The 2021 edition of Mergerstat Review is now available for preorder; the guide will be available in PDF format in mid-April, and the print version will be available in May. The subscription includes all 2020 deals and monthly updates on new transactions during 2021.

Mergerstat Review, published by BVR, summarises and ranks all of the top private and listed company transactions in the UK, cross-border, and globally each year. Rankings cover all industries and provide essential deal financial data. Data on M&A announcements and purchase prices are presented annually and quarterly, for the current period and historically, including details on individual deals and trends in prices, methods of payment, multiples, and premiums.

Financial analysts have used Mergerstat Review for years to support their valuations.

The free Q4 2020 Argos Index, released last week, shows that private equity acquisition prices in the eurozone soared to a new record, confirming an overheated rebound to what now appears to be a business value “blip” caused by COVID-19. The Argos Index measures private midmarket-company valuations.

What did private equity pay unlisted European SMEs during the fourth quarter? Deal volumes dropped, but the new record multiple climbed to 11.1x EBITDA.

Conducted since 2006 by Epsilon Research for Argos Soditic, the index is calculated based on the information contained in the Epsilon Multiple Analysis Tool (EMAT), the database of European acquisition multiples and deal analysis reports (€1 million-to-€500 million deal value). The EMAT transaction multiples database includes:

• Epsilon studies on the European private-company M&A market, including the Argos Index;

• Alerts on the publication of EMAT reports on your sectors of activity; and

• Set up your dashboard to centralise your M&A info: market, news, etc.

The DealStats Companion Guide offers financial analysts a structure for supporting the best use of any private-company market transactions included in their business valuation reports. This includes a sample private-company transaction report and analyses of typical DealStats transaction data such as:

• Company data;

• Income statement data;

• Balance sheet data;

• Purchase price allocation data;

• Transaction details;

• Company structure data;

• Valuation multiples; and

• Financial ratios.

The Companion Guide is available as a free subscriber service for BVWire—UK readers on the BVR DealStats web page.

BVWire—UK readers will enjoy looking back at “How to Choose the Right Forecasting Technique,” the essential 1971 Harvard Business Review (HBR) article. During a recent BVR webinar, Josh Shilts (Shilts CPA PLLC) said, “What it covers still holds true.” He highlighted the article’s sections on the basic features and limitations of classic forecasting techniques, including qualitative methods, time series analysis, and causal methods.

The article’s authors (John C. Chambers, Satinder K. Mullick, and Donald D. Smith) provided a great chart that compares the different techniques and includes typical applications, computation times, accuracy ratings, reference material, and more. “This was gold to me when I found it,” Shilts said.

“How to Choose the Right Forecasting Technique” is still available free from HBR.

ValueTrust has released the seventh edition of its “European Capital Market Study,” a comprehensive compilation of capital market parameters such as cost of capital and implied as well as historical risk premiums for European countries. The study, written by ValueTrust’s Professor Dr. Christian Aders, Florian Starck, and Marion Swoboda-Brachvogel, also includes trading multiples and total shareholder returns across a wide range of industries.

This index includes the UK, Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Spain, Sweden, and Switzerland. Data for CAPM analyses are available here for 10 industrial sectors: financials, basic materials, consumer cyclicals, real estate, industrials, consumer noncyclicals, healthcare, technology, utilities, and energy.

Here are a few key findings:

• The risk-free rate declined from 0.21% as of Dec. 31, 2019, to -0.14% as of Dec. 31, 2020, the further decline in 2020 largely being the consequence of measures the European Central Bank took to fight the COVID-19 crisis;

• After reaching the highest market-value weighted mean, at 9.0%, as of Dec. 31, 2018, the implied European market return decreased to 7.0% as of Dec. 31, 2020. Overall, the implied market return decreased to the lowest level within the study’s observation period; and

• The technology sector showed the highest multiples on average, followed by the industrials sector; the financial sector continues to have the least expensive valuation level of all sectors.

A new High Court decision makes it more difficult to challenge a business valuation expert’s authority under a price determination mechanism in a share sale and purchase agreement (SPA)—at least after a substantial amount of work has been done.

In General Electric Company v AI Alpine US Bidco Inc. [2021] EWHC 45 (Ch), the High Court also offers new clarification about how much lawyers respond to expert’s requests or participate in the valuation process itself, since such activities may indicate that the lawyer has accepted the expert’s jurisdiction (or is at least prepared to see the process play out before raising any challenge).

This new case concerned the sale of the shares in a company operating a power distribution business. Under the SPA, the price for the shares was to be adjusted via a “completion accounts” term, post-sale, to reflect the company’s working capital, cash, and debt at the time of completion. The mechanism called for estimated closing statements, final closing statements, and a 60-day dispute period—fairly common transaction terms in UK deals.

In this case, the buyers triggered the dispute process after receiving the final closing statements and substituted their own “correct” version. The sellers claimed that these new statements used new accounting judgements, so a third-party independent valuer was appointed to resolve the disagreement—particularly whether the buyers were permitted to revisit the company’s historical accounting practices in their final closing statement and the resultant valuations. The seller tried to stop that expert’s review, and then the buyers asked the court to stay the seller’s application so the expert could issue its determination promptly.

The expert may complete the analysis: First, the High Court said the accounting experts were qualified and that the matter fell within the expert’s “jurisdiction.” It stayed the proceedings to allow the expert to proceed.

A full analysis of the new decision from McFarlanes notes that several factors of import to business valuation experts influenced the judge’s decision, including that:

• “[T]he independent accounting firm’s determination was ‘well advanced’ and so an intervention by the court would not be likely to save the buyers and seller from incurring substantial costs;

• “[T]he proceedings would take some time and so delay what was intended to be a quick process for determining the final price under the SPA; and

• “[T]here is no saying that the seller would be unhappy with the expert’s determination, and to continue proceedings at this point would potentially be a waste of time and resources.”

McFarlanes advises counsel that “it is clearly better to avoid a dispute in the first place. This becomes a matter of drafting the SPA carefully, setting out clearly the matters on which the expert is to reach a determination, as well as the factors the expert is or is not permitted to take into account when doing so.”

We reported on the changes to IVS 200 regarding the definition of business interests in the 2 March 2021 edition of BVWire—UK. Another proposed addition to the current standards (planned for January 2021) involves further definition of adequate procedures required in a business valuation.

These “Proposed Changes to IVS 102 Investigations and Compliance” provide additional clarification to the General Standards, say IVSC. Here’s the language of the new standard (comments may be submitted via IVSC.org):

40. Governance

40.1. Valuation processes should be governed in order to ensure high quality valuations. Governance should clarify the roles and responsibilities of the parties involved in the valuation process.

40.2 A systematic approach should be used in order to ensure sound valuation results. Governance over the valuation process should include considerations such as:

1. Independence and professional scepticism of those involved in the valuation process to make certain that the valuation is free from bias.
   
   
2. Pre-planning to establish a sound approach that addresses all relevant valuation factors.
   
   
3. Consistent and systematic processes to help provide completeness and accuracy.
   
   
4. Internal controls to check findings and judgements at various steps of the valuation process.
   
   
5. Transparency into the valuation approach(es) that were used and the factors that resulted in that determination.
   
   
6. Documentation (see IVS 102 Investigations and Compliance, Section 30 Valuation Record and IVS 103 Reporting) that includes a demonstrable understanding of the contractual and performance features of the unit being valued and how they are each addressed in the valuation.

40.3. Governance should clarify the roles and responsibilities of the parties involved in the valuation process.

40.4 Controls should be in place to verify the quality and observability of the inputs and tools used in the valuation process, including:

1. Sources for reliable and observable data.
   
   
2. High quality modelling systems, as applicable.

The English courts have expanded the risk for larger global organisations to account for unlawful ethics breaches their overseas subsidiaries committed. BVWire—UK notes that these heavily reported recent judgements indicate that liability could also be found to apply to valuations conducted for private equity holdings and their portfolio companies.

Two precedential decisions: The significant cases began with the Supreme Court ruling in Vedanta Resources PLC and another v Lungowe and others [2019] UKSC 20. Following the Vedanta ruling, the Supreme Court also granted permission to appeal the case against Royal Dutch Shell [Okpabi and others (Appellants) v Royal Dutch Shell Plc and another (Respondents)]. The Vedanta decision allowed a claim 1,826 Zambian villagers brought in relation to damages allegedly resulting from pollution emanating from a copper mine Konkola Copper Mines Plc (KCM), Vedanta’s subsidiary, owned.

12 March: EACVA Business Valuation Virtual Conference 2021, online

18 March: Cleary Gottlieb Webinar on the UK's New Investment Regime: Changes and Challenges, 18:00-19:00 BT

29 March: IVSC Advisory Forum: Impact of COVID-19 on Valuation, virtual

20 May: ICAEW Virtual Valuation Conference, 8:55-16:00 virtual

14-15 June: ICAEW Advanced Valuation Techniques, virtual classroom taught live by Steve Shaw

21-25 June: NACVA Business Valuation & Financial Litigation Hybrid & Virtual Super Conference

24-26 October: ASA International Conference,
Las Vegas

27-29 October: IVSC Annual General Meeting (programme and format information to come)

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