Implied minority discount lacks theoretical, financial basis

BVWireIssue #85-3
BVWireIssue #85-3
October 21, 2008

In a poll of ASA BV Conference attendees, at least half raised their hands when speaker and Lawrence Hamermesh (Univ. of Penn.) asked if they used an implied minority discount when adjusting data from comparable public companies to value a non-marketable, minority share in a private entity. When asked how many would continue to do so after his presentation with Gil Matthews (Sutter Securities)—only a couple of stalwarts kept their hands in the air.

“We’re all working toward a convergence of thought and shared conceptualization on fair value appraisals,” said Matthews. “Part of our job is to overcome a failure in terms,” Hamermesh agreed. He attributed the courts’ continued application of the IMD to “a gap in communication between folks who make the legal standards regarding fair value and folks like you who actually do it.” His solution? In his current article, he and co-author Michael Wachter argue that:

Where a [controlling shareholder] fails to present a valid discounted cash flow analysis and relies instead on a comparable company analysis that is based solely on historical data, the minority shareholders and the court are deprived of access to projections of future free cash flows of the firm. We therefore advocate that the courts adopt a penalty default in the form of a presumption that fair value includes the value of control as reflected in comparable company acquisitions.

To access “Rationalizing Appraisal Standards in Compulsory Buy-outs,” click here.

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