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December 19, 2006The Rule of Thumb
I recently attended the AICPA Business Valuation conference in Austin, Texas. Three days of mingling with my peers and listening to some of the progressive leaders within the profession was eye opening and interesting. One question that struck a chord with me though was; do widely accepted rules of thumb provide reasonable valuation results? This also led me to ask myself, do the use of rules of thumb do the business valuation profession justice? For example, discounts for lack of marketability commonly range from 20 to 30 percent. However, much of the data prominently utilized and accepted as the basis for these discounts is flawed and can be misinterpreted.
It is important to the evolution of credible and defensible business valuation practices not to let the tail wag the dog. I.e., business valuation analysts should determine and utilize methodologies based on reasonable conclusions from underlying data that has been carefully considered. Business valuation analysis should be skeptical of the many rules of thumb that are essentially simplifying complex issues. Decisions on business valuation should be based on analysis, not what will be most easily explained to and accepted by a tax court.
December 17, 2006Private Equity - Where's the Exit?
This weekend, Michael Flaherty of Reuters wrote an interesting article "Money drying up for some investors in buyout firms" addressing some questions we have had for some time now. Specifically, when and how are private equity firms going to unwind their wild acquisition spree, at a profit?
Private equity firms are buying companies with the fervor of just putting money to work, without seemingly paying attention to any valuation metrics. This has caused us to ask, "How are they going to exit at comparable multiples? And when?"
However, Flaherty, approaches this from a different angle. Private equity firms have tapped out their checking accounts and turned to LP's for another round. This would not be a problem if the LP's had some tangible returns to measure their next investment against. But with no exits, LP's are a bit leery of doubling down based on firm's buying strategies. Who can blame them?
December 12, 2006Is the IRS listening?
Just as the corporate governance issues of Enron and WorldCom seemed to extend on for years, backdating continues to morph. Today the WSJ extended the backdating discussion with a front page article titled "How Backdating Helped Executives Cut Their Taxes". The article details how there is "strong statistical evidence that executives manipulated the exercise dates of their options as part of a tax dodge". Basically claiming that part of the backdating intention was to defer tax obligations. It seems that the WSJ and now the SEC will do the IRS's dirty work. The same sort of risk scenario that we have been concerned about with IRC 409A. By not electing a safe harbor under IRC 409A, companies may well be greatly exposed as "low hanging fruit" for the IRS served up by the SEC. Watching how the backdating/tax avoidance issue plays out will provide some interesting parallels for IRC 409A enforcement.
December 04, 2006Great Advice From a Former SEC Insider
Today at the KPMG 16th Annual Accounting and Financial Reporting Symposium I heard an interesting presentation from Thomas C. Newkirk a Partner with Jenner & Block in D.C. Mr. Newkirk's session was titled "A Former Insider's Look at SEC Enforcement Development." Near the end, he summarized his thoughts on keeping out of trouble with the SEC. Here are some of the highlights:
a. "never make a mistake alone," always go to subject matter experts and work with a good faith approach.
b. "don't rely on the engagement partner," in many cases the engagement partner is not necessarily a subject matter expert and on difficult issues you should insist that national weighs in on the issue.
c. "everybody does it," is obviously no excuse, simply look at backdating.
d. "its only temporary," don't hide financial results because you think they will recover (e.g. WorldCom).
e. "good soldier," don't be a good soldier - this is extremely difficult especially if you are uncomfortable (even slightly) with the people that you work with and/or for.
f. "email, email, email," the SEC loves email - imagine every email you write on the front page of the WSJ.
g. "10b-5-1 program," a binding plan = bullet proof from insider trading.
h."not my problem," actually it is.
i."do not make false statements or destroy evidence," why has this one been so hard for some?
j. "it's not what you did that sends you to jail, it's what you do after what you did".
Great advice for a lot of things.
December 04, 2006Backdating Options - how big is the problem?
Surprisingly, the Wall Street Journal basically broke this story and investigation wide open, not the SEC. They have developed an interesting site on backdating that is worth a look.
Analysts are estimating that between 500 and 2,000 violators are involved - the IRS has identified 40 companies - and the SEC/DOJ are investigating over 100 companies. WOW!
