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?
“Yes it is going to be ugly, but the financial world should not end solely because ultra-low rates engineered by the Fed led to a speculative lending boom in the energy sector that few noticed until it was too late.”
One of the perennial controversies in business valuation is the estimation of so-called control premiums. Following the closing of the comment period on the Appraisal Foundation’s white paper on the topic, control premiums were back in the news last week with announced acquisition of Keurig Green Mountain by JAB Holdings. The transaction’s $92 per share purchase price rewarded investors with a 78% premium to the previous closing price. Compared to the often-cited range of benchmark control premiums between 30% and 40%, the JAB offer is an outlier. As such, what can we learn about control premiums by examining the proposed Keurig transaction a bit more closely?
Contrary to the silence that often occurs after the phrase – “Speak now or forever hold your peace” – is uttered in marriage ceremonies, the voice of dissent is being heard more frequently from shareholders dissenting to corporate unions. Appraisal, or dissenters’ rights, actions occur when shareholders dissent to a transaction and petition the court to determine the “fair value” of their shares. Dissenting actions are on the rise and have begun to receive considerable attention from attorneys, investors, and other deal makers.
In this post, we consider the trend of dissenting shareholders and discuss some of the basics of valuing a bank while acknowledging that each bank, transaction, and appraisal action is unique.
There’s something about nature that abhors a vacuum. Right now that vacuum seems to be the imbalance between the public and private markets, with the latter attracting maybe too much interest since the credit crisis, at the expense of the former. Blame fair value accounting or Sarbanes-Oxley or the plaintiff’s bar, but it has been some time since being public was actually considered a good thing. With interest running high in the “alternative asset space” and cheap debt for LBOs, the costs of being public have not been particularly worthwhile. This situation is not sustainable, and was never meant to be. Family businesses can stay private forever, but institutional investors eventually need the kind of liquidity that can only come from the breadth of ownership afforded by established public markets. Valuations are never really proven until exposed to bids and asks.
Recently, we interviewed Travis Harms, who leads the financial reporting valuation practice at Mercer Capital. Travis commented on a few issues around valuations of startups from a financial reporting perspective. The following is a lightly edited transcript.
August has become the new October for markets in terms of increased volatility and downward pressure on equities and high yield credit. This year has seen similar volatility as was the case in some memorable years. Declining commodity markets, exchange rate volatility and a pronounced widening of credit spreads finally began to reverberate in global equity markets this year. Declining markets in the context of negotiating and opining on a transaction will raise the question: How do current market conditions impact fairness?
Leveraged dividend recapitalizations and leveraged share repurchases are two corporate finance tools that are available to owners of private companies. These tools can be used to create liquidity outside the ownership of private businesses. In this post, we will illustrate the impact of a leveraged share repurchase and a leveraged dividend on the same company. This analysis will enable us to see the impact leverage has on the company and also, the different impacts the transactions have on owners.
We have previously noted that the degree of difficulty for fair value measurements has been low for some time. Switching metaphors, choppy equity markets and widening credit spreads during the third quarter of 2015 indicate that it may no longer be safe to move about the valuation cabin.
Appraisal arbitrage cases have been around for years but they have become more common lately, led by hedge funds looking to profit from mergers and acquisitions. In an “appraisal arbitrage”, investors in a company vote against a proposed deal and then appeal to a judge to determine and award them the statutory fair value of the stock after the deal has closed. In recent years, a number of hedge funds have seen the opportunity to accumulate shares of a company on the eve of a buyout and attempt to profit from this strategy. When the court takes up the matter, the judge’s final decision becomes the price paid to those involved in the lawsuit – and this price (statutory fair value) could be higher or lower than the agreed upon merger price.
Mercer Capital had a great time sponsoring the Southern Capital Forum on Lake Oconee last week. The annual gathering of the venture community is a favorite to check in with many of our clients and get a read on capital markets from some intentional listening. Beautiful weather and the bucolic surroundings of Reynolds Plantation helped, and on the second day of the conference, Janet Yellen kept her foot on the cost of capital. So what’s not to like? Despite the generally upbeat attitude of the sponsor community, and plenty of planned fund raisings, we heard one theme repeated over and over again that threatens the broader asset management world: stretched valuations.
Because of the wide availability of low-cost debt, even a “hefty” purchase multiple does not necessarily obliterate prospective equity returns. Berkshire Hathaway’s purchase of Precision Castparts provides a timely illustration of the practical effect of the Fed’s accommodative monetary policy on corporate costs of capital and valuation multiples.
On July 1, the SEC proposed new rules to require public companies to clawback certain types of incentive-based executive compensation if the award was improperly given due to accounting misstatements. For example, if an executive received a bonus based on the company achieving a revenue target and it is subsequently determined that revenue was misstated, the bonus would be subject to clawback.
Many market participants and business appraisers refer to EBITDA as one measure of gross cash flow. Some think about the value of a businesses in terms of rule of thumb multiples of EBITDA. However, Warren Buffet warns against “trumpeting EBITDA” as a “pernicious practice.” In light of both sides, we consider whether it can valuable to look at EBITDA in the context of two different public companies: Exxon and Apple.
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.
I once heard a friend in the investment management business quip in 2006 that value stocks were no value and growth stocks were not growing. Depending upon the sector, the thought may apply today; I think it applies to most banks. Commercial banking usually is a slow- to moderate-growth proposition — if not a boring one except when industrywide credit issues develop. However, what many investors crave is growth, not value. After attending the Gulf South Bank Conference, a number of things caught my attention as it relates to growth and M&A accounting.
With analysts and pundits trying to identify those sectors that may be overheating as the market grinds to all-time highs, one sector to keep an eye on is financial technology (“FinTech”). Against a backdrop of optimism and growing investor interest, we thought it might be useful to examine valuation multiples within the FinTech industry over time to see whether public markets are reflecting these trends as well. While key valuation drivers such as profitability, growth prospects and risks vary among each FinTech niche, our graphic illustrates that the public market is indeed telling a similar story and perhaps a FinTech bubble is emerging or at least starting to form as margins are generally down across various FinTech niches while valuation multiples have expanded.
The fairness opinion states that a transaction is fair from a financial point of view of the subject company’s shareholders. The opinion does not express a view about where a security may trade in the future; nor does it offer a view as to why a board elected to take a certain action. Valuation is at the heart of a fairness opinion, though valuation typically is a range concept that may (or may not) encompass the contemplated transaction value.
On March 25, 2015, the SEC issued its final ruling amending Regulation A, an existing exemption from registration requirements for smaller issuers of securities. The new rules, commonly referred to as “Regulation A+,” were first proposed in December 2013 under Title IV of the Jumpstart Our Business Startups (JOBS) Act (subscription required). Regulation A+ is expected to increase access to capital markets for small companies that do not report to the SEC by exempting registration requirements for securities offerings of up to $50 million annually.
The online marketplace Etsy is planning an initial public offering which could raise more than $300 million. It’s also a “Certified B Corporation” which means that in addition to focusing on building shareholder value, the company must maintain certain standards of social and environmental performance, accountability, and transparency. From a valuation perspective, what does this mean?
In a prior blog post, we noted a plethora of pricing indications observed around Box, Inc.’s (NYSE: BOX) initial public offering and asked the question, “Which price is right?” The prices (and implied valuations) that a business venture can obtain in future funding rounds, and in the public markets, are important considerations from the perspective of VCs and other investors. Unlike most mature public companies, however, startups have a predilection for complex capital structures, which introduces a degree of opacity that makes simple inference from headline numbers (however correct, however precise) difficult. A future funding round or exit event can result in varying outcomes for the multiple classes of securities with dissimilar rights and protections. This blog post will focus on the impact of (relatively steep) pre-public pricing on equity granted as employee compensation, usually the junior-most security in a startup capital stack.
Box, a cloud-based enterprise, began trading publicly today after delaying the process last year. Since then, the company was valued at nearly $730 million less than that implied by the Series F round just six months prior.
Non-GAAP performance measures are becoming more and more popular, particularly for companies looking to raise capital in an IPO. Although financial statements prepared in accordance with GAAP provide the public a standardized basis for historical and comparable financial statements, the use of non-GAAP measures, such as adjusted EBITDA or adjusted gross profit, can allow management to emphasize alternative measures.
In this article, we discuss the importance of fairness opinions when the primary form of consideration consists of the buyer’s shares, warning that less focus should be placed on the “price” and more focus should be placed on the “value.”