Must an expert’s aged report comply with current
BV standards?

Do valuation analysts have to update their report, which was prepared years ago, if they have to testify on that report in 2010? Do the current professional standards apply to that report?

Analyst Nilufer Usta (Kahn, Litwin, Renza & Co.) posed these questions in a recent discussion on LinkedIn (note: you may have to join the BV Professionals group to access the thread). Nearly two dozen responses have been posted so far, touching on the central topic (short answer: the report need only comply with the standards applicable as of the date of issuance). The BV Professionals discussion also touches on the litigation exception contained in the current SSVS-1 and NACVA standards, litigation strategy in general—and how to challenge an aged report under Daubert and relevant disclosure standards.

The discussion reminded us of a recent federal district case, Lawton v. Bank of America Corp., (D.R.I.) (April 14, 2010), in which the plaintiffs intended to rely on a 2002 valuation of closely held stock, prepared by a CPA in connection with an earlier stage of the litigation. But after disclosing her report, they discovered her underlying workpapers had been destroyed in the normal course of her firm's document retention policy. A deposition revealed additional memory gaps (about her prior methods and data) that only her workpapers could have answered. The defendants challenged the report under Daubert (reliability) and Rule 26 F.R.C.P. disclosure standards (requiring experts to disclose all underlying support for their opinions). The court ultimately let the report in along with a revised supplemental report, but it also expressed some credibility concerns and exposed some weaknesses that the defendants will no doubt use at trial.

The complete digest of the Lawton case appeared in the June 2010 BVUpdate™, and the court’s opinion is one of nearly 3,000 valuation-specific cases currently available at BVLaw™.

Direct secondary market sales: trend building to a tidal wave

Direct, secondary market transactions among private equity companies are surging, according a recent survey by PitchBook (co-sponsor of the new BVR/PitchBook Guideline Public Company Comps Tool™). Already, PE investors have completed 56 deals this year—compared to only 45 for all of 2009. These sales accounted for nearly a third (28.1%) of total U.S. exit activity in the first half of 2010, up from 23.5% in the first half of last year and 18.7% during the second half. “2010's median deal amount is about the same as last year's at $206 million, much higher than the overall PE deal median at $120 million,” say the PitchBook surveyors. “With a $400 billion capital overhang, portfolios of mature investments and favorable credit markets, it's likely we'll continue to see many more secondary deals during the remainder of the year.”

“We foresee a tsunami of secondary transactions on the horizon,” comments Bo Brustkern, whose analysts at Arcstone Equity Research have been working intensively with industry leaders SecondMarket and Sharespost. The perfect storm will continue to build in the private secondary markets as 1) PE and VCs grow more comfortable on the buy- and sell-side; 2) legal counsel grow more comfortable with the transaction mechanics; 3) management gets more frustrated with the lack of exit options; 4) company-designed liquidity programs (such as those pioneered by SecondMarket) become more broadly implemented; and 5) credible research/valuation reports (such as those by Arcstone Equity Research) proliferate. 

When will secondary transactions furnish reliable indications of FMV? ”For the foreseeable future, valuation analysts must closely analyze these transactions to understand how and why they transpired,” Brustkern notes. Further, “companies involved in significant secondary market transactions should consider incorporating such activity in their periodic 409A valuation updates.”  But until the private secondary markets begin to exhibit more profoundly the qualities of an efficient market—e.g., similarity of transactions, proximity, volume, supply/demand balance, participants, information quality, information symmetry, and sophistication—“it is quite likely that the valuations arrived at through a fundamental 409A analysis will not yet be equal to the price obtained in secondary transactions,” Brustkern says.

BV experts outline industry conditions affecting
auto dealerships

During last week’s BVR webinar “Valuing Auto Dealerships” Carl Woodward (Woodward & Associates), Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) and James Alerding (Clifton Gunderson) provided expert insight about valuing an auto dealership in today’s economy. Some of the points made concerning industry conditions include:

• Woodward pointed out that some profits have stayed high because the LIBOR rate is so low and inventory is priced at an artificially low level.  ”That’s not going to last for ever, so floorplan costs are going to go up for dealers in the near future.”

• What changes in the market are permanent?  ”A lot of the discussion I hear from industry leaders is that there’s a new normal for car sales.  Consumers will hold on longer,” reported Yeanoplos. ”Green cars are also a permanent change, compounded by investment in mass transit,” he added.

• Increased union presence, particularly in the west, locks in some liabilities for buyers.  Another issue is that auto dealer real estate is likely to recover in value slower than other sectors, since “these building are generally single purpose, and there are more sellers than buyers,” said Alerding.

Audio recordings, including all webinar materials, are available here.

And, BVWire has assembled a free download for its readers: “The Top 5 Free Sources of Automobile Dealership Industry Information.”

FASB has slideshows and podcasts available free on fair value convergence draft

FASB just released podcasts and a webinar covering some key points in their June 2010 FASB Exposure Draft, Fair Value Measurements and Disclosures (Topic 820): Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (comments are requested by September 7, 2010).  This Exposure Draft is the result of a joint project with the IASB.

The free resources include:

• A slide deck and podcast on measurement and uncertainty
• A podcast, intended primarily for investors, that explains the Boards’ plans to provide investor insights into measurement uncertainty through enhanced and expanded disclosures (hosted by Hilary Eastman, IASB Senior Technical Manager, and Henri Venter, IASB Technical Manager).
• A webinar that offers a high-level overview of the FASB and IASB Exposure Drafts and how they would improve and bring about convergence of financial reporting internationally (hosted by Eastman, Stephen Cooper, IASB Member and Leslie Seidman, FASB Member).

More evidence the 2010 M&A market is improving

“Merger and acquisitions transaction activity picked up in the second quarter of 2010,” says Mike Rosendahl (PCE Investment Bankers).  A number of factors are driving the increase, he believes:

“The economy continued to show modest signs of improvement, debt markets became more active and valuations remained strong for companies that performed well.  Additionally, a segment of business owners are motivated by pending tax law changes that will increase taxes and lower net proceeds after 2010, unless there is an extension of the Bush tax cuts. As a result, companies are evaluating liquidity alternatives resulting in the uptick in transactions. For companies that are performing well this is a good opportunity for shareholders to maximize the proceeds from a sale.”

For the full report, “State of the M&A Markets, 2nd Quarter 2010,” including the latest, year-end, summary transactions data, contact Rosendahl directly or check PCE’s Investment Banking page.

Need answers to DLOM questions?   Look no further…

Despite the volume of work written and presented on discounts for lack of marketability (DLOM), many appraisers still have questions about the subject:

• “Am I using the best method, given the valuation assignment?” 
• “If using QMDM, will a holding period have any affect?” 
• “Are options assets or measures of risk?” 
• “What’s the deal with LEAPs?” 

In their August 11 webinar, “Everything You Always Wanted to Know About DLOM But Were Afraid to Ask”, experts Kevin Yeanoplos, Jim Lurie (CapVal, LLC) and Chris Mercer (Mercer Capital) will respond directly and unabashedly to these and other tenacious questions about DLOM.  Attendees are invited to email their DLOM questions in early for these presenters’ considerations, and you can do so by clicking here.  For more information about the webinar click here. Two CPE credits are available.

PCOC, CAPM and BUM: good tools, but don’t abandon public market data

Pete Butler sent this response to our item on private cost of capital methods last week:

“The total beta technique eliminates the problematic issues of the CAPM and BUM.  While I respect what the Private Cost of Capital does … use of publicly-traded data can be based on timely (specific) empirical data (the Butler Pinkerton Calculator) and not based on (general) expectations every six months. Moreover, investors in private companies have a choice to invest in private companies or publicly-traded stock.  The law of substitution (alternative investments) requires us to look at publicly-traded data, at least in my opinion.  Public disclosures of risk in Forms 10-K provide outstanding feedback for appraisers to compare/contrast with their subject company. So, while the PCOC may be another interesting tool to add to an appraisers' toolbox, this appraiser will never abandon publicly-traded stock data.”

IP Summit to feature multi-party case study

As any practitioner will tell you, the valuation process involves multiple parties representing varying professions and interests.  At BVR’s Summit on Best Practices in Valuing Intellectual Property, hosted by Morningstar Valuation Services, this very scenario will play out in front of attendees with a multi-party case study.  Featuring Jimmy Nguyen, Ron Laurie, Robert Reilly, and David Ruder, this session will showcase the valuation process from the points of view of the legal council, the IP manager, the appraiser, and the financier, respectively.  More information on the Summit and this session are available via our website.

AICPA FVS reminds BVWire readers of upcoming CPE opportunities

Eva Simpson at FVS reminds us of the following events run by her section:

•  AICPA National Forensic Accounting Conference
in Boston from September 29 – October 1 
• AICPA Expert Witness Skills Workshop--a new five day interactive forum (limited to 24 participants) October 11 – 15 in Washington, DC.  It’s designed for financial professionals who want to develop and enhance their skills as an expert witness or as a testifying or consulting expert in litigation.
• And, two upcoming web seminars: Family Law: The Divorce Process (August 17 from 3-5 PM ET) and Forensic Technology: Options & Methodologies (September 14 from 3-5 ET)

These, of course, are in addition to FVS’ Annual BV conference November 7-9 in DC. We’ll see you there!

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