March 6, 2013 | Issue #126-1  

Apple loses nearly half of $1 billion award due to an aggressive—and illegal—damages theory

Last Friday, the federal court decided a good portion of the $1 billion damages award in Apple v. Samsung—the continuing battle of two Goliaths in the smartphone industry—was based on an “impermissible legal theory.”

That is, the court confirmed its earlier ruling that holders of design patents may recover an infringer's entire profits, without the need to split damages between the patented design and the overall product. But the holders of utility patents can recover only their own lost profits (proved to a reasonable certainty) and/or a reasonable royalty. Since the jury’s award to Apple was apparently based on Samsung’s profits for the entire smartphone device, its patented design and utility functions—and the court couldn’t reduce the excess without “bending over backwards”—it slashed $450 million from the original award and sent the giants back to battle the question of damages.

Before any new trial, however, the court suggested both sides might want to appeal its decision, which also discredited Apple’s expert for using an “aggressive” notice date for all the patents, when a more “circumspect” approach might have avoided a retrial. Read the complete digest of Apple, Inc. v. Samsung Electronics Co., No.: 11-CV-01846-LHK (N.D. Cal., March 1, 2013) in the April Business Valuation Update; the court’s decision will be posted soon at BVLaw.

Don’t discredit the DCF, says Trugman: Put the blame where it belongs

“Thank you for another article that points out the flaws in the testifying experts rather than the DCF methodology itself,” writes Gary Trugman (Trugman Valuation) about our item last week on the latest in a series of bankruptcy decisions favoring market or other “credible” evidence over an expert’s valuation. “I am rather disheartened at the fact that the courts are permitting experts to testify who are taking such poor positions that they not only lose in court, but more importantly, end up being written about in a manner that suggests the problem was with their methodology rather than their inputs.”

“The DCF is a well-established method, and in fact, is the most theoretically correct method to be used in establishing an indication of value,” Trugman adds. “Unfortunately, there are those experts who are using the methodology to further their clients’ interests regardless of the ethics of doing this. I only wish that these so-called ‘experts’ get what they have coming to them as a result of their actions.”

That said, he tells the BVWire, “I also wish that your slant on these court decisions would be placed where it belongs, and not allow your readers to think that the methodology is the problem. Judges would not criticize the method if it was being used ethically and in accordance with professional standards.” (Point taken, and much appreciated.)

Forbes position with respect to the BV ball is a bit … behind?

The title of a new article in Forbes declares “Valuing Private Companies Is an Art, Not a Science.” That’s hardly news to experienced business appraisers and valuation analysts—but just when the article gets interesting, depicting a private holding company that earns over $70 million in dividends per year from a 15% stake in a family-owned conglomerate run by a pair of maverick if not miserly brothers, it falls back on a “reasonable formula” for valuation that “seems to pass muster in tax court,” based on three variables:

  • A discount for lack of control, which the article says “can be interpolated from the premium bidders pay to take over public companies” and ranges from 20% to 25%, “meaning stock that doesn’t have control trades at an equivalent discount.” (Really—it’s that simple, and defensible?)
  • A discount for lack of marketability, which, based on studies of pre-IPO shares in private equity funds, “runs as large as 40%.” (Just like that, without any mention of restricted stock or other quantitative sources for DLOM.)
  • Discounts for holding companies, based on long-term studies of real estate limited partnerships, still come in “as large as 39% of NAV,” the article says.

Shouldn’t the sophisticated business reader be on top of valuation? In the past few weeks, we’ve reported articles in the New York Times and now Forbes, not with a mind to discrediting the sources or their authors, but only to point out their omission of business appraisers as credible sources with current, cutting-edge insights into complex valuation topics. Publication is still the best publicity for any professional, and in Forbes, any comments the editors decide to “call out” online will be highlighted across the publication’s financial and business network. Already there is a “called out” question on how to value voting rights, answered by the author (and citing Damodaran). Letter to the editor or author, anyone?

How to beat the BV hiring crunch

“When you’re hiring above a certain functional level in the hierarchy of a BV firm, your only option is to hire from within the profession,” says John Borrowman (Borrowman Baker), responding to last week’s survey suggesting a current shortage of BV talent. Most consulting services suffer a similar crunch, but more so for BV because it is a business of judgment in which the deliverable is an opinion.

The BV profession may also suffer a “structural” mismatch between where the jobs are and where the talent is willing to be, he says. Firms in smaller markets, in particular, may find it difficult to attract experienced professionals from the larger firms and urban markets. Shrinking the universe of available talent by each of these hurdles—the capacity to do the work, the readiness to make the change, and the willingness to do so—quickly reveals why the BV market is so tight. Of course, compensation plays a role in attracting top talent, Borrowman says, but just as important in keeping it at the firm (or keeping your current professionals from leaving) is providing top-notch training and supervision.

What is a growing practice to do? First, use “smarter” hiring decisions (with testing on practical and writing skills) to reduce turnover. “Offer plenty of training and development” for new recruits, Borrowman says, “and make sure there are advancement opportunities” for existing talent. Two additional key points:

  • Be less insistent on hiring “someone I don’t have to train.” He’s not suggesting that you hire “green beans,” only that you consider talent that shows good potential for bearing fruit in the future.
  • Pay more attention to campus recruiting and internships. More finance programs, at the undergraduate and advanced levels, are incorporating valuation-related coursework, Borrowman says. “If you build a good relationship with finance professors and demonstrate that you are a solid employment opportunity for students, you can find yourself receiving cream-of-the-crop referrals,” including former interns, perhaps, with actual BV experience.

And, of course, compensation is critical. To position your salary structure correctly within the universe of BV firms and constellations of available talent, check out the Borrowman Baker/BVR 2012 National BV Salary Survey Report now.

Free excerpt from 2013 Mergerstat data now available

  • Which U.S. states announced the greatest number of corporate sales/divestitures in 2012?
  • What were the top five seller industries in 2012, in number and dollar value of announcements?
  • Did the total value of announced M&A deals in 2012 exceed those in 2011?
  • What about net announcements in 2012?

The answers are all in this new download, an exclusive excerpt from the upcoming 2013 Mergerstat Review—which for the first time will include the Mergerstat Monthly Review, a monthly PDF summary of deals, trends, and industry spotlights. To order your copy of the 2013 Mergerstat Review, with shipping in mid-April, click here.

Before taking on the next healthcare assignment, check for ‘valuator shopping’

Just as important as knowing the particular regulatory definitions that govern sales and compensation arrangements in the healthcare sector—such as “remuneration,” “financial relationship,” and “recommendation”—valuation analysts should get to know their particular client, said Matthew Jenkins and James Pinna in their session last week on The Stark Law and the Anti-Kickback Statute, Part 2 of our ongoing 2013 Online Symposium on Healthcare Valuation. Before performing a risk assessment for transactions or compensation arrangements, the healthcare analyst should ask the following questions about the subject company:

  • Does it have competent lawyers who are familiar with the applicable law?
  • Does it have a history of “valuator shopping” and, if so, why?
  • Did other valuators decline to provide opinions because the transaction was “troubled”?

“Be careful about clients wanting a favorable opinion for arrangements that, by objective standards, are too good to be true,” the speakers cautioned. For a straightforward take on the OIG’s reading of the definitions and the law, healthcare valuators can also check out the agency's advisory opinions on its website.

FASB issues new ASU on fixed liabilities

Last week, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) No. 2013-04, Liabilities (Topic 405): Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.

For all except nonpublic entities, the amendments in the ASU are effective for fiscal years (and interim periods within those years) beginning after Dec. 15, 2013. For nonpublic entities, the amendments are effective for fiscal years (and interim periods) ending after Dec. 15, 2014. To download a copy of the new ASU, click here.

San Fran BV slam

“You are invited to a smack-down!” says the announcement for the ASA Northern California chapter’s annual BV forum. “The BV/real property/personal property discussion is ON,” it says—but you’ll have to hurry: The forum meets tomorrow afternoon, Thursday, March 7, in downtown San Francisco.

The two-part seminar features “hot button issues” in estate and gift tax, presented by an IRS attorney and valuation specialist, and a panel on multidisciplinary appraisals, with the BV portion being presented by Eric Nath (Nath & Associates). For more information on attending, click here.

March CPE: the impact of Bernier in Mass. and beyond

In Bernier: History, Impact, and Implementation on March 13, Marc Bello (Edelstein & Co.) will discuss how this nearly 10-year old divorce case—twice appealed on the question of tax affecting per the Delaware standard and twice returned to trial—is affecting the valuation of S corporations, determination of discounts, standards of value, and other key BV questions in cases that go beyond divorce in any one state.


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Copyright © 2013 by Business Valuation Resources, LLC
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