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January 28, 2008Out of Ammunition
With the possibility of a recession looming on the horizon and the panic that appears to have stricken Wall Street, the Federal Reserve has determined the best way to battle the trouble is with a series of aggressive rate cuts, including an emergency rate cut of 75 basis points. While there are indications the economy is on the edge of a possible recession, it is after all, only mid-January and we won't really be able to tell if we are in a recession until the summer. So, was the Fed thinking about he long-term health of the economy or simply attempting to calm the current unrest within the markets. If the motivation of the Fed was to reinvigorate the US economy was it really necessary to make such an aggressive emergency cut one-week before they were scheduled to meet? Another issue with such a substantial rate cut is the fact that the Fed can't continually keep cutting rates every time the markets panic. The Fed only has so much ammunition to fight economic pressures and with the emergency cut and the expectations of further rate cuts following the next meeting, it seems the Fed could be running out of ammunition long before the battle really begins.
January 28, 2008Deja Vu
Recently, the prospect of a recession has put into motion events causing the Federal Reserve to slash interest rates and the government to begin talk of an economic stimulus package centered on tax refunds. But with both the Fed and the federal government desperately trying to boost the economy and stabilize a shaky market you cant help but get a sense of déjà vu.
January 23, 2008A 2008 reflection on 409a
With the implementation of 409a over the past several years, we have seen and heard it all. Frustrated, mad and confused executives, auditor/client disagreements, auditor/valuation firm disagreements; however, there are a large portion of companies that handle 409a compliance with ease- minimal time and minimal stress. Knowing that the regulations will be enforced by the end of the year, we reflected back over the 200+ 409a valuations we have done over the past several years to comment on what works (and doesn't work). Here's some thoughts on how to make 409a compliance less time consuming, stressful and costly:
· Assemble a team and get them on the same page- early. As you pick your valuation firm, have a pow-wow with your auditor (and even legal counsel) to set the standards and expectations. Most reputable valuation firms prefer to talk to your auditor before the project begins (and sometimes even before the contract is signed). Buyoff on the front end helps control back end fees and headaches.
January 21, 2008Shot in the arm.
Last Friday, January 18, President Bush announced a preliminary plan to offer Americans $150 billion in tax relief to prevent the economy from sliding into a recession. While economists seem be in consensus that a quick capital injection into the economy will increase spending and hold recession at bay, temporarily; the debate is focused on what form this capital injection should take. The choices include unemployment insurance benefit increases, increased food stamp funding, individual tax cuts, business tax breaks and increased federal housing subsidies. Of course all of these have the pitfalls. In my opinion, what's most important is that a large portion of the capital injection go to those who are having to choose between heating their home, or feeding their family; otherwise, we'll likely see a spike in plasma television sales, or maybe an increase in the savings rate?
January 21, 2008The sky is falling...
From its high in October of last year the public market place has fallen by about 15% through last Friday. As the market takes a well deserved holiday after a tumultuous start to the year, I ask myself "what if any impact these last four months have on the price of option grants?" And more importantly, "what if we see a continued correction through the first quarter?" Consider that many emerging companies last valued their grants right about the market peak and are now faced with setting a price as of 12/31/07. With a slew of annual updates on the way, how do we know factor in the changing sentiment in not only the public market but the economy in general? Recession/inflation talk is the new buzz while the housing market collapse remains a well versed threat. Yes, we base the value of most emerging biotech and tech companies on some future exit which may or may not be in this economic cycle. And, of course, we have already begun to hear the refrains, well we are actually "recession proof" and even some "new economy" talk sparks up from time to time much like 10 years ago. By no means, am I implying that we are on the edge of a similar bubble, but we are cognizant that despite the fact that most of our clients had great years in 2007, values must be tempered by the changing landscape. That means multiples might tick down slightly, we are going to more cognizant of company specific risk factors (e.g. how susceptible are you to the over all economy), and most importantly are the management teams we talk about in tune with the change in values around them.
January 07, 2008Welcome to the Recession
With anticipation and a touch of fear, many were hanging their hats on the December jobs data and the official start of the recession. The disappointing numbers were the lowest in more than four years and further signal the economic slowdown. For what is worth, an economic recession conjures up many assumptions with respect to valuation. Aside from the migration to consumer cyclical stocks such as Proctor and Gamble, Johnson and Johnson, and possibly the fight to treasuries, we also may expect to see more write-downs on corporate balance sheets. As we move into the 2008 audit season auditors will have the nagging benefit of hindsight relative to year-end financials. The question is how will this clouded perspective impact the results of goodwill impairment tests (FAS 142), fair value calculations of investments under the anticipated FAS 157 or the fair value of various embedded derivatives under FAS 133. With less optimism than late last year, will auditors view companies' projections with an even greater deal of skepticism? Only time will tell, but management will be under pressure to defend the assumptions used in the valuation of the assets on carried on their balance sheets.
