Fair value measurements have been a hot topic for many years due to the judgmental nature of the estimation process. Despite ongoing improvement efforts by standards setters, regulators, and valuation specialists, deficiency findings in audits continue to proliferate. In March 2015, a survey conducted by the International Forum of Independent Audit Regulators (IFIAR) found that nearly half of global audits contained a deficiency. Of those deficiencies, 20% centered on fair value measurements.
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.
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.
Although successful bank acquisitions largely hinge on deal execution and realizing expense synergies, properly assessing and pricing credit represents a primary deal risk. Additionally, the acquirer’s pro forma capital ratios are always important, but even more so in a heightened bank regulatory environment and merger approval process. Against this backdrop, merger-related accounting issues for bank acquirers have become increasingly important in recent years and the most significant fair value mark typically relates to the determination of the fair value of the loan portfolio. Fair value is guided by ASC 820 and defines value as the price received/paid by market participants in orderly transactions. It is a process that involves a number of assumptions about market conditions, loan portfolio segment cash flows inclusive of assumptions related to expected credit losses, appropriate discount rates, and the like. To properly evaluate a target’s loan portfolio, the portfolio should be evaluated on its own merits, but markets do provide perspective on where the cycle is and how this compares to historical levels.
Against the backdrop of depreciation, as with Prospect Capital Corp. and Fifth Street Finance Corp., heightened investor scrutiny may be on the horizon for BDCs dealing with issues like fair value marks and lower yields. Companies can increase leverage to offset lower yields, but there is a limit to how much leverage BDCs can employ and what investors and rating agencies will accept. High payout ratio companies like BDCs are susceptible to dividend cuts. Lower payout ratio entities such as commercial banks are not as long as credit quality is okay, but future dividend hikes may be much more limited than envisioned by investors for the same reason.
