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— Analysis —
A company valuation sounds like a single measurement. But it's also a process, with inputs and judgements produced by many different players and outputs that matter not just in negotiating acquisitions, but also in finding tax-efficient deal structures, in moving deals from signing to closing, and in working with investors to restructure companies. What issues are coming up for the various participants in a time of financial and economic uncertainty? Here are views from four different vantages. A skeptical eye on seller projections Oliver Maier is accustomed to buying established companies with stable cash flows. Lately, though, the head of Americas M&A for German chemical maker Evonik AG says his targets have been reporting zero or negative cash flows that would be more typical of venture-capital backed companies. But they don't think he should worry about it.
-- See related stories on valuation -- Out of kilter "They're projecting they would come back to [cash-flow] levels they had in 2006, 2007 or 2008," says Maier. "In the past, the first year is the base year, and that counts for a big chunk of valuation anchoring. But the sellers will say to you, 'that doesn't count, it's unfair. We can tell you that we'll see recovery by the fourth quarter that will take us back to early '08.'" And when Maier presses them to substantiate those assumptions? "Then you hear a lot of hot air." Restructure or liquidate? Stamos Nicholas, principal for valuation services at Deloitte Financial Advisory Services LLP, says the firm has seen a big increase in valuation work for clients in distress. "Right now valuation is a fundamental issue for them and for their investors, particularly debtholders and equity holders. They want to understand, depending on the collateral value, is there enough to cover the bondholders? Will there be anything left for the equity holders? And with the market so poor, is it better to renegotiate as opposed to taking over the assets and trying to sell them. There are a lot of negotiations going on -- from Fortune 500 companies all the way down -- as to what is the best answer." Getting the tax angle right The current climate may lead some into decisions with bad tax consequences down the road, warns Paul Beecy, tax partner for Grant Thornton LLP. During a transaction or a restructuring, a company may choose to transfer an asset to a foreign subsidiary -- for example, some intellectual property to an Irish subsidiary. Given the depressed market, the company may seek to lower its immediate tax hit by recording a low price. Bad move, says Beecy. If the IRS later concludes -- with 20/20 hindsight -- that the asset was underpriced by 30%, then the U.S. parent will still be considered a 30% owner. "Most first-world tax authorities don't care who legally owns it," says Beecy. "They look at economic ownership. And economic ownership is oftentimes based on value. So if you screw up your value, you cloud the issue of who economically owns that asset. The IRS could come in five years later and say, 'Let's determine all the income the Irish company earned on this IP, and impute a royalty back to the U.S. company.' " The eternity from signing to closing Financial uncertainty makes it harder to write rules to govern pre-closing purchase price adjustments, says Paul Bird, co-chair of the M&A group at Debevoise & Plimpton LLP. "In the context of a negotiated deal, parties almost always negotiate exceptions to GAAP as applied historically to reflect how much risk they're willing to take for the period between the last balance sheet and the closing," says Bird. These days, Bird explains, the exercise can be like trying to read a crystal ball. "I've seen some deals that were essentially scuttled because of the inability of the M&A team to feel comfortable about how they would value the change in assets and liabilities between, for example, a pre-Jan. 1, 2009, balance sheet and a balance sheet that might be prepared in the summer of 2009." |
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