Delaware Supreme Court disses Chancery’s blending of valuation methods
The Delaware Supreme Court recently overturned a 2016 ruling by the Delaware Court Chancery that had blended the results of three valuation techniques to arrive at fair value. Chief Justice Strine, who once headed the Chancery, wrote a harsh critique replete with lots of advice to his successor, Chancellor Bouchard, on how to do a valuation.
The contested merger involved a global payday lending company that faced regulatory uncertainty in key markets and fierce competition. A private equity firm acquired the company. The chancellor, who handled the appraisal proceeding, performed a discounted cash flow analysis and also used the outcomes of the multiples-based comparable company analysis and the transaction price in calculating fair value. He weighted the results equally.
Market beats DCF. Post-trial, the company asked the court to correct an error related to the working capital figures in the Chancellor’s DCF analysis. In response, the dissenters wanted an adjustment to the perpetuity growth rate based on their expert’s affidavit that there needed to be a “codependent … and directionally consistent relationship” between the projected working capital in the DCF and the perpetuity growth rate. The court made both adjustments and achieved a fair value that was slightly higher than the original one.
The company appealed the decision with the Delaware Supreme Court. It asked the high court to create a judicial presumption, applicable in appraisal proceedings, that provides that, when the merger that triggered the lawsuit was an arm’s-length transaction, the merger consideration was the best indicator of fair value.
The Supreme Court declined to craft a bright-line rule. But it strongly agreed with the company that the Chancery’s adjusted DCF analysis was highly problematic and that the weighting of the results of the three methods was not supported by the record of the case or by basic economic principles. “Market prices,” the Supreme Court said, “are typically viewed superior to other valuation techniques because, unlike, e.g., a single person’s discounted cash flow model, the market price should distill the collective judgment of the many based on all the publicly available information about a given company and the value of its shares.”
The Supreme Court remanded, directing the chancellor to reassess the earlier valuation.
A digest of DFC Global Corp. v. Muirfield Value Partners, L.P., 2017 Del. LEXIS 324 (Aug. 1, 2017) (DFC Global II), and the court’s opinion, will be available soon at BVLaw. A digest of the Chancery’s decision, In re DFC Global Corp., 2016 Del. Ch. LEXIS 103, as well as the court’s opinion, is already available to BVLaw subscribers.
The value of a dollar of earnings of an automobile dealership is dramatically affected by the franchise that is generating those earnings. The strongest franchises continue to be the luxury imports, according to the “Haig Report, Second Quarter 2017.” Porsche maintains its “blue sky” multiple range of 7.5x to 9.0x, the highest range of all auto franchises.
CIMI method: In this industry, the blue sky multiple remains the most commonly used method for determining the value used in actual dealership transactions. Several years ago, Dixon Hughes Goodman LLP developed the “current industry market indicator” (CIMI) method, which is essentially the blue sky multiple method. The CIMI method estimates the fair market value of a dealership by multiplying the expected pretax earnings by an appropriate multiple to determine the amount of blue sky (intangible asset value) and then adding the adjusted net assets to get the fair market value of the entire company.
Timothy York and Adam Lawyer, both with Dixon Hughes Goodman, recently conducted a webinar that included an update on industry trends, such as:
Auto dealership volume, earnings, and price tags arguably are still near all-time highs;
The Trump administration is generally good news for auto dealerships due to reduced regulations;
Top three auto dealership disruptors are direct sales (Tesla), sharing (Uber), and self-driving cars; and
While luxury imports are still the most desirable auto franchise, they are losing steam to high-end domestics.
Upcoming IP auction adds to sources of transaction data
An interesting source of transaction data for valuing patents is Ocean Tomo, an investment bank that holds private and public auctions of patents. The next auction will include 1,100 patents from a global technology company that represent the following technology areas: printing, computing, imaging, network services, personal communication systems, life science and microfluid, photovoltaic, mobile, tablet, telecommunications, projectors, sensors, RFID, and gaming. The patents will be grouped into 45 lots. For further information on these assets for sale and to request bidding information, please contact www.auctions@oceantomo.com.
Traditional sources of data include IP databases such as ktMINE, Royalty Source, and Consor. Also keep an eye on SEC filings and court cases.
No, we’re not referring to an asset with negative equity, but one that’s actually under the deep blue sea. In an article, maritime valuation specialist Ed Geary talks about appraising assets not found on terra firma—from ships to underwater hotels.
Unusual site visit: He was the expert for the IRS in a Tax Court case involving a donation of stock in a company that owned the Jules’ Undersea Lodge in the Florida Keys. “Using scuba gear, I conducted an underwater inspection of the hotel,” says Geary, who has the FRICS designation from the Royal Institution of Chartered Surveyors. He used a replacement cost approach adjusted for inflation and depreciation to determine the hotel’s fair market value, which was also adjusted for a DLOM because the donated stock represented a minority interest. The court ruled in favor of the IRS.
The article points out that an accredited and certified maritime appraiser must have complete knowledge of engineering principles and practices of design and construction. He or she also must also have expertise with flag administration requirements and statutory and regulatory compliance in a maritime context.
One question to ponder: Can an asset covered with water be subject to a discount for lack of liquidity?
Time is ripe for the Tax Court’s S corp tax affecting opinion
It’s been a year and a half since the Tax Court heard a significant case related to S corp tax affecting, which is about the average time it takes for the court to render an opinion on a matter such as this. For the first time, one of the S corp models is being used—and by both the IRS and the taxpayer.
The case is Cecil et al. v. Commissioner of Internal Revenue, and it involves a gift of shares in the Biltmore Co., which operates the famous Biltmore estate, a Gilded Age mansion the Vanderbilts built that is now a tourist attraction. The Cecils (descendants of the Vanderbilts) valued the stock gift at $20.88 million, but the IRS said those shares are actually worth $95.29 million. One of the main issues in the case is the S corp matter.
The tax-affecting issue has been argued in a number of Tax Court cases (most notably the Gross case). In all of these cases, the IRS and the Tax Court have refuted the notion that shareholder-level taxes affect a firm's value, so the valuation conclusions in these cases were based on earnings not being tax affected. The valuation community disagrees, so a number of models were developed that are designed to reflect the impact of shareholder taxes on value. In the Cecil case, both sides made very similar adjustments using the S corporation economic adjustment model (SEAM) developed by Daniel Van Vleet (Stout Risius Ross). The case was heard in February 2016.
The AICPA is launching the Certified in Valuation of Financial Instruments (CVFI) credential, and an exposure draft of a “disclosure framework” has been issued that establishes parameters of documentation requirements. Comments are due September 26.
The AICPA’s goal is “for the CVFI to become a global credential that other valuation organizations are able to offer their members.” This new credential is not just for CPAs and will involve training, an exam, and ongoing quality control. The global nature of the credential means that it will embody not just U.S. GAAP, but international standards as well, such as IFRS.
For more information, the AICPA has set up a special page that includes links to the exposure draft and a sign-up form so that you can get future alerts as the credential develops.
Early-bird discount ends soon for AICPA’s annual FVS conference
Register by September 29 to get the $75 early-bird discount for the AICPA Forensic & Valuation Services Conference November 13-15 at Caesar’s Palace in Las Vegas. But BVR has arranged with the AICPA for an extra discount of $100 for BVWire subscribers. Just use the code VLH when you register. The full agenda for this year’s conference is now posted, and there is something for the seasoned practitioner as well as those new to the profession. In fact, there’s a special NextGen program tailored to individuals with fewer than five years of BV or forensic accounting experience. Before the main conference, you can take either the ABV or CFF exam review course or one of the preconference workshops: Data Analytics or Valuation Report Writing. BVWire will be there—will you?
In the Chicago area? Attend the Chicago M&A Conference tomorrow, September 14, where you’ll hear perspective and practical insights on the latest strategies for evaluating and structuring corporate transactions. Transaction Advisors brings together experts from Shearman & Sterling, The Boston Consulting Group, Aon, EY, Latham & Watkins, and many others for a full day of sessions at the University of Chicago Gleacher Center.
As of the time of this writing, the ASA’s joint 2017 Advanced Business Valuation and International Appraisers Conference will go on as planned October 7-10 in Houston. The hotel and venue for the event is open and fully operational, the ASA announced, but the organization will provide updates should the status of the hotel or conference change. Of course, everybody’s thoughts are with the people who have been affected by Hurricane Harvey.
The International Association of Consultants, Valuators and Analysts (IACVA) and the International Institute of Business Valuers (iiBV) have joined forces to boost IACVA’s International Certified Valuation Specialist (ICVS) designation. The two groups will develop in-class and online certification training and testing that will reflect International Valuation Standards and will be translated into other languages as well as allow for the addition of nation-specific modules. ICVS certification training is planned for China and Beirut later this year, according to IACVA’s current training calendar. Earlier this year, ICVS training was done in Korea, Australia, and Hong Kong.
Valuation practices around the word can diverge quite significantly. An international designation will help improve and provide a minimum level of uniformity and give assurance to clients and regulators that the analysis is consistent with other areas around the globe.
Public comments are being reviewed on an Agenda Consultation Paperon future revisions to the International Valuation Standards (IVS). This is part of the IVSC’s new efforts to continually evolve IVS instead of issuing completely revised standards every few years. There will be further review and conclusions at the Standards Boards meetings at the IVSC Annual General Meeting in Mexico City October 1-4. The IVSC will also release a document giving the rationale for how it prioritized areas of future focus.
Buoyed by increased viewership and a relatively controversy-free tournament, the Indian Premier League (IPL) has seen a spike in its brand valuation to $5.3 billion after the 10th edition, according to global valuation and corporate finance advisor Duff & Phelps. The IPL's overall value as a business has increased to $5.3 billion from $4.2 billion last year, representing a three-year CAGR of 13.9%, Duff & Phelps said in a report.
People: Karl Schwabauer was promoted to partner at BKM Sowan Horan LLP (Dallas) and leads the Forensic Accounting, Business Valuation and Litigation group … Two promotions in the valuation, forensic, and litigation department at BST & Co. CPAs LLP (Albany, N.Y.): Katie Stott to senior manager and Caleb Barton to senior analyst … Eric Flickinger was promoted to manager in the business valuation department of Apple Growth Partners in Ohio; he’s in the Cleveland office … Jessica Barnes has joined Cherry Bekaert LLP as director of business development based in its Richmond, Va., office … Former KPMG Sweden CEO Helene Willberg has joined Alvarez & Marsal as a managing director based in Stockholm; she’s a top transaction advisory professional and, with Christer Wiberg, will co-lead the firm’s Nordic practice … MPI expands into commercial damage litigation and forensic accounting services with the hiring of James T. O’Brien as managing director; the firm’s headquarters is in Lawrenceville, N.J.
Firms: WithumSmith+Brown has acquired Bond Beebe, expanding its presence in the Beltway with the firm’s offices in Bethesda, Md., and Arlington, Va.; the combined firm has 124 partners and 830 staffers in 16 offices … HBK CPAs & Consultants has acquired Pittsburgh appraisal firm Brabender Mascetta Pattison LLC to strengthen its valuation, litigation, and forensics business unit; HBK has over 500 professionals in Ohio, New Jersey, Pennsylvania, and Florida … Denver-based Arcstone Partners has joined the business valuation practice of CPA firm Frank, Rimerman + Co. LLP (Palo Alto, Calif.); the combined team will focus on venture-backed technology companies and other niche industries … GBQ Partners LLC has relocated its offices in Cincinnati to new space that fits up to 48 employees with options to expand … Boston-based AAFCPAs, with another office in Wellesley, Mass., adds a new one in Westborough, Mass.; 180 people-plus are in the three spots.
A detailed case study on estimating the FMV of a 100% controlling, marketable interest in a nonfood franchisee that will provide real-time insight into the thought process for evaluating a business model, historical financials, projections, and guideline private transactions.
Valuation of Management Incentive Units (September 14) with Patrick Guthrie (RSM), Stephanie Johnson (RSM), and Amanda Lessiohadi (RSM). This is Part 11 of BVR's Special Series on Fair Value.
Management incentive units (MIUs) have become increasingly popular in recent years due to more companies electing to be structured as LLCs. They can take such forms as restricted stock units, profits interests, or profit-sharing units.
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