The UK has taken the lead in what is now a global trend for increased anti-competitive review, a new summary report from White & Case shows. This trend increases the risk that market-dominant companies—including nonlisted or SME enterprises—may need to exclude their most synergistic buyer(s) when considering market value.

White & Case analyses activity from the 58 most active merger control jurisdictions globally (out of the 135 countries that have now enacted mandates for their competition authorities to review potentially anti-competitive transactions). Their new White & Case Global Antitrust Merger StatPak (WAMS) “is the first tool of its kind to serve as a real-time clearinghouse for global merger notification data.”

The UK Competition and Markets Authority have reviewed 33 transactions thus far in 2021 (through 30 November), a rate that keeps them on par with 2020. Additionally, the UK enacted further national security review schemes for any cross-border transaction last fall.

Morningstar have acquired frequently to increase their UK market share among advisors to wealthy and business-owning clients, including the private equity investing platform PitchBook. Last week, they continued that trend with the announced agreement to acquire 100% of Praemium’s operations in the United Kingdom, Jersey, Hong Kong, and Dubai for £35 million cash.

According to Daniel Needham, president of wealth management solutions for Morningstar, nearly 500 independent financial advisors already use Praemium. It’s existing UK platform “offers proprietary, friction-free SaaS-based technology and services that allow fee-based advisers to outsource key elements of the advice workflow.” Wealth advisors can white label the platform according to their own requirements.

Currently, managing director Mark Sanderson oversees Praemium’s U.K. market. Completion of the transaction remains subject to regulatory approval from the Financial Conduct Authority in the United Kingdom and the Jersey Financial Services Commission in Jersey.

The business valuation profession is still among the newest, and it continues to evolve new standards and methodologies to meet financial reporting and business needs. The International Valuation Standard Council (IVSC) recently interviewed David Larsen, Srividya Gopal, and James Gavin, managing directors at Kroll, to get their perspectives on current issues facing the valuation profession. Among the themes the panel addressed are:

• The importance and scope of the business valuation profession has increased significantly during the pandemic.

• This growing need may have outpaced the availability of experienced and qualified valuation professionals.

• Over the past two decades, capital the alternative asset industry deployed has dramatically increased. This accelerates the current need for the profession to “institutionalize valuation practices and processes.”

• The BV profession has participated in aligning global valuation standards related to fair value measurements and business combinations, even within U.S. GAAP and the International Financial Reporting Standards (IFRS).

• While the investment community have absorbed ESG initiatives, it’s been a more difficult road to make these tools reliable and consistent in the context of existing valuation methods and practices, so more work needs to be done.

• Finally, more corporate boards are fully aware of the need for—and benefits from—independent valuations or fairness opinions.

Closely held companies or family-run firms experience various life-cycle stages, meaning that the top management may be mismatched for long periods. The mismatch increases risk and may diminish cash flows, which is why Professor Aswath Damodaran (New York University Stern School of Business) feels that traditional thinking about what makes a great CEO is flawed. “There is no one template that works for all companies,” he writes in a blog post, citing research from the Harvard Business School and McKinsey.

Assessing management is a key part of any valuation analysis, so financial experts should compare the business’s stage—from startup to decline—to the skills of the CEO and the management team. This is particularly true in SMEs where top management tends to stay entrenched as the company goes through the various stages of its life cycle.

Ask questions: For the valuation analyst, if, during the management interview, you get the impression that the CEO is a visionary, is that good or bad? If it’s an early-stage company, it may be a good fit because the CEO needs to think outside the box in terms of new ideas, markets, and ways to attract investors. But, if the company is in a mature stage, a visionary may not be a good fit—the mindset needs to be on maintaining market share, fending off competitors, and other tactics for “trench warfare.” The analyst’s questions should be geared toward ferreting out whether management is up to the task. If not, that may mean adjusting forecasts or company-specific risk.

The Financial Conduct Authority (FCA) have introduced a targeted form of dual-class share structures (DCSS) that allow a class of premium shares to retain voting control over a listed company beyond the economic interest held by those shareholders. The new rule (Policy Statement PS21/22), which came into effect on 3 December 2021, expands control rights, and the value, of director-held premium shares compared to all other classes of shareholders.

The new DCSS aims to minimise the risk of unwanted takeovers during the first five-year period after a company’s initial listing. It exempts shareholders of premium shares from a limited set of the many rules that already restrict voting rights. The first five-year exemption on beneficial weighted voting rights limits premium shareholders in the following ways:

• Directors who are premium shareholders may retain a maximum weighted voting ratio of 20-to-1;

• These weighted voted rights only offer control benefits in two circumstances:
  1. A vote on the removal of the shareholder as a director; and
  2. In the event of a change of control, in relation to a vote on any matter.
• Only directors of the company (or beneficiaries of such a director’s estate) may retain beneficial weighted voting rights.

One consulting firm, Mathys & Squire Consulting, offers tools and insights into the IP valuation process as a way to attract clients, recognising that business owners may not fully understand the concepts. Further, many may not realise that intangible assets and registered rights such as intellectual property (IP) contribute significantly to overall business value, they say.

Lawrence Bickers, a business consultant at the firm, makes an important point that intangibles will be valued differently depending on the buyer. “A crucial consideration in IP valuation is to understand your business model and to evaluate whether it is most likely to lead to a transaction … with a party that has a key position in a strong value chain,” he writes for Lexology. “It can often be the case that several business model alternatives exist, and numerous factors need to be reviewed to determine the optimum approach to take when valuing IP.”

Bickers emphasises the following other aspects business valuers should consider when valuing IP:

• The assets’ ownership within the value chain (i.e., owned by the customer or subcontractor). At every step of the value chain, the value of an intangible asset tends to increase as businesses move deeper into the value chain.

• The purpose of the IP valuation. This “could be for the purpose of mergers and acquisitions; securing more funding and investments; asset transfers; infringement-related damage evaluation; or insolvency,” Bickers writes. “All these scenarios call for an IP valuation, but it is likely they will be approached differently.”

• Industry and market trends. IP assets can be more market-sensitive than tangible business assets. Their value “can fluctuate significantly given changes to the state of the economy, industry trends and market competitiveness. Such valuation should be updated as the business expands or any external changes occur, which could inflate or devalue the asset value.”

The UK economy has performed independently of the US and eurozone countries since COVID-19 began, as the first edition of the “International Guide to Cost of Capital (IGCC) Summary Edition” from Kroll confirms. This 173-page work was released in conjunction with the CFA Institute Foundation last month and is available free of charge.

Highlights of this often-undesirable independence during this period include the overall stock market performance. Kroll notes the following returns as of 30 November 2021:

Ten-year government bond yields also vary widely, impacting valuation.

A further economic differentiator is annualized 3Q growth rates. The eurozone and the UK led most global economies comparing the most recent third quarter with 2020.

The Kroll “Summary Edition” examines the important difference in risk characteristics of investing in various countries and has the following seven chapters:

1. “International Cost of Capital Overview”;

2. “Strengths and Weaknesses of Commonly
   Used Models”;

3. “International Equity Risk Premia”;

4. “Country Yield Spread Model”;

5. “Relative Volatility Model”;

6. “Erb-Harvey-Viskanta Country Credit Rating
   Mode”; and

7. “Firm Size and the Cost of Equity Capital in Europe.”

17 January: Injunctions—A Proportionate Remedy for Patent Infringement? A Powell Gilbert webinar
1600-17:00 BT

17-18 February: ICAEW Advanced Valuation Techniques, virtual classroom

12-20 April: ICAEW Practical Business Valuation, virtual classroom. Repeated 21-29 June

14-16 September: IVSC Annual General Meeting, Fort Lauderdale, Fla.

3-5 October: 12th Annual International Valuation Conference, Riyadh, Saudi Arabia

Want to share a news item? Have feedback or comments? Please contact David Foster at ukeditor@bvresources.com.

Want to share a news item? Have feedback or comments? Please contact
David Foster at ukeditor@bvresources.com.