The Financial Reporting Blog

A weekly update on financial reporting topics curated by Mercer Capital’s Financial Reporting Valuation professionals.

Perspectives from Purchase Price Allocations: Value of Intangible Assets

A while back, I shared a dinner with a group of friends that included a small business owner who runs a young trucking company. At one point, my friend wondered out aloud what price his company would fetch in the marketplace. A quick-witted pal amongst us suggested a number on the order of 1.01 times the book value (as a proxy for the value of the tangible assets). The business owner was a bit peeved – he was hoping for a higher figure, of course – but the quick-thinking friend was merely opining that this particular business did not yet have any intangible assets that a market participant acquirer would find valuable.

Is It Time for Banks to Rethink Insurance?

It’s no secret that the number of insurance agency acquisitions by banks and thrifts has declined considerably over the last ten years. According to SNL Financial, an average of 60 agencies were purchased by banks annually between 2004 and 2008. Over the next five years, the average annual tally dropped to 27. The most likely reason for this decline is the effects of the recession and less capital available for investment. Interestingly enough, however, the number of agency divestitures by banks has been fairly constant at about ten per year. In the broader market for insurance agencies/brokerages, transaction volume has only gotten more robust over the last ten years, including a record 361 deals completed in 2012. Private equity and strategic consolidators remain keenly interested in the sector. So is there any reason for banks to care about insurance anymore? A look at the numbers from some of the leading banks in insurance suggests that there is.

Market Participant Perspectives: An Inside Look at the YouTube Seed Round

A recent issue of Fortune’s daily Term Sheet included a link to a copy of documents relating to YouTube’s 2005 seed round fundraising. The documents, attached to a 2010 court filing, include the presentation made by YouTube’s founders to potential investors and an internal investment memorandum from Roelof Botha, partner at Sequoia Capital, outlining the rationale for an investment in the Company.

The documents provide a fascinating peek behind the curtain, demonstrating what actual market participants care about (and don’t care about) when evaluating early-stage companies. For valuation specialists preparing fair value measurements of early-stage companies, the documents are great reminders of the key elements of start-up valuation.

Secrets of the Tech Road: The Evolving Status of Non-Competes

For hundreds of years, various Chinese dynasties prevented the dissemination of their sericultural secrets along the Silk Road by punishment of death. If anyone were caught smuggling a silkworm egg or cocoon or revealing any information about silk production, well, it would be off with their head. While axes have fallen out of fashion as the weapon of choice for protecting intellectual property, some might argue that they have been replaced by the equally controversial non-compete agreements (NCAs). Massachusetts is considering the adoption of policies to all but eliminate employee non-compete agreements (certain sales of a business are one exception), modeled after California legislation where courts have essentially refused to enforce them. While opinions are split, the winds of change may be blowing against covenants not to compete.

Audit Deficiencies Continue to Cause Headaches

A survey conducted by the International Forum of Independent Audit Regulators (IFIAR) found that many audits still have significant areas of deficiency, primarily relating to fair value measurement, internal controls testing, and disclosure adequacy. IFIAR members inspected audits at public companies and large financial institutions using the six largest accounting firms (including the Big Four). In many cases, the inspections indicated that the audit firm did not gather enough evidence to support its audit opinion. Among the public companies reviewed, the leading area of deficiency was fair value measurement, which arose in 17% of cases.

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