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April 29, 2007Where were the appraisers?
House-flipping in Vegas! Seemed like a great idea at the time. As I have read several of the articles on the problems in Clark County I am amazed at the stories. "We had seen real evidence of what was possible in this crazy, inflated market, and we just wanted to get a piece of the investment equity" said an investment buyer (Denver Post - April 29, 2007). Once again we all sit back and ask ourselves how in the world could anyone think that after home prices had soared $200,000 in 18 months, that now was a great buying opportunity. We wonder, what they were thinking, when they still would buy the home knowing that the sales staff increased the price $20,000 after every fifth buyer or when they slept over night in the parking lot with 100 other people just to simply have an opportunity to make an incredibly speculative investment. And most importantly how making a down payment of $5,000 on a $540,000 investment home was a 'great opportunity'.
April 26, 2007Patty Dunn Speaks
I had the opportunity to listen to Patty Dunn speak at the Western M&A forum yesterday in San Francisco. With her attorneys at her side, she gracefully dodged any questions pertaining to the HP drama and addressed the crowd of investment bankers, transaction attorneys and private equity firms with a perplexing observation on the recent buyout activity. Her point focused on the fact that many public companies feel the need to go private (or "go dark") in an attempt to move away from public company scrutiny. Instead of worrying about back dated options, (or leaky board members) the executives can focus on running the company. Although Ms. Dunn failed to consider the factor of leverage, the greatest returns are generated in the dark stage, and it is the reason that so many public pension funds are allocating substantial amounts of resources to this alternative investment category. The irony she points out is that it is these funds that are often leading the charge on greater regulation and visibility in the public markets, but increasing investments in limited partnership interests, where visibility is even worse.
So let's see. This sounds a bit like 2000 all over again. Higher returns, public funds follow, someone screws up, public funds point finger, and heavy regulation followed. For what it's worth, I hope nobody screws up......
April 09, 2007According to Management... Fair Market Value = $1.00
Chavez Properties-Airport Parking Albuquerque, L.P. v. Lorentzen, 2006 U.S. App. LEXIS 27735 (November 2006)
Chavez Properties-Airport Parking Albuquerque, L.P. v. Lorentzen highlights the importance of expert valuation testimony in calculating lost profit damages. The dispute involved several income producing parking lots located throughout Metro-Albuquerque. The partnership was created to consolidate operating expenses and streamline the management of the lots. However, shortly after formation, one partner complained that he was harboring more expenses than his counterpart. After several contentious months, the disgruntled partner removed the cash collection machines from the lots, resulting in litigation.
April 09, 2007That's Life!
What is the life of an asset? Is it something that the SEC and FASB says it is for the preparation of financial statements? Is it something the IRS says it is for the preparation of a corporate tax return? Or is it the amount of time before an asset actually has no remaining value (i.e., reality)? While each of these definitions has their place, investors, the users of financial statements, should be most interested in reality. And that is where the divergence begins.
April 08, 2007Fair Value, Fair Market Value, "Fair"?
Is there a difference? Fair value vs. Fair Market Value...value is value right? Wrong? Standards are critical to clearly defined valuation parameters.Tackling valuation problems in the world of corporate finance and dissenting shareholders is often a tightrope driven by the valuation standard. Shareholders, managers and board members are all concerned about what is "fair" and how to reduce potential liability.
A recent Colorado court case highlights the importance of clearly defining the valuation standard on the front end of an engagement. In the case of Kim v. The Grover C. Coors Trust (March 8, 2007), a minority shareholder alleged a breach of fiduciary duty by directors for approving a $100 million sale of preferred stock to raise badly-needed capital. The court determined that the fair value standard was not appropriate, which would have involved a dissenters' rights action and precluded the application of discounts to minority interests (Model Corporation Business Act). Instead, the court concluded the fair market value standard should be applied, which meant that the case involved "the question of whether a transaction was fair". The fair market value standard in this context allows for the consideration of discounts. What is the difference? Well in the Kim case the discounts were 15% to 20% for marketability and the difference in whether the transaction was "fair".
April 04, 2007That's not your deal! It's mine!
The much-discussed drama of the EGL, Inc. private equity transaction has everyone questioning the "new" rules of engagement. It seems that if a higher bid comes in after the documents are signed, the board has to consider the higher offer. As the EGL board was accepting the management led buyout at $38 per share, Apollo Management LP was submitting an offer for $2 more (and have since increased it to $41). At first the Apollo law suit seemed to have little validity, but a recent court decision has delayed the close. And guess what? The market thinks the lawsuit holds and the deal gets done higher than the original offer. EAGL closed today at $39.69!
April 03, 2007Maverick Valuation - An Invented Methodology
Nellson Nutraceutical, 2006 Bankr. LEXIS 3186 (November 29, 2006)
Nellson Nutraceutical, a privately held manufacturer of nutrition bars, filed for Chapter 11-bankruptcy protection in 2006. At issue was the company's $355 million and $10 million in secured and unsecured debt, for the debtors to be "in the money" Nellson's enterprise value needed to exceed $365 million. In September 2006, the bankruptcy court held a hearing to determine the company's enterprise value. Four valuation experts testified in case, three of which utilized standard methodologies - discount cash flow ("DCF"), comparable transactions and comparable companies. A standard DCF analysis segments an entity's future cash into two parts: (1) the projected free cash flow for the interim periods determined via a company's projected financial statements; and (2) a terminal value which estimates the value of a long-term investment in the entity.
April 03, 2007Chasing Alpha
The asset management industry is currently in the midst of a paradigm shift. In early March of this year, I discussed the benefits of performance fee refunds to compensate investors for sub par returns. However, while many investors and asset managers laud the alignment of interests (of investors and asset manager) through charging for alpha, as opposed to beta, criticisms have inevitably come to the forefront.
