Contingent considerations (earnouts) are agreements between the parties to a corporate transaction to defer a portion of the purchase price. Techniques for measuring fair value have evolved over time. The exposure draft advocates wider application of options-based methods. The guidance is an important step in advancing the valuation profession. The SEC and others have lamented the diversity of practice among practitioners, and the exposure draft addresses that concern in a constructive manner. The detailed discussions and examples should promote broad and consistent adoption of techniques that have to-date been applied only sporadically and inconsistently. Techniques advocated in the exposure draft should promote the “auditability” of very tricky and subjective fair value measurements.
Purchase Price Allocation
Sears is in trouble. Or rather, it’s been in trouble for some time. Same-store sales fell 13% in November and December 2016 and Sears has booked losses of over $9 billion during the past eight years. The company has had to resort to shedding assets – tangible and intangible – in a bid to right-size operations and manage liquidity. In the past, Sears financed some of these losses through the sale of real estate.
We have published a collection of these posts in a book entitled “Market Participant Perspectives: Selections from Mercer Capital’s Financial Reporting Blog.” For our existing clients and blog subscribers, we hope that the book uncovers a post or two of interest that you might have missed the first time around. For clients that we haven’t met yet, there’s probably no better introduction to our team than the collection of posts in this book.
On October 13, 2016 RSP Permian (RSPP) announced the acquisition of Silver Hill Energy (SHE) for approximately $2.4 billion dollars. SHE will receive approximately $1.182 billion in RSPP common stock and $1.25 billion in cash. Based on RSPP disclosures, the assets received include (1) wells currently producing 15,000 barrels of oil equivalent per day (BOEPD); and (2) 41,000 in net acreage throughout Loving and Winkler County Texas.
Mergers and acquisition activity relays much information to the general public: trading multiples, future expectations, the premium paid for a company above and beyond the company’s tangible and intangible assets, to name a few. In our bi-annual Lab Services Newsletter, we observe M&A transactions within the industry, and further analyze the largest acquisition(s) to gain insight behind the deal.
How is a veterinary practice or animal hospital valued? Knowing which methods to apply in the valuation of a veterinary practice and which assets to recognize in a business combination can have a material impact on the value of a company and its purchase price allocation.
Part I of this series presented a broad outline of the PFE-MDVN transaction. Part II will delve more into the transaction to present some high-level observations around allocation of the purchase price.
In August 2016, Pfizer (“PFE”) announced it would acquire the biopharmaceutical company Medivation (“MDVN”) for $81.50 per share, or a total enterprise value of approximately $14 billion, in an all-cash deal. The transaction made headlines for the how the size of the deal escalated over a period of approximately six months prior to the PFE announcement, as well as the potential implications regarding the attractiveness of (relatively) smaller biopharmaceutical targets in an environment where larger deals face an inordinate amount of regulatory scrutiny.
On June 15, 2016, the Appraisal Practice Board (“APB”) of the Appraisal Foundation released the final version of the Valuation for Financial Reporting Advisory #2, The Valuation of Customer-Related Assets. The non-authoritative best practices guidance elaborates on valuation approaches and methodologies that can be used to measure fair value of customer-related intangible assets such as customer lists, order or production backlogs, and contractual and/or non-contractual customer relationships. This post briefly discusses this document.
Non-compete agreements are increasingly in the news, though not always in the most favorable of contexts. Proponents argue that such agreements protect firms’ intellectual property and prevent the loss of key employees, customers, suppliers, and trade secrets. Others would suggest that non-competes stifle innovation by limiting competition and employee mobility. In this post, we consider recent examples of non-compete agreements and how they impact value.
The Financial Accounting Standards Board’s (FASB) definition of a business is important when it comes to classifying assets and related expenses. However, some feel that the FASB’s current definition is ambiguous and can result in inconsistent designations of business or asset status. In this post, we discuss the FASB’s proposed standards update, clarifying the assets versus business debate.
Last week, Lands’ End, Inc. (NASDAQ: LE) announced that it would write down the value of its flagship trade name asset (Lands’ End). Management’s preliminary guidance is for a charge of $90 million to $110 million, which could lower the asset’s value by 20% from $528 million to $418 million. Obviously, a non-cash impairment charge is just that, non-cash, but what does it mean for stakeholders and how is such a charge actually determined?
A purchase price allocation report should be well documented, concise, and provide sufficient background information. This post enumerates elements of a properly prepared purchase price allocation report.
Customer relationships form a key intangible asset for firms operating in many industries. Firms devote significant human and financial resources in developing, maintaining and upgrading customer relationships. In some instances, supply or customer contracts give rise to identifiable intangible assets. More broadly, however, customer related intangible assets consist of the information gleaned from repeat transactions, with or without underlying contracts. Firms can and do lease, sell, buy or otherwise trade such information, which are generally organized as customer lists.
The Appraisal Practices Board of The Appraisal Foundation originally released a discussion draft of a document entitled “The Valuation of Customer-Related Assets” in June 2012. The draft, authored by the Working Group on Customer-Related Assets, provides best practices guidance on the valuation of customer-related intangible assets. A subsequent exposure draft was released in December 2013. A final version of the document is pending. This article, drawing in part from these documents, examines attributes of customer-related intangible assets and their valuation.
Back in 2010, Diamond Foods, Inc. completed its acquisition of Kettle Foods, a premium potato chip manufacturer. Diamond paid approximately $616 million for Kettle Foods and $235 million, or nearly 40%, of the purchase price was allocated to “brand intangibles”. Such a high value leads to the question: How are such valuations determined and what are the drivers?
The CFA Institute recently released a report about investor apprehensions concerning separate accounting standards for private companies. The report reflects the results of a survey of investment professionals in the CFA Institute. The separate accounting standards include differing accounting rules for SMEs (small or medium sized entities) under IFRS and for private companies under GAAP (as advanced by the Private Company Council). On balance, while investors seem to think the initiative will reduce companies’ compliance costs, they believe the benefits are unlikely to outweigh the costs.
The FASB’s Simplification Initiative is designed to make small changes to GAAP that will reduce costs and complexity, while maintaining or improving the usefulness of financial statements. One such potential change to ASC Topic 805 was announced on May 21, 2015. In response to stakeholder feedback, the FASB has proposed modifying standards related to how companies are required to account for business combinations.
Companies often use contingent consideration when structuring M&A transactions to bridge differing perceptions of value between a buyer and seller, to share risk related to uncertainty of future events, to create an incentive for sellers who will remain active in the business post-acquisition, and other reasons. ASC 805 stipulates that acquiring entities are required to record the fair value of earn-outs and other contingent payments as part of the total purchase price at the acquisition date.
About a year ago, we discussed Facebook’s impending purchase of messaging service WhatsApp. At the time, the acquisition was the subject of much debate, but the intervening period gives us a chance to see how things have shaken out. This also gives us the chance to see how the purchase price has been allocated for accounting purposes.
Golden parachute payments have long been a controversial topic. These payments, typically occurring when a public company undergoes a change-in-control, can result in huge windfalls for senior executives and in some cases draw the ire of political activists and shareholder advisory groups. Golden parachute payments can also lead to significant tax consequences for both the company and the individual. Strategies to mitigate these tax risks include careful design of compensation agreements and consideration of noncompete agreements to reduce the likelihood of additional excise taxes.
Just before Christmas 2014, FASB issued Accounting Standards Update No. 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination, a consensus of the Private Company Council (“ASU”). The ASU allows a private company (i.e. not a public or not-for-profit entity) to choose not to recognize two types of intangible assets separately from goodwill following a business combination: customer-related intangible assets that cannot be sold or licensed independently from other assets of a business, noncompetition agreements.
If you are a top company executive, salesperson, or are employed in a highly skilled technical field, you likely have a clause in your employment contract that prohibits you from leaving to work for a competitor or starting your own firm for a specified period of time. While commonplace for more senior positions and in certain industries, you may be surprised to find a non-compete agreement (NCA) in your contract if you assemble or deliver sandwiches at one of Jimmy John’s 2,000 restaurant locations.
At its September 16, 2014 meeting, the Private Company Council reached consensus on a proposed GAAP exception available to private companies completing a business combination. The exception must be endorsed by the FASB before becoming effective. The proposed exception would allow private companies not to recognize non-competition agreements and certain customer-related intangible assets acquired in a business combination. The PCC’s mandate is to reduce the cost and complexity of financial reporting for private companies. However, the degree to which this proposal meets that objective depends, in part, on two factors …
Jimmy Kimmel jokes that “Tax day is the day that ordinary Americans send their money to Washington, D.C., and wealthy Americans send their money to the Cayman Islands.” Tax day is now the day when Medtronic, a leading medical device company headquartered in Minneapolis, will be sending its money to Ireland. On June 15th, Medtronic and Irish healthcare company Covidien PLC announced they had signed an agreement in which the former would acquire the latter for approximately $42.9 billion. One motivation for Medtronic to acquire Covidien has to do with taxes. As part of the acquisition, Medtronic will have a new corporate tax rate of 12.5%, down from a top marginal rate of 35%, just by changing its address from the US to Ireland, using a strategy known as “inversion.”
- Bankruptcy and Restructuring Advisory
- Equity-Based Compensation Valuation
- Fair Value
- Impairment Testing
- Portfolio Valuation
- Purchase Price Allocation
Green is the Color of Inversion M&A
The Financial Reporting Blog
Financial Reporting Valuation Flash