BVR Logo September 11, 2019 | Issue #204-1

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

Some takeaways from the ASA Advanced BV Conference

BVWire attended the ASA Joint 2019 Advanced Business Valuation and International Appraisers Conference in New York sponsored by the American Society of Appraisers. Here are some takeaways from a few of the breakout sessions:

  • “Just explain what you did,” advises Frank Molinari, appraisal team leader at the IRS, who noted that the agency red-flags unsupported opinions of value. Many of the appraisers who work for the IRS were also “on the other side,” and they look objectively at valuations and just want to understand how the expert developed his or her opinion.
  • For litigation engagements, if the other side is not cooperating with a site visit or management interview, ask the judge to intervene, advises the Honorable Matthew F. Cooper, a New York State Supreme Court Justice. He looks “very negatively” at the party that stymies an expert’s access to the subject business.
  • Extended or cross-reality (XR) is the next big wave that is leveraging intellectual property (and its value) in the entertainment and other industries by using immersive technology and digitally replicated humans, says Travis Cloyd (Worldwide XR).
  • Jim Hitchner (Financial Valuation Advisors) compared the Duff & Phelps Cost of Capital Navigator to the “new kid on the block,” BVR’s Cost of Capital Professional, which was shown to be simpler than the Navigator and provide results that are similar to those the Navigator provides.
  • There were several sessions on the size effect when estimating the cost of capital, an input that needs more “intellectual curiosity,” says Adam Smith (PwC). Based on recent academic research, practitioners should not automatically use a size premium but take a fresh look at it and consider other factors. One of these factors is firm quality, and Roger Grabowski and Anas Aboulamer (both with Duff & Phelps), in their session, say that two recent papers show that the size effect continues to be observed and is significant once you take firm quality into account.
  • John Finnerty (Alix Partners) unveiled a new version (not yet published) of his average-strike put option DLOM model that can be generalized to accommodate a restriction period of up to about 10 years (data for longer periods were not available) and also if the length of the restriction period is uncertain. His basic model can be used for a restriction period of up to two years.
  • In the exhibit hall, John Borrowman (Borrowman Baker) told us that valuation firms too often make new hires without sufficient objective input as to their “fit.” Borrowman, a recruiter who has worked exclusively in the BV profession for over 20 years, offers a pre-employment assessment tool to use on BV job candidates (which can also be used for current employees to improve productivity and identify coaching needs). For more information, click here.

More extensive coverage of the conference will be in the October 2019 issue of Business Valuation Update.

Unadjusted deal price best represents fair value, Court of Chancery says

In a statutory appraisal case featuring a publicly traded company, the Court of Chancery, after an exhaustive evaluation of the sale process, found the deal price was the best evidence of fair value. It said neither side met its burden of proof to justify a downward or upward adjustment of the deal price. (Throughout the opinion, the court gives great attention to the burden of proof and asks whether the parties were able to meet it.)

The contested merger closed in July 2016. The subject was Columbia Pipeline (Columbia), a midstream company that developed, owned, and operated natural gas pipelines and related assets. The buyer was TransCanada Corp. (TC). The deal price was $25.50 per share. Columbia’s plan to sell itself attracted a number of possible buyers, but management and the board soon favored TC. Aspects of the sale process were problematic. Key Columbia negotiators had conflicting incentives, held meetings with TC without the board’s approval, and made confidential disclosures to TC about the competition.

DCF is ‘second best’ only: At trial, the petitioners argued for use of their expert’s discounted cash flow analysis, claiming the sale process was flawed and undermined the deal price for appraisal purposes. TC, the respondent, proposed the use of the deal price minus synergies or Columbia’s unaffected trading price. For guidance on how to assess the strength of the sale process and the reliability of the deal price, the court looked to the Delaware Supreme Court decisions in DFC Global, Dell, and Aruba Networks, in which the high court favored the use of the deal price.

The court found in the instant case there were “objective indicia of deal-price fairness.” The merger was an arm’s-length transaction with a third party; the board had no conflicts of interest; other buyers, when given a chance to pursue a deal, did not do so; and Columbia extracted price increases during the negotiations. Although the petitioners had identified real flaws in the sale process, the facts of the case, when compared to those in DFC Global, Dell, and Aruba, allowed for the conclusion that the deal price was a persuasive indicator of fair value, the court said.

At the same time, the court found TC had failed to prove that the deal price included synergies. Contemporaneous evidence showed that the deal price was “comfortably” within TC’s DCF valuation of Columbia, exclusive of synergies, the court said. It also dismissed the petitioners’ argument that Columbia’s value had risen in the time between the signing of and closing of the merger.

Both parties offered expert testimony on the validity of the trading price as an indicator of fair value, but the court declined to spend much time on it, noting that Delaware precedent made clear a reliable trading price was not a prerequisite to a determination of fair value based on the deal-price-minus-synergies metric.

The court gave no consideration to the DCF-based result of the petitioners’ expert and declined to explore the valuation inputs in detail, noting that the DCF here was only a “second-best method” to determining fair value since there was a reliable market-based indicator.

Stay tuned for more reporting on the petitioner expert’s DCF analysis at a later date.

A digest of In re Appraisal of Columbia Pipeline Grp., Inc., 2019 Del. Ch. LEXIS 303 (Aug. 12, 2019), and the court’s opinion will be available soon at BVLaw. Digests of the various DFC Global, Dell, and Aruba Networks decisions as well as the courts’ opinions are available at BVLaw.

Avoid this inconsistency with the terminal value

Terminal value calculations use a perpetuity model that, when using Gordon growth, assumes cash flows occur at the end of each year. But, if you are valuing the subject company on a midperiod basis, you are assuming cash flows during the discrete period occur effectively at the middle of the year. The result is a disconnect: The perpetuity model assumes end-of-year convention, but the valuation of the discrete period is based on a midperiod convention. To fix this internal inconsistency, the undiscounted terminal value that assumes cash flows are received at the end of each year can be discounted by a period that is six months (N - 0.5) before the discrete projection period ends, advises Michael Vitti (Duff & Phelps), during a recent webinar. It can also be fixed by increasing the undiscounted terminal value to reflect an additional six-month return at the same rate as the discount rate. Of course, when the valuation is done using the end-period convention, there’s no disconnect, so N years should be used for the discount period. Likewise, a terminal value based on an exit multiple must also be discounted by the length of the discrete period (N years) because we assume the business is sold at the end of the discrete period. He co-presented the webinar, Terminal Value: A Perpetual Issue in Valuation, with Seth Fliegler (Duff & Phelps). A recording is available if you click here.

BV and litigation seminar in New Haven, Conn., September 26

There’s a unique opportunity to hear from a veteran valuation expert with many years of experience in court, and BVWire will be there! Appraiser Jim Alerding (Alerding Consulting LLC), who has testified in over 400 cases, will present a full-day seminar, Business Valuation and Litigation. He’ll cover hot topics such as goodwill, forecasts and projections, control premiums and discounts, expert witness tips, the written report, and more—all in the context of litigation. To register, you need to fill out a form, which is available if you click here. The Connecticut chapter of the National Association of Certified Valuators and Analysts (NACVA) sponsors the seminar.

AICPA updates practice aid on IP damages

The fourth volume of Calculating Intellectual Property Infringement Damages, an AICPA practice aid, has been issued, and it’s more streamlined and focused than prior editions. The practice aid addresses key damage measures in intellectual property infringement matters, including lost profits, reasonable royalty, and unjust enrichment. There is also an examination of relevant case law with updates of new cases since the last volume was published in 2013. The practice aid is available as part of the AICPA’s Forensic & Valuation Services Library.

Extra: The updated practice aid was discussed in a recent webinar, Calculating Damages in Intellectual Property Disputes: New Guidance, with Jeff Press (Eisner Amper) and Drew Voth (Alvarez & Marsal). A recording is available if you click here.

Two reports examine valuation impact of new IFRS 16 lease accounting

Equity values should remain unchanged, but enterprise values increase under IFRS 16 lease accounting rules, which went into effect Jan. 1, 2019, for many companies, according to two new reports from KPMG and Deloitte. Also, the new rules are “likely to complicate the comparability of valuation multiples, particularly in the short term,” says the Deloitte report. KPMG advises: “A consistent approach is of the utmost importance when applying the multiple methods.” The two reports are contained in the KPMG International Valuation Newsletter (July 2019) and Deloitte’s “IFRS 16 Valuation Impact” (August 2019). Note: There are differences between IFRS 16 and U.S. GAAP (ASC 842) for leases, as KPMG points out in a separate advisory, that make it complicated for companies with dual reporting.

IACVS adds course on China vs. U.S. BV

Later this month, an online CPE course will be presented on the differences in the basic structure between China and the United States in professional valuation systems, procedures, and identification. The course is presented by the International Association of Certified Valuation Specialists (IACVS), which offers the ICVS credential (International Certified Valuation Specialist). The dates for the new CPE course are:

  • September 21: IACVS CPE course (Online/English/Kuala Lumpur Time); and
  • September 28: IACVS CPE course (Online/Chinese/Beijing Time).

For more information on these courses, contact the IACVS at The IACVS global training calendar is available if you click here.

Extra: Two live events of note are coming up: the IACVS World Council Meeting (Singapore, October 9) and the Conference on Valuation of Intangible Assets 2019 (Malaysia, October 15), which will be presented jointly with the Business Valuers Association Malaysia (BVAM).


BV movers ...

People: Brent Sloan, ASA-BV/IA, CEIV, is joining San Diego-based Vantage Point Advisors as managing director to lead the firm’s new office in Seattle; he was formerly with Alvarez & Marsal Valuation Services and Grant Thornton in its valuation services group … Kim Robison has been promoted to senior associate in the business valuation department at Akron, Ohio-based Apple Growth Partners Joseph DeCusati, CPA, ABV, ASA, CFE, had been admitted as a partner at Marcum LLP; he is in the firm’s valuation and litigation support services group and is in the firm’s New Haven, Conn., office … Patrick DeLangis, CPA, MAFF, CFE, CFF, CVA, EnCE, has joined Milwaukee-based Wipfli in the firm’s forensic and valuation group as the senior manager of forensic accounting; he has testified as an expert witness and has extensive experience in calculating damages in disputes.

Firms: Clifton, N.J.-based Sax LLP expanded its New York City presence by merging with James D. Miller & Co. LLP of New York City; the combined firm will have 34 partners with 185 total employees, and four offices: two in New York City (350 Fifth Ave. and 551 Madison Ave.) and two in New Jersey (Clifton and Pennington) … On October 1, Topeka, Kan.-based Mize Houser & Co. will spin off its Lawrence, Kan., office into a separate, independent firm to be known as Kindred CPA … Rochester, N.Y.-based EFPR Group LLP has joined CPAmerica Inc., an accounting association of independent CPA firms … South Korean firm Lee & Ko has joined Duff & Phelps’ Transfer Pricing Alliance … Redwood City, Calif.-based Seiler LLP continues its San Francisco Bay Area expansion with the opening of a new office in Walnut Creek, which is expected to house 45 employees.

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Upcoming BVR training events

  • Fairness Opinions and Projections (September 12), with Craig Jacobson (GlassRatner), Jeffrey Rothschild (McGuireWoods), and Richard Peil (GlassRatner). This is part of BVR’s Special Series on Fair Value.

    An attorney joins two valuation experts for a discussion of both the legal and financial aspects of fairness opinions, with a special focus on the role of projections used in the underlying valuation analysis, and special insight on the interaction between management and the opinion provider.

  • Goodwill: A Discussion and a Debate (September 18), with R. James Alerding (Alerding Consulting LLC) and Alan Zipp.

    Hear two of the most knowledgeable experts in the area of goodwill and personal goodwill cover the key issues and controversies that every valuation expert needs to know about.

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

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