Calculating control premiums: New study suggests invested capital may be the most important metric What is the most meaningful way to measure a control premium? Brad Pursel investigates data on corporate environment, buyer types, country of exchange, and other metrics in “Control Premiums: Application and Analysis,” in the current (March 2010) Business Valuation Update™. His analysis relies heavily, of course, on the Mergerstat/BVR Control Premium Study. “The magnitude of a control premium is only part of the issue; the appropriateness of even including a control premium (or discount for lack of control) is now increasingly…debated in legal, tax, financial reporting, and other settings,” Pursel points out. The application of a control premium may introduce a faulty assumption; i.e., since public companies are acquired at a premium to their then traded-values, then there must be a buyer for every public company willing to pay such a premium. More factors may be at work, Pursel says. For instance, “recent academic research has indicated that the 52-week high price for target companies has a key role in purchase prices and control premiums.” Data on the country and exchange also play a critical role. “However, data…in this article would appear to indicate that the utilization of invested capital is a more meaningful method of measuring a control premium,” Pursel concludes. His exclusive, empirical study helps provide a reliable analytical framework for valuation specialists, financial advisors, courts, and others to assess this key input. ASA decides ‘we are one’ In strategic growing pains that may be felt by the rest of the appraisal profession, the American Society of Appraisers’ Board of Governors discussed quite a bit more at its most recent midterm meeting than just a potential merger with RICs (see last week’s BVWire™). “[We] gave serious thought to the issues of long range planning and the direction that should be set for the Society,” says ASA International President Michael Evans, in a follow-up letter to members. “We met, debated, and [though] we did not all agree, we did reach consensus on a number of issues.” First and foremost: “Do we plan for one organization or for six disciplines?’ After all, one society can be subject to central planning—six cannot. “The Board clearly decided that we are one Society,” Evans said. As for any non-profitable disciplines, the discussion was “hotly debated,” with several ideas on the table but none clearly accepted. How will we fund future operations? “Again, the Board debated this issue at length but did not make any changes,” Evans said. Similarly, it requested more information on expanding its international educational strategy, including a collaborative proposal with Canadian appraisers (CICBV). As to the proposed merger with RICs (an estimated five-to-ten year process), the Board did not believe it was the ASA’s best interest. Long-term cooperation with sister international societies is “appropriate and necessary,” Evans said, and to that end, the Board affirmed its long-term commitment to coordinating “a unified voice” among appraisal organizations. New (free) tutorial on using FMV restricted stock data Courts are continually asking for more accurate, empirical data in determining discounts for lack of marketability. Tax Court judges, in particular, have become more sophisticated when it comes to valuation issues and are more likely to reject simple averages or medians calculated over a specific time period. The BV profession has evolved, too—as have the data sources they need to produce credible, clearly supported valuations for the courts and their clients. The FMV Restricted Stock Study™ provides comparative empirical data on restricted stock transactions for appraisers to use in support of their discounts for lack of marketability. For the first time, FMV Opinions (the authors of the database) have created a tutorial on using the data. The free case study describes an effective, three-step methodology for determining DLOM for a minority interest in a privately held company: First, it provides background information regarding a hypothetical minority interest in an operating company, including company-specific as well as broader economic data. Second, it describes the valuation theory and empirical data related to the determination of the DLOM; and finally, it applies this methodology to the specific case. Don’t miss this opportunity to learn more about the database and solidify your DLOM calculations for the future. Implied minority discounts: How to help the doctrine die What do you do when the courts have yet to catch up to the appraisers? That’s one of the problems with precedent-based jurisprudence; by nature, it depends on prior decisions and takes a long time to turn around, even when new applications have gained common acceptance by experts in the field. Such is the case with the current doctrine of implied minority discounts (IMD) in statutory appraisal law. “The IMD posits that, no matter how liquid and informed the financial markets, all publicly traded shares trade in the market at a substantial discount relative to the going concern value using a DCF,” writes Professor Lawrence Hamermesh, in his recent (Dec. 2009) article for BVUpdate. “The IMD amounts to a statement that financial markets consistently price shares significantly below pro rata going concern value.” The problem: When a company issues public shares, it creates agency costs, Hamermesh explains. “Pubic traders price those additional costs going into the investment as part of the company’s ‘operative reality.’” How does the IMD justify paying minority dissenters the value of control when they already belong to a larger shareholder class to which control has been dispersed through public ownership? Put another way, if shareholders were truly entitled to getting the value of control in a statutory fair value appraisal, then appraisers would likely adjust the DCF values upward to account for reduced agency costs. How can business appraisers help turn the courts’ opinions? “Cite the current positions,” says Gil Matthews, “and point out the fallacies of courts continuing to apply the IMD.” And tune into “Implied Minority Discounts in Statutory Fair Value: The Doctrine that Won’t Die”, a 100-minute BVR teleconference featuring Matthews and Professor Michael Wachter (frequent co-author with Hamermesh, and his co-director at the Univ. of Penn. Inst. for Law & Economics). These two top IMD experts will explain the theoretical and practical gap between the courts and appraisers— and how to forge new connections with better content and communications. Find out more and register here. Nearly 500 new deals in Pratt’s Stats show recovery is slow
“It’s important to note that the above includes all industries, company sizes, company types (S Corp, C Corp, etc.), all sale types (asset and stock); it includes everything in one tasty soup,” says BVMarketData publisher Doug Twitchell. “Even with that, it’s probably a fairly good indicator of what’s happened with valuation multiples overall.” Even better news: In just the last two months, we’ve collected 439 deals for Pratt’s Stats, taking the total transactions to just over 15,000. The median net sales of the collected deals equaled $438K with a median selling price of $200K. Here’s a breakdown of the deals by major industry category—note that restaurants still show up as the top SIC code, accounting for 87 new deals:
IVSC aims to ‘demystify’ valuation of intangibles The adoption of International Financial Reporting Standards (IFRS) has greatly increased the need for improved information and consistency when valuing intangibles, especially in the context of cross-border mergers and acquisitions, joint ventures, and other investment arrangements. However, too often a disconnect results between “the book value of companies and the real market value of their intangible assets,” says Chris Thorne, President of the International Valuation Standards Council (IVSC) in a new release. To assist practitioners and to “help demystify the whole process so that it becomes more comprehensible to investors around the world,” the IVSC has just published its updated Guidance Note 4 on valuing intangible assets, including brands, customer relationships, IP, and goodwill. The IVSC is also collaborating with The Appraisal Foundation on developing best practice guidance in specific areas where such authority is currently lacking, including the valuation of customer relationships and the identification and valuation of control premiums.
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