We began this blog in August 2013 with the mission to keep you, the reader, current on the latest financial reporting news. After over 200 posts and a book, it’s time to bid the blog farewell. Over the years, we have appreciated your readership, feedback, and support. Even though the blog is ceasing publication, we are committed to continuing our mission in a different format.
It seems fitting that we end the blog with a look back to 2017 and our 10 most popular posts for the year.
In the latest issue of Mercer Capital’s Bank Watch, we update our analysis of trends in CDI assets recorded in whole bank acquisitions completed from 2008 through the third quarter of 2017.
The Appraisal Foundation’s forthcoming VFR Valuation Advisory #3, The Measurement and Application of Market Participant Acquisition Premiums (“Advisory #3”) suggests that control of a business enterprise has limited value for its own sake. Rather, the value of control is correlated to the expectation for enhanced economic benefits from exercising such control. Recently published research from McKinsey & Company confirms this insight, finding that investors view acquisitions more favorably when specific synergies are identified and quantified at the announcement date.
The first three quarters of 2017 were active for U.S. markets. Major indices were characterized by low volatility and upward momentum against a backdrop of tightening monetary policy and strong economic indicators. Private equity saw steady deal flow despite challenging market conditions, and record levels of venture capital deployment were seen amidst declining deal volume as capital continued to gravitate to the unicorns. With one quarter left, we take a look at market activity during the first three quarters of 2017.
Football coaching legend Bill Parcells famously said, “You are what your record says you are.” Adapting that thought to the corporate world, one could say, “Your company is what its financial statements say it is.” Although we would not deny that there are important non-financial considerations in business, the remark strikes close enough to the truth to underscore the importance of being able to read financial statements. Accounting is the language of business, and financial statements are the primary texts to be mastered.
Our latest whitepaper is intended to help readers develop an understanding of the basic contours of the three principal financial statements. The balance sheet, income statement, and statement of cash flows are each indispensable components of the “story” that the financial statements tell about a company. After reviewing each statement, we explain how the different statements relate to one another. Finally, we provide some guidance on how to evaluate projected financial statements.
We have recently discussed the changing dynamics of the IPO market and startups’ shifting perspectives in regards to going public. Public offerings haven’t all gone wrong this year, but latest rounds of unicorn IPO flops appear to have dampened some investors’ outlook on the traditional IPO route. Nevertheless, unicorn investors still need liquidity and are turning to creative ways to get the IPO pipeline flowing again.
EBITDA as a universal measure of unlevered earnings may get more play than is warranted because CapEx requirements can vary widely among firms even within the same industry. Nevertheless, EBITDA is the baseline profitability measure for lenders and equity investors across many if not most industries other than financials. Creditflux held a panel discussion titled “Getting EBITDA right.” My more descriptive title after listening to the panel’s comments would be along the lines of: “Is adjusted EBITDA a hoax?”
What to do when an IPO requires too much legal work and is subject to regulation and finding a venture capital partner takes too long and is full of unknowns? Mint your own money, of course. In this case, however, companies are minting digital coins rather than churning out physical objects.
From our perspective, contractual (and/or customary) rights and preferences allocated among the various parties to a transaction define the parameters within which we operate while measuring fair value. That being said, the extent to which differential shareholder rights can or cannot be (legally or normatively) enforced may inform the assumptions and expectations of market participants, be they VC investors or startup employees. And those market participant perspectives will inform the valuation analysts’ assumptions and methods.
Much has been written about Amazon’s $13.4 billion acquisition of Whole Foods Market that was announced on Friday, June 16. There are all sorts of theories about Amazon’s strategy and the brilliance (or folly) of combining the powerhouse online retailer with a traditional retail grocery chain. But for purposes of this post, we’re going to take a step back and look at the impact of the two externally-driven events on the stock prices of other players in the industry.
What effect does the loss of a key leader have on the value of an enterprise? Valuation specialists often consider whether a business is subject to a key-person dependency when measuring fair value. For early-stage enterprises, key-person dependencies tend to be obvious and significant as many start-ups simply would not survive the loss of the founder. For a company of the scale and complexity of Uber, the analysis becomes a matter of degree. To what extent would the loss of Mr. Kalanick’s services affect the expected cash flows (including growth) and risk perceived by investors?
The stock market rallied in the first five months of the year, with the Dow Jones and S&P 500 reaching record highs and continuing to climb. Nevertheless, IPOs remain scarce compared to prior years.
In October 2015, the SEC adopted final rules governing the crowdfunding of startups and Regulation Crowdfunding was issued in May 2016. Subsequently, the SEC has issued investor bulletin(s) to educate potential investors on the new investing opportunities. The new rules allow non-accredited investors to invest directly in startup (and other) companies that can raise up to $1 million every twelve months through crowdfunding. At the time the SEC first proposed the rules in October 2013, we speculated that crowdfunding might turn into a new source of capital for small businesses. Now, a year after Regulation Crowdfunding came into effect, we take a look at the state of crowdfunding.
It seems like it was just last year when we mused if non-GAAP earnings measurements were becoming a permanent fixture of the market. How quickly the times change.
A couple of articles in the Wall Street Journal last week highlighted challenges of managing and investing in early-stage companies. From a valuation standpoint, the articles are timely reminders of the importance of cash burn rates, dilution factors, and exit probabilities in measuring the fair value of startups.
With the rapid rise of corporate venture capital and increasing pressure to jump on board with startups, it seems that many companies across the industry spectrum are making venture investments.
David Einhorn of Greenlight Capital Inc. is no stranger to controversy. His current project is General Motors Corp. He put a flashlight on its common shares on March 28 arguing that they are unreasonably cheap. Immediately before the proposal was made GM’s shares were trading just below $35 per share, which equates to 5.8x 2016 earnings of $6.00 per share and 5.6x the midpoint of management’s 2017 guidance ($6.25 per share). The dividend yield is high at 4.4%, more than double the yield of the S&P 500. As Einhorn points out, the yield is not high because the payout ratio is high; the $1.52 per share dividend equates to just one quarter of (current) earnings.
The new revenue recognition standard has been called “historic in its breadth and impact across industries.” The standard itself was introduced back in 2014 with the FASB’s issuance of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Since that time, accountants and preparers have grappled with preparing for the new guidance. The focus of this post is not to comprehensively explain the new rules. Instead, we examine one public company’s experience with the transition (Workday) and then highlight a few areas that may be of interest to analysts, finance managers, and interested onlookers – from a valuation perspective.
l was struck by how the Ruth’s Chris Steak House in Lafayette, La. was packed on a mid-March Tuesday night. When I ate there a year ago, I was one of a half-dozen people in the restaurant. Perhaps it is just a coincidence, but the price of oil nearly doubled over that period. The regional economy may not be that responsive to moves in the price of crude, but people’s reaction of being tight-fisted vs. loosening-up can change quickly based upon perceptions.
When it comes to money, “enough” is the hardest word to define. The challenge of defining “enough” extends to corporate managers deciding what cash balance is appropriate. Cash balances can provide a cushion against unanticipated adverse events in the business. When companies need cash is usually the worst time to try to raise capital. Having sufficient cash on hand to weather an unexpected downturn in the business can help shareholders avoid dilutive capital raises at inopportune times. On the other hand, cash is a very low-yielding asset.
A few months ago Amazon put Charles Ellis’ new book, Index Revolution, on my recommended list. I probably would not have bought it had I not heard Ellis give an extended interview on Bloomberg Radio one morning while walking the dogs. He is quite persuasive about the rationale for index funds. Although I own index funds, it is not a subject I had given much thought.
The motivation behind incentive pay at the startup level is that in order for the employees to strike it rich, the company must succeed by hitting certain milestones. This aligns employees’ personal goals with the company’s overall success. The slight misalignment of this structure, however, can lead to employee turnover at companies.
The traditional method for measuring return premiums is backward-looking. Analysts typically compare realized returns for various asset classes over long historical periods, inferring the premiums from the differences in the return series. With regard to the size premium in particular, this approach has a number of shortcomings.
On December 27, 2016 Toshiba Corporation, the Japanese electronics conglomerate, announced the possibility of a goodwill impairment charge related to its U.S. nuclear power plant construction business, specifically, CB&I Stone & Webster Inc. (“Stone & Webster”), which was acquired for $229 million in late 2015 by Toshiba’s Westinghouse Electric Company subsidiary. Both the buyer and target have been plagued by financial difficulties (and goodwill impairment charges) since that time.