Are certain M&A targets being overvalued?
Most private-target M&A deals have “issues” after the closing, including price adjustments favorable to the buyer. Does this mean the valuations were wrong?
The 2013 SRS M&A Post-Closing Claims Study analyzes post-closing issues and payouts across 420 private-target acquisitions, comprising $66.7 billion in stated deal value. Shareholder Representative Services (SRS) is a post-closing expert for private-company M&As. Overall, the study shows that two-thirds of all deals had issues arise after closing, and one in five deals with claims actually had exposure exceeding half of the escrow.
Other interesting findings: Of the deals analyzed, 8% had at least one claim made in the final week of the escrow period. Final escrow releases were delayed due to claims in 30% of deals. Almost three-quarters (73%) of deals with post-closing purchase price adjustment mechanisms saw adjustments, which were more often buyer-favorable than seller-favorable. Of these adjustments, 27% were ultimately modified from the initial amount claimed.
What do you think? Is there a tendency for sellers to overvalue acquisition targets? Are buyers not doing enough due diligence into value to justify the prices they’re paying? Or is this phenomenon merely a result of the complex negotiation and deal structure process inherent in these deals? Write to the editor here.
Most popular sources for guideline public
company data
The large proprietary databases containing guideline public company data have found favor in the business valuation profession, according to preliminary results of BVR’s 2013 BV Firm Economics and Best Practices Guide. While the majority of business appraisers get this information from other, less expensive sources, an increasing number are using sources such as PitchBook or Morningstar 10K Wizard.
Pecking order: By a wide margin, the top two sources are Yahoo! Finance (used by 55% of survey respondents) and EDGAR (38%). The BVR/PitchBook Public Company Comps Tool jumped to third place, with 16% citing the use of this source versus 6% in 2010, the last time the survey was conducted. Tied for fourth (at 13% of respondents each) are Hoover’s and Morningstar 10K Wizard. FetchXL rounds out the list, used by 5% of respondents.
Our thanks to everyone who participated in the survey, which collected data from about 250 complete responses, representing firms with 2,000 business appraisers, on a variety of issues. We will provide further results and analyses here in future issues of BVWire and also the BV Update.
Causation is pivotal to credible damages testimony, expert points out
Nancy Fannon (Meyers, Harrison & Pia) is concerned that recent BVWire reports on causation and lost profits leave the impression that damages experts don’t have to consider causation. Failure to link your damages to the actions of the defendant and rule out all causes for the loss, she says, makes an expert vulnerable at deposition or on cross-examination and a likely candidate for exclusion at trial.
“I frequently find that the misconception among experts is that they do not need to address cause,” which, she feels, may contribute to a general lack of credibility with the court. “The question is,” she goes on to say, “how can you calculate the extent of damages flowing from the breach, if you don't consider the realm of things that could have caused the plaintiff's presumably declining results? Is the attorney going to tell you the economy is down, prices went up, his client's product is nearly obsolete, a new competitor went in down the street? I don't think so. That's our job to ferret it out.”
Calibration under IFRS 13 is tough nut to crack
This past January 1, International Financial Reporting Standard No. 13 (IFRS 13) went into effect. It provides guidance on how to measure an asset’s fair value, but many companies haven’t even begun to implement it. Plus, certain aspects of the new rules will be particularly troublesome.
Speaking on a recent webcast, David Larsen (Duff & Phelps) said IFRS 13 applies to most corporations because it requires disclosures of fair-value measurement for M&A activity, asset impairment, or activity involving certain investment entities. During the webcast, attendees were asked: Have you started implementing IFRS 13? About half (47%) said they had started it, but over a third (38%) said they had not. The rest (16%) said they had completed full implementation.
Stumbling block: IFRS 13 now requires a lot more substantiation of the valuation techniques used in obtaining fair value, such as comparisons of different measurements to observable market data. This is known as "calibration," and it is “one of the most important tools in IFRS 13 … and likely one of the least understood and least applied,” Larsen said.
Under IFRS 13, companies now must disclose fair values according to a “fair value hierarchy,” which categorizes the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs.
In its disclosures, a company must also explain qualitative sensitivity analysis if changing inputs would result in alternative assumptions about fair value. There must also be a quantitative disclosure for Level 3 inputs.
Larsen noted: “The expansion of disclosures could be a new thing for many; a lot of judgment goes into the disclosure area.”
New FASB exposure draft on ESOP fair value disclosures
FASB has issued an exposure draft that gives ESOP companies an indefinite deferral on the requirement to disclose quantitative information on how they value nontraded securities, including securities of the sponsoring company.
The concern here from stakeholders is that proprietary information would be divulged through the disclosing of all information on the valuation of private company securities held by employee benefit plans. The disclosures are made public by the Department of Labor on Form 5500, which posts the information online.
FASB has acted quickly here because of the looming deadline for the Form 5500, which is due July 31 (October 15 with an extension). Comments on the new exposure draft are due May 31 on FASB’s website.
Keep in mind: Although the exposure draft eliminates the most troubling part of the new rules, the requirements left intact will require disclosure of the qualitative information—the valuation method and key inputs. These disclosures will need to be done with care and in close collaboration between valuation experts and ESOP fiduciaries.
Spring CPE Fever
A terrific lineup of CPE events is on tap, starting with Valuing Professional Practices on May 8, featuring expert Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos). Learn how to overcome obstacles relating to goodwill, key-person value, and standards of value when valuing a business in which the workforce is possibly its only tangible asset.
Valuation experts have enough to worry about without the U.S. Department of Labor looking to designate appraisers as fiduciaries when assessing pensions and ESOPs. To find out when these changes would take effect, what they would mean for appraisers, and how the changing economics of ESOPs and pensions could place even more burden on appraisers, don’t miss Valuation and ERISA Fiduciary Liability: Traps for the Unwary Appraiser on May 14. This 100-minute webinar features expert appraisers Susan Mangiero (Fiduciary Leadership), Rob Schlegel (Houlihan Valuation Advisors), and ERISA attorney James Cole (Groom Law Group).
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