Samsung flip-flops on off-the-market lost profits calculation

Apple vs. Samsung: The Sequel. As the two giants headed into a second trial, a damages issue that they litigated only a few months ago concerning Apple’s off-the-market lost profits took the spotlight in pretrial proceedings. In a surprise move, Samsung did a complete reversal on the question of when to consider potential design-arounds.

Prior case: In November 2013, Apple and Samsung retried damages related to Samsung’s infringement of critical components of Apple’s iPhone and iPad. A source of contention between the parties was the timing for calculating Apple’s “off-the-market” lost profits—damages for times when Samsung infringed but should not have been able to sell the infringing products because there was no noninfringing alternative. The issue was whether the damages calculation must consider potential design-around products from the point of first infringement or the date of notice of the infringement. Samsung vigorously argued for the date of first infringement and prevailed in court. The ruling reduced Apple’s damages demand by $305 million. Ultimately, Apple was awarded $930 million.

Contradiction: In this second case, Apple seeks $2 billion, alleging Samsung violated five of its mobile software patents. For its part, Samsung claims Apple infringed two of its patents. Initially, Apple’s damages expert analyzed off-the-market lost profits based on the notice dates. For four of Apple’s five patents in suit, the infringement date preceded the notice date. In terms of the fifth patent, since the notice date preceded the infringement date, he did not calculate damages.

In a Daubert motion, Samsung successfully used the court’s prior ruling to force a revaluation for damages—a decrease in lost profits—related to the four patents. But the earlier ruling cut both ways because Apple’s expert determined that Apple now could claim additional damages in off-the-market lost profits for the fifth patent. Samsung tried to preclude the expert’s calculation as to the fifth patent by arguing that the court’s prior order did not apply to where the notice date was earlier than the first infringement date. Apple pushed back saying Samsung “contradicts itself to reduce potential damages exposure for [the patent in suit].” Even though it had notice of the patent a year before infringement, it decided to infringe rather than design around it.

The court agreed with Apple and refused to strike the expert’s calculation. Samsung’s position “would require analysis of potential design-arounds before the infringement period—in this case the notice date.” Samsung failed to cite any authority for assessing noninfringing alternatives for a period “when no lost profits could have been available.”

Find a discussion of Apple, Inc. v. Samsung Electronics Co., Ltd. (Apple II), 2014 U.S. Dist. LEXIS 43907 (March 28, 2014), in the May issue of Business Valuation Update; the case will be available soon at BVLaw.

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IRS bars appraisers over Circular 230 violations

A group of appraisers have been barred from valuing façade easements for five years under a settlement agreement with the Internal Revenue Service. The IRS accused them of aiding in the understatement of federal tax liabilities by overvaluing façade easements for charitable deduction purposes. The appraisers applied a flat diminution percentage of typically 15% to the fair market values of the underlying properties prior to the donation of the easements. Under the settlement agreement, the appraisers admitted to violating Circular 230 sections relating to due diligence and submitting accurate documents to the government.

Warning: “Taxpayers expect advice rendered with competence and diligence that goes beyond the mere mechanical application of a rule of thumb based on conjecture and unsupported conclusions,” says Karen L. Hawkins, director of the IRS Office of Professional Responsibility, in a release.

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Analyst guidelines for bankruptcy valuations

As bankruptcies have become more complex and bankruptcy proceedings have become more contentious, the scope of valuation analyst professional services has expanded. In their book, A Practical Guide to Bankruptcy Valuation, Robert Reilly (Willamette Management Associates) and Dr. Israel Shaked (The Michel-Shaked Group) present their top 10 valuation analyst guidelines when working on a bankruptcy assignment.

Know your assignment: One of the guidelines points out that the analyst should understand and document all of the elements of the bankruptcy valuation assignment. The elements of the valuation assignment are typically described in the statement of the purpose and objective of the bankruptcy valuation. Before the start of the engagement, the analyst should understand the following elements of the bankruptcy valuation:

• The valuation subject (what debtor businesses, assets, or securities are the subject of the analysis);
• The subject ownership interest (this is typically, but not always, a fee simple ownership interest);
• The appropriate standard of value (this is typically, but not always, fair market value);
• The appropriate premise of value (this is typically, but not always, value in continued use as a going concern); and
• The appropriate valuation date (unless purely determined by law(s), the analyst should understand why the selected date is relevant to the bankruptcy proceeding).

See the entire list: For the rest of the guidelines, see “Top 10 Analyst Guidelines for Bankruptcy Valuations,” which BVR is pleased to provide as a free download.

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Top 10 on the hit parade of free BV downloads

BVR provides over 150 free resources on our Free Downloads page. They include articles, papers, court cases, and videos featuring top experts in the field of business valuation. Which downloads have been the most popular with BV professionals? Over the past year, the Top 10 downloads were:

• Commissioner v. Estate of Jelke (briefs on writ of certiorari to the U.S. Supreme Court);
• Holland v. United States (tax case);
• “State-by-State Summary of Economic Resources”;
• “The Implied Private Company Pricing Line” (new method of estimating cost of capital for small private companies);
• “Pitfalls in Levering and Unlevering Beta and Cost of Capital Estimates in DCF Valuations” (Journal of Applied Corporate Finance);
• “The Increase of Initial Public Offerings (IPOs) in 2013 and the Impact on Lack of Marketability”;
• “2013 Duff & Phelps Risk Premium Report”;
• “Compare Apples to Apples: Recommended Adjustments to Transactional Data”;
• “FLP Appraisals: Plan for the New Matrix”; and
• “Factset Mergerstat Review Excerpt 2013.”

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Take a free look inside the 2014 Mergerstat Review

An exclusive excerpt from the soon-to-be-released 2014 Mergerstat Review is now available. The excerpt shows:

• U.S. states that announced the largest number of corporate sales/divestitures in 2013;
• The top five seller industries in 2013 (number and dollar value of announcements); and
• Trends in M&A activities, with Net announcements.

The 2014 Mergerstat Review, which includes the Mergerstat Monthly Review, a monthly PDF summary of deals, trends, and industry spotlights, is expected to ship in late April. To order your copy, click here.

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New data on A/E valuation and M&A transactions

Late last year, on behalf of Rusk O'Brien Gido + Partners, we asked for participants to take a confidential survey designed to gather transactional data on the fair market value of businesses in the architecture, engineering, and environmental consulting industries (A/E firms). The goal was to analyze the valuations of stock from actual transactions, including transactions between employee-owners, ESOP transactions, and mergers and acquisitions.

Now available: The survey collected data from over 200 distinct stock transactions, which, along with supplemental data from publicly available sources, is now available in the A/E Business Valuation and M&A Transaction Study.

The study examines the differences in valuation multiples between controlling and minority interest transactions, the difference in value between marketable stock (stock of publicly traded firms) and nonmarketable stock (stock in privately held firms), and the valuation of stock in employee stock ownership plan (ESOP) transactions. Also provided is a statistical analysis of merger and acquisition deals—including how the transactions were structured and the forms of consideration paid. This is the most comprehensive and reliable study on valuation and M&As ever published for this industry.

For more information, click here.

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WhatsApp with tricky startup valuations?

The WhatsApp deal is an extreme example of valuing an early-stage entity that has lots of potential and value but doesn’t have the stability in revenues or cash flows required to use the traditional valuation methods. Valuation analysts are facing an area of growing challenge when confronted with engagements involving entities with high growth and complex capital structures with potential for dilution as venture capital and angel investors become involved.

This becomes more challenging if the startup company is entangled in a divorce proceeding, and it is the topic of a session at the upcoming AICPA/AAML Conference on Divorce (April 24-25, Las Vegas). The session, “Challenges to Valuing, Protecting and Treating an Owner’s (Dilutable) Interest in a Startup Business,” will be conducted by David W. Griffin, Esq. (Rutkin, Oldham & Griffin LLC) and Ronald L. Seigneur (Seigneur Gustafson).

Different animal: This kind of assignment is fundamentally different from valuing an established company, Griffin and Seigneur point out. There may be no comparables, and there may not be an ability to utilize traditional methodologies such as determining a discount rate and applying it to free cash flows. Revenue forecasts are more hope than reality, and, in some instances, startups will not forecast revenue, due to the fear of dampening valuation expectations from potential angel investors.

In a divorce context when a startup company is involved, the valuation expert needs to review all underlying documents, account for the treatment of startup costs and related financing, understand voting rights and restrictions on stock including conversion rights and the potential for dilution. At times, debt is convertible to stock on a certain date or upon the occurrence of a future event, either of which can dilute the ownership interest, which is the subject of valuation (and equitable distribution). Owners or high-ranking employees may be paid in some combination of stock and cash and with no consistency. What is the stock component worth? Can it be sold for the purposes of supporting the family? Should the nonowner spouse negotiate for lump-sum alimony rather than wait and see?

During their presentation, Griffith and Seigneur will address these and other questions and give real-life examples of how these issues were addressed. For information on the conference, click here.

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RICS offers new IVS-compliant BV training

The Royal Institution of Chartered Surveyors (RICS) has made a big leap into business valuation certification—and now training. Its Core Business Valuation Techniques Courses I and II are launching as distance learning (150 hours each) introductory courses as of June 18, 2014. The courses are intended to take 12 weeks each, but, since they’re self-paced, attendees are welcome to take more time to get through the key materials.

The courses are the first certification-level business valuation training efforts that match the International Valuation Standards as promulgated by the IVSC. And, as John Barton, the primary designer of the course and the instructor for this first release, points out “a lot of candidates struggle with three days of structured instruction followed by a four-hour test. Self-paced learning allows candidates to spend the time they need to truly master each module.”

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BV movers . . .

People: For her leadership and achievements at Reinsel Kuntz Lesher LLP as well as her contributions to the community, Amy Gohn Anstine was named to Central Penn Business Journal’s 2014 “Women of Influence” awards list …Smart Devine announced that Key Coleman has joined as a managing director in the business advisory practice in Pennsylvania … Rea & Associates announced the promotion of Becca Davies, who is responsible for spearheading marketing, business development efforts, and guiding strategy for each of the firm’s 11 offices as well as 12 special service and niche markets … BKD LLP announced that Caleb Harris, an associate at the Springfield, Mo., office, is a recipient of the 2013 Elijah Watt Sells Award from the AICPA … Perkins & Co. announced that Ray Jordan, former owner of Ray Jordan, PC joined its Portland, Ore., office as a principal in the tax department … Frank Pina, leader in its forensic and litigation support practice and a managing director at The Mercadien Group and principal in Mercadien PC, was included in the Philadelphia Business Journal’s annual “40 Under 40” list … Emily Schenk and Caleb Spears have joined Kemper CPA Group LLP, Greenfield, Ind., as staff accountants … Gettry Marcus CPA, P.C. of New York City recently added three new members to its firm: Janet Winiarski, CPA to the Accounting and Audit Department; Stacey Ellenthal to the Marketing Department; and Jarred Berman, CFE, CFIP to the Business Valuation and Litigation Group.

Firms: BCG & Co. was recently named as one of the “Best Employers in Ohio for 2014” … Baker Tilly Strachan Lafayette, of Kingston, Jamaica, joined the international network of Baker Tilly International … Ernst & Young LLP received an unprecedented five Association of Management Consulting Firms' Spotlight Awards for Value and Excellence in Consulting, winning trophies in the categories of Change Management, Growth Strategies, Developing Markets, Operating Model Design, and New & Digital Media … HLB International, the global accountancy network, announced its newest member, HLB McKeogh Gallagher Ryan, of Limerick … One of the largest minority-owned accounting firms in the USA, McConnell Jones Lanier & Murphy LLP opened a new office in Austin, Texas … Saslow Lufkin & Buggy LLP was named the No.1 “Best Place to Work in Vermont” by Vermont Business Magazine … Warren Averett Asset Management LLC opened an office in the Tampa, Fla., market, bringing the firm’s office locations to five, including Birmingham, Huntsville, and Montgomery, Ala., as well as Pensacola and Tampa, Fla.

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New Risk Premium Calculator, DLOM—and more—highlight CPE events

An exciting lineup of CPE events is in the wings.

The Duff & Phelps Risk Premium Calculator: Utilizing New Data & Features for 2014 (April 17), featuring James Harrington (Duff & Phelps). Join Calculator co-creator Harrington for an exclusive guided tour of the new data available in 2014 as well as the new features that make this tool even more powerful. This one-hour webinar is free.

Using the Empirical Method for Determining DLOMs (April 24), featuring Bruce Johnson (Munroe Park & Johnson). Cut through the noise of competing DLOM methodologies and studies to learn how the nature of marketability discounts themselves can be used to determine a sound and defensible adjustment.

Valuing Veterinary Practices (May 8), featuring Byron Farquer and David McCormick (both Simmons & Associates). Like their patients, veterinary practices come in many varieties. Learn how to value a veterinary practice and where the opportunities and pitfalls lie from two experts whose experience includes veterinary practice valuation, brokerage, and management, as well as the practice of veterinary medicine itself.

Advanced Workshop on Monte Carlo Simulations: Applications & Examples (May 15), featuring David Dufendach and Randy Heng (both Grant Thornton). Learn how to harness the awesome power of Monte Carlo simulations through this intensive, four-hour workshop, featuring in-depth analysis, instruction, and two thorough case studies.

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We welcome your feedback and comments. Contact the editor, Andy Dzamba at: editor@bvwire.com or (503) 291-7963