Grabowski draws conclusions from ERP arguments in the Global GT case
The Global GT case (as reported in BVWire’s™ June “Supply-side ERP More Reliable, Says Delaware Chancery Court”) shows that at least some courts have become more sophisticated in their understanding of cost of capital analyses. There’s been lots of commentary on this issue (BVR’s digest is available at BVLaw™)—but, as usual, Roger Grabowski (Duff and Phelps) summarizes the most critical conclusions clearly and thoughtfully in the most recent ASA Business Valuation E-letter.
The award of approximately $33 million to the petitioners in Global GT LP and Global GT LTD v. Golden Telecom, Inc. was largely hinged on the rate used to discount the expected cash flows of Golden Telecom, Inc. back to present value. Citing “…substantial support in the professional and academic valuation literature”, the Court rejected the use of Ibbotson’s “historical” equity risk premium, and instead opted for a significantly lower “supply-side” equity risk premium. Had the equity risk premium used to construct the discount rate been higher, the resulting award would have been lower.
The Golden Telecom Inc. decision has important messages for those involved in litigated valuation disputes:
“The Courts are quite aware of the most recent valuation research, and the “cook book” methods traditionally used to determine the cost of capital (discount rates) are no longer simply accepted as doctrine; and
Attorneys and their experts involved in litigated valuation disputes should certainly be more prepared than their opponents are, and should be at least as well-versed in the most recent valuation research as the Court is. To be conversant in the most recent professional and academic valuation literature is absolutely crucial. Those who cannot explain and defend the inputs used to develop their estimates of value will ultimately lose to those who can.
Robert Herz to retire early from FASB chairmanship
FASB Chair Robert Herz is taking early retirement as of Oct. 1, 2010. FASB Board Member Leslie Seidman will fill the role of Acting Chair until a replacement board member and a chair among those board members is chosen. Herz’ term was originally to last until June 30, 2012.
Herz has distinguished himself in many ways during his tough tenure, dominated by fair value issues. He’s made himself available to the business valuation profession, speaking at many of our meetings and showing a solid understanding of valuation practices in his many statements–for that alone he deserves a round of applause.
FASB will continue to gather feedback on its Exposure Draft on financial instrument accounting until September 7. A series of public roundtables to discuss the issue is also scheduled, Neal McGarity (FASB) told Market International News last week.
100+ corporate counsel argue FASB’s litigation contingency reporting proposals do more harm than good
BVWire is following the story of the August 18th letter signed by a host of Association of Corporate Counsel’s leading members. ACC and many of their members believe that the proposed disclosure requirements about impending risks from litigation will alert the tort bar to insurance and other funds that can be pursued–delaying settlements and counterproductively inducing more litigation.
FASB had dropped this proposal in 2008, and recently reintroduced it, causing ACC’s response. Some commentators feel that FASB, facing the twin threats of Bob Herz’ early retirement, and the increasing dominance of IASB, is struggling anyway–so now’s a good time to go on the offensive regarding fair value issues.
Among those signing ACC’s letter were its key officers, including Patricia Hatler, chief legal and governance officer at the Nationwide Mutual Insurance Company; J. Alberto Gonzalez-Pita, general counsel of HCP, Inc.; Jonathan Oviatt, chief legal officer of the Mayo Clinic; Michele Gatto, corporate services & chief legal officer at the National Life Group; and Bradford Smith, general counsel of Microsoft Corporation and chair of the ACC Board Advocacy Committee.
Will the outcome of this regulatory issue influence business valuation standards? At this time, BVWire believes the answer is “no.” Appraisers are mandated to form their own opinions about future cashflows and risks–all of which contribute to the income approach and methods. If there is “known or knowable” litigation in the works, that will influence both the income projections and the discount rate–whatever FASB ultimately decides, and whatever strategy the plaintiff bar adapts.
U.S. Supreme Court approves amendments to Rule 26 FRCP, exempting draft expert reports from discovery
Nearly six months ago, the BVWire reported that a financial expert’s draft report would no longer be discoverable under proposed changes to Rule 26 of the Federal Rules of Civil Procedure (F.R.C.P.). We assumed the U.S. Supreme Court would approve the changes and send them to Congress.
Most recent update: On July 15, 2010, the U.S. Supreme Court ratified the proposed changes, including the key provisions that apply the work-product protections of F.R.C.P. Rule 26(3)(A) and (B) to drafts expert reports and expert-attorney communications. Congress is fully expected to approve the rules, to take effect on Dec. 1, 2010. (But note: The new Rules will not apply retroactively, which may lead to delayed depositions in current lawsuits.)
Also noteworthy: “The proposed amendments to Rule 26 recognize that discovery into the bases of an expert’s opinion is critical,” says the Report by the Committee on Rules of Practice and Procedure (posted by attorneys Faegre & Benson). “The amendments make clear that while discovery into draft reports and many communications between an expert and retaining lawyer is subject to work-product protection, discovery is not limited for the areas important to learning the strengths and weaknesses of an expert’s opinion.” The following three types of communications between counsel and an expert will remain open to discovery:
- Compensation for the expert's study or testimony
- Facts or data provided by the lawyer that the expert considered in forming opinions and
- Assumptions provided to the expert by the lawyer that the expert relied upon in forming an opinion.
At the same time, the Report recognizes that expert have become critical to the litigation process and the new rules will eliminate the often “tortuous” avoidance steps that experts previously had to take—such as refraining from taking any notes, making any record of preliminary analyses or opinions, and producing any drafts. For a copy of all amended Rules, click here.
A number of up-in-the-air tax issues are complicating the world of BV in 2010
Everyone knows about Congress’ failure to reinstate the estate tax, and now it looks like nothing’s going to happen until after the November elections. The later in the year it gets, the less likely there will be a retroactive estate tax. And the more talk there is of deficits, the less likely that the estate and gift tax will be repealed or even reset to 2009 levels.
Another potential tax change affecting FLPs is the proposal directed against hedge funds, which are typically structured as limited partnerships. The upshot is that certain income taxed as capital gains benefiting both hedge funds and FLPs would be converted to ordinary income tax rates as high as 40%. The current version of the proposed legislation doesn’t distinguish FLPs from hedge funds – and would not only apply to investment gains but from the sale of the FLP itself.
Randall Schostag (Minnesota Business Valuation Group) shared the impact of all this uncertainty on his practice with BVWire:
“Our business was slow at the beginning of the year because there was some hope that the tax rates for gifting and estate purposes were going to be at least as favorable, or even more favorable than they were in 2009. The realization has now occurred that in fact we’re not likely to see things any more favorable and the chances are much greater that things will be worse come 2011. Therefore, there is some pick-up in BV assignments for gift tax purposes right now. The government has a huge deficit and they have to get cash from somewhere. Our read is that there will be an unwillingness on the part of our legislators in Washington to fight for low tax rates because they may believe that they have more important things to fight right now.”
How are the tax issues affecting your practice? Send your comments to firstname.lastname@example.org.
Note for appraisers using Done Deals
Heidi Walker (Fannon Valuation Group), speaking on BVR’s webcast yesterday focusing on transaction databases, reminds users that “equity price” on Done Deals doesn’t quite mean what most appraisers think it does. If no debt is assumed, invested capital price equals equity price…so we have to remove debt from our subject company.
Because all of Done Deals transactions come from SEC filings, Walker recommends that you always go back to the purchase price allocation information to see what assets transferred.
For more information on the webinar, “Putting Transaction Databases to Work”, click here.
From fractional interests to convertible preferred stock transactions - BVUpdate addresses BV issues
The most recent BVUpdate (Sept. 2010), now available on BVLibrary, contains 8 timely articles of interest to business appraisers:
- Using Convertible Preferred Stock Transactions to Calculate DLOM: Brian Pearson (Valuation Advisors LLC)
- To Calculate or Not to Calculate: Revisiting the AICPA’s SSVS-1: Nathan DiNatale (SC&H Group LLC)
- Valuing Fractional Interests in a Vacation Home: A Conversation With Eric Nath
- Should Withheld Indemnifications Affect Licensing Valuations? David Wanetick (IncreMental Advantage LLC)
- Book Review: Buy-Sell Agreements for Closely Held and Family Business Owners—How to Know Your Agreement Will Work Without Triggering It: Dan Golish (Skoda Minotti)
- ETFs, DLOMs, and FLPs: Minimum Marketability Discounts: Ronald Seaman (Southland Business Group)
- ESOP Valuation— Smoothing versus Volatility: Robert Buchanan (PCE Companies, Inc.
- Special Legal Report: Daubert Challenges Ten Years After Kumho Tire: Sherrye Henry, Esq, (BVU Legal Editor)
Valuation of IP assets a vexing endeavor
“An understanding of intellectual property (IP) law, and in particular IP transactions, is critical to success” in the new IP market, wrote attorneys Peter C. Schechter and Allison Singh (Edwards Angell Palmer & Dodge) In their recent article in The Computer & Internet Lawyer, “Buying and Selling Intellectual Property: Why, What & How. “Still, valuation of IP a critical aspect of the IP marketplace,” the authors report.
Experts in the valuation, regulation, and management of intellectual properties are gathering in Chicago on September 15-16 for BVR’s Summit on Best Practices in Valuing Intellectual Property. Whether you attend in person or via webcast, experts will address issues from early stage company valuation techniques to how new regulatory changes are affecting the valuation and management of intellectual properties. Special focus will be paid to the management of intellectual properties, monetizing those assets, and appraising intellectual properties for purposes of economic damages, strategic use, and litigation purposes.
Click here for more information.
Expert insights on intellectual property valuation and economic analysis
We’ve just posted numerous new articles from Insights, the esteemed valuation quarterly published by Willamette Management Associates and provided exclusively to subscribers of BVResearch. The new content includes special-focus articles on intellectual property valuation and economic analysis. The new articles include:
- “The Sport of Kings: Promise and Perils of 21st Century Patent Litigation” by Scott D. Eads, Esq. (Perkins Coie LLP) and Julia E. Markley, Esq. (Perkins Coie LLP)
- “Valuation Considerations and Methods for a Patent Valuation Analysis” by Katherine A. Gilbert
- “What to Do When Considering an Intellectual Property Purchase” by Scott Slavick, Esq. (Brinks Hofer Gilson & Lione)
- “Forensic Patent Evaluations” by Mila Shvartsman and Vlad Shvartsman, Esq. (Shvartsman Laporte Shvartsman)
- “The Value of a Trade Secret” by Robert P. Schweihs (Willamette Management)
- “Valuing Trademark Intellectual Property Using the Relief from Royalty Method” by Robert P. Schweihs
- “Internal Revenue Service Announces That Intangible Assets Qualify as Section 1031 Like-Kind Exchange” by Robert F. Reilly (Willamette Management)
- “Intellectual Property Valuation, Economic Damages, and Transfer Price Analyses” by Robert F. Reilly
- “The Role of the Valuation Analyst in Providing Intellectual Property Litigation Services and the AICPA Professional Standards” by James G. Rabe (Willamette Management)
- “The Importance of Valuing Intellectual Property from an Attorney’s Perspective” by Gail Podolsky, Esq. (Carlton Fields, PA)
- “Combating Counterfeiting in an Electronic Era” by Camille M. Miller, Esq. (Cozen O’Connor) and Jennie A. Taylor, Esq. (Cozen O’Connor)
- “The Valuation of Copyright-related Intangible Assets” by C. Ryan Stewart (Willamette Management)
Mark your calendars: four-part webinar series on damages and lost profits
The 2010 edition of The Comprehensive Guide to Lost Profits Damages comes to life in BVR’s new Webinar Series on Economy Damages, curated by Guide editor Nancy Fannon (Fannon Valuation Group). Throughout October, BVR will host eight of the top minds in economic damages and lost profits cases for a four-part webinar series.
The series includes:
More information on each of these two-hour, two-CPE programs, including our all-access series pass, is available at the BVR conference webpage.
Andersen and Seigneur on new valuation opportunities
Join James Andersen (Burr Pilger Mayer) and Ron Seigneur (Seigneur Gustafson) for “Succession Planning & Exit Strategies: Challenges and Opportunities Today”, a BVR webinar at 10:00 am PT/1:00 pm ET on Thursday, September 9. As these two experts will show, the retirements of the baby boomer generation have created a wave of valuation business in succession and exit planning. To take advantage, appraisers need to know how to recognize both the opportunities and the challenges these valuation assignments present.
For more information or to register, click here. Two CPE credits are available.
NERA seminar addresses impact of recent changes in business valuation practices for transfer pricing studies
NERA, in cooperation with the Tax Executives Institute (TEI), is hosting a tax and transfer pricing seminar on October 19 in NYC. Experts from NERA's Global Transfer Pricing Practice will provide updates on US international tax legislation and country specific updates on transfer pricing issues in Canada, the UK, Germany, France, Japan, and China.
For more information click here.
ESOP repurchase obligation – part of the appraiser’s due diligence
During last week’s webinar, “ESOP Valuation: Repurchase Obligations”, attorney Jared Kaplan (McDermott Will & Emery) and appraiser Robert Gross (Prairie Capital Advisors) agreed that the way a repurchase obligation (RO) is handled by the Company should be a part of the valuation process.
An ESOP RO is a bigger issue now than it was 30 years ago because there are more majority and 100% ESOPs. In addition, demographics in many companies are weighted by baby boomers, resulting in large ROs as this group approaches retirement age. Consequently, some trustees and their appraisers are reexamining traditional thinking of RO treatment in the ESOP valuation, challenging companies to focus on RO planning, requiring companies to forecast RO, and explicitly reflecting RO in the valuation. Kaplan listed several factors that can change an ESOP RO:
- Timing of benefit payments
- Form of payment
- Timing of valuations
- “Run on the Bank”
- Early diversification
- Dividends or distributions of S-Corp earnings
- Annual leveraged repurchases
To hear all of Kaplan and Gross’ discussion of these ESOP valuation topics, click here.
Private cost of capital survey starts another round
John K. Paglia and the Graziadio School of Business and Management at Pepperdine University is conducting their ongoing private cost of capital survey, a research survey pertaining to privately-held companies and the markets in which they raise capital. The survey “examines the behavior of senior lenders, asset based lenders, factors, mezzanine funds, private equity groups, angel investors, venture capital firms, business owners, investment bankers, business brokers, limited partners, and business appraisers.”
You can contribute to the updated survey by clicking here. Individual responses will be kept confidential, and participants will receive the survey results and a comprehensive outlook on private lending and investing, expected in four to six weeks.
If you have any questions or comments, email Paglia.
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