultants in New York, is the incoming chairman of the business valuation committee (BVC) of the American Society of Appraisers (ASA). 

Firms: BDO USA has expanded its central Florida presence by acquiring the Orlando, Fla., firm Cross, Fernandez & Riley LLP and will incorporate all 95 employees … Hodgson Pratt Pratt & Saunders of New Bedford, Mass., has joined the national firm CliftonLarsonAllen … Mitchell & Titus (M&T) has ended its membership in the Ernst & Young global network at the end of October. The largest minority-owned firm in the U.S., having served its clients for over four decades, has decided it is in the best interest of both firms as well as its clients to return to its status as an independent, stand-alone entity.

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Great summer lineup of CPE events continues

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963 ext. 133
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In this issue:

Synergy shift

Yardstick issue

Fair value scrutiny

Industry cost of capital

Senior care M&A

Global BV news

Real estate websites

'New' acctg. glossary

BV movers

CPE events












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