BVR Logo May 26, 2021 | Issue #224-4

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:



What you should know from the spring
BV conferences

BVWire has been on the virtual road attending some excellent events. Last week, we brought you some coverage of the ASA Energy Valuation Conference from Houston. This week, we share some interesting takeaways from three events we attended.

The New York State Society of CPAs (NYSSCPA) Business Valuation and Litigation Services Conference had two timely sessions on cryptocurrency. Valuations are tricky, but finding them in the first place can be even trickier. Locating crypto assets is a long, slow, and complex process. There’s no IRS reporting if you just buy and hold it, so it won’t show up on Forms 1040 or 8949. Reporting is triggered if you sell or trade in it—and just spending it to buy something constitutes a “sale” that is reportable. Of course, some of this goes unreported and some transactions are done under the table. One of the speakers was a Certified Cryptocurrency Forensic Investigator (of which there are very few) who pointed out that not all Bitcoin transactions are recorded—some are done on the dark web, a “very dangerous” place where conventional tracing tools do not work, he said. Other topics at the conference included more emerging issues (SPACs, Zoom as a practice-builder) and some new twists on evergreen topics (estate valuations, cannabis, distressed firms, and collaborations).

Later in the week, it was the first-ever ASA Complex Securities Virtual Conference, where new research on volatility was presented that revealed that the market is not capturing the full extent of volatility. Convertible debt with high volatility is being overvalued—and so are those with lower market volatility (but not as much). An entertaining session compared the valuation of complex securities to valuing NFL contracts. Player contracts often include options, but teams are not required to value them. What are they worth and how do they affect risk? Should a player enter into a contract with a guaranteed minimum and team options? The principles developed in valuing options on common stocks can help answer these questions. Monte Carlo simulation can be used just as analysts use it to value complex financial options. Other speakers discussed SPACs and contingent consideration, and there was a lively ask-the-experts session.

Then it was on to the United Kingdom for the Institute of Chartered Accountants in England and Wales (ICAEW) Valuation Conference. Professor Pablo Fernandez (IESE Business School, Universidad de Navarra), who has written extensively on valuation and common sense and is well-known for his opinions on the capital asset pricing model (CAPM), did the lead-off session While CAPM received a Nobel Prize and is used in nearly every business valuation textbook, “CAPM can be an absurd model, lacking any relationship to human understanding,” he told the audience. His position is that CAPM and its betas do not explain anything about expected or required returns. Professor Ian Cooper (London Business School) did a separate session on the adjustments many analysts apply (for small size, distressed assets, country risk, or other factors). These adjustments can compound business valuation “anomalies.” With today’s historically low interest rates, premiums have a disproportionate impact and can “drive your entire valuation. Your adjustments matter a lot at the moment,” he said. He showed that a 12% micro-cap size premium reduces value by about 76% for small firms. “Certainly, the evidence for this kind of adjustment is less clear now than it was in the past,” making the application of size premia more complicated. Other sessions included more on the impact of company size, cost of capital for family firms, an economic update, and a town hall-style panel session.

Of course, these events contained a great deal more useful information. More detailed recaps of these conferences will be in the July issue of Business Valuation Update.

Court of Chancery adopts deal price, adjusting for synergies and tax savings

In a statutory appraisal action, the Delaware Court of Chancery recently adopted the deal price minus synergies as the best indicator of fair value. The court found one further adjustment to account for the change in the target’s operative reality between the date of signing and closing of the merger also was necessary. This is one of those increasingly rare cases in which the petitioners, as shareholders of a public company, obtained a price that was slightly higher than the merger consideration.

Background: The petitioners owned shares in Regal Entertainment Group (Regal). In February 2018, Cineworld Group (Cineworld) acquired Regal by way of a reverse triangular merger. The merger consideration was $23 per share. The petitioners owed shares in Regal. Regal’s board approved the merger agreement in early December 2017. In late December 2017, then-President Trump signed the Tax Act into law. Most changes took effect starting Jan. 1, 2018. The merger closed in February 2018.

Two required adjustments: The court looked to the deal price and found the sale process was sufficiently reliable to consider it the best evidence of Regal’s fair value as of the signing of the merger. However, this was a synergistic transaction. Under the applicable law, the court must determine the value of the company as a going concern, meaning the court must deduct any value derived from the expectation of the merger. The buyer, Cineworld, undertook detailed analyses as to the synergy value it could derive from the merger. Ultimately, this value was important to Cineworld’s financing. Much of the court’s analysis deals with how to estimate the value of synergy and how much of that value to allocate to the seller. The court was guided by the Delaware Supreme Court’s ruling in Aruba, which says a trial court has to make a synergy deduction, even if it is difficult to determine this value, using its best judgment.

The court noted that, here, there was evidence that the buyer had not overpaid for the target but had allocated some of the anticipated synergies to the seller. There also was contrary evidence that the buyer did not contemplate synergy value from the deal. The parties apparently did not bargain over synergies. Cineworld’s trial expert said he could not determine how the parties split synergies. He relied on a 2018 Boston Consulting Group (BCG) study that found that sell-side stockholders of the target company typically capture about 54% of synergies.

The court acknowledged it faced a less-than-optimal record and unsettled precedent as to what is necessary to prove a synergy allocation. It decided the 2018 study was “the best tool available for an imprecise task.” If the amount of the synergy value was $6.99, based on the study, the seller side captured 54% of it. Therefore, the court said, $3.77 must be subtracted from the deal price as synergy value.

A second, upward, adjustment was necessary as a result of the 2017 Tax Act, the court found. It noted that the applicable appraisal law requires fair value be measured by the operative reality of the company at the close of the merger. Both sides agreed that the company’s value changed as the new Tax Act lowered corporate taxes to 21%. The court noted Regal’s lowered tax rate reduced the amount of financial savings that the buyer could achieve. After the Tax Act, those financial savings were part of the value available to Regal in its operative reality as a stand-alone entity, the court said. It added $4.37 per share to the deal price minus synergies. As a result, the court decided the fair value of the petitioners’ shares was $23.60 versus the $23 deal price.

A digest of In re Appraisal of Regal Entertainment Group., 2021 Del. Cha. LEXIS 93; 2021 WL 1916364 (May 13, 2021), and the court’s opinion will be available soon at BVLaw.

Today! Inaugural National Economic Damages Virtual Conference

Attorneys and financial experts join forces for the first-ever National Economic Damages Virtual Conference, a two-day event that starts today, May 26. Dynamic topics direct from the pages of BVR’s Guide to Economic Damages willcome to life during the event, including intellectual property damages, COVID-19 damages, forensic evidence, and the ins and outs of appearing in court. Also, several panels will recap key takeaways and field your questions. Earn up to seven CPE/CLE credits. If you hold a BVR Training Passport Pro, there is no additional charge for this conference. You can check out the agenda and register if you click here.

TAF needs volunteers for BV panel

The Appraisal Foundation (TAF) is accepting applications from volunteers to serve on its Business Valuation Resource Panel (BVRP). The purpose of the BVRP is to oversee the development of business valuation advisories, provide input on exposure drafts, and offer insight into emerging issues or other matters of like significance. The panelists will serve for a term of up to three years. Completed applications must be received by September 1. For an application, click here.

Election time at the ASA

Ballots have been sent to members of the American Society of Appraisers for the organization’s 2021 election. Members need to add the email addresses noreply@eballot.com and noreply@votenet.com to their safe sender list to receive election ballot notifications. To see the biographies and campaign messages of all the candidates running for office, click here.

Discrepancy in data breach data

Data breaches reported to the UK Financial Conduct Authority (FCA) dropped by 30% between 2019 and 2020, the regulator says. This represents a significant discrepancy to proprietary data from Kroll that show actual cyber incidents increased by 56% for the same period. Also, Kroll’s data show that the fintech industry was more prone to be a target of such cyberattack attempts.

A concern here is that organizations may misinterpret the data and underestimate the true risk.

Extra: How do you account for cybersecurity risks in business valuations? See the BVR briefing Cybersecurity in Business Valuation: Addressing the Impact of Data Breaches on Value.

iiBV adds to growing staff

The International Institute of Business Valuers (iiBV) has added two individuals to its staff. Roberta Di Chiara, based in Toronto, Canada, will provide administrative assistance to the executive director, the board of directors, and the iiBV education, marketing, finance, and audit committees. Amine Zaari, based in Agadir, Morocco, has joined the team as a marketing and communication manager. He is responsible for optimizing iiBV’s website and social media and managing advertising campaigns and marketing channels for students and member organizations. The iiBV provides educational opportunities, promotes consistent professional ethics and standards, facilitates the exchange of information and ideas, and encourages international co-operation and communication.

BV movers . . .

People: Travis R Lance, ASA, has been accepted into the partnership of Fargo, N.D.-based Eide Bailly; he provides business valuation and transaction advisory services to a wide variety of industries, including agriculture, energy, and manufacturing, specializes in employee-owned companies, and acts as an adviser in employee stock ownership plan (ESOP) transactions and related compliance consulting … Cary Mailandt has been promoted to managing partner at Chicago-Based Baker Tilly US LLP effective June 1; he is practice leader for the firm’s middle market advisory group, helping operating companies and private equity firms with their transaction advisory, CFO advisory, strategy consulting, valuation, and fund administration needs.

Firms: Calgary-based MNP is adding St. John’s, Newfoundland-based DMK Chartered Professional Accountants; DMK provides a wide range of professional services to organizations in diverse industries throughout Newfoundland … To broaden its service offerings to include government contracting and consulting, Badger CPA of San Antonio has acquired Austin, Texas-based Libby King & Associates, a firm that offers transactional accounting services and has experience in government contract-specific requirements and processes … Clifton, N.J.-based Sax LLP has expanded its transaction advisory services with the addition of a new investment banking practice, Sax Capital Advisors; the practice will assist clients selling or acquiring a business, preparing for sale, raising capital, and/or restructuring an organization.

Please send your professional and firm news to us at editor@bvresources.com.

CPE events

Dynamic topics direct from the pages of BVR’s Guide to Economic Damages willcome to life during this two-day event, including intellectual property damages, COVID-19 damages, forensic evidence, and the ins and outs of appearing in court.

Are you confused by business combinations? Join William Kennedy for this engaging session covering GAAP fair value standards and their application in business combinations. Part of BVR’s Special Series on Fair Value.

Holiday Break
BVWire will not be published next week due to the Memorial Day holiday. We will return on June 9. Have a happy and safe holiday!





We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at: info@bvresources.com.

 


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