Put ESG impact in numerator, not denominator

Currently, there is no empirical evidence to support including the impact of environment, social, and governance (ESG) factors in the cost of capital, so it should be reflected in the cash flows. This point was made during a Big Four panel discussion during the recent ASA New York Fair Value Conference. Studies are being done about the relationship between ESG and returns, but the results so far have been “mixed.”

The panel of Big Four leaders included Josh Putnam (Ernst & Young LLP), Manish Choudhary (Deloitte), Martin Mazin (KPMG), and Adam Smith (PricewaterhouseCoopers). Myron Marcinkowski (Kroll) acted as moderator.

A full recap of the conference is in the September issue of Business Valuation Update.

Delaware court cites studies of appraiser bias

Valuation experts who testify should not assume that the courts view them as independent parties who are advocates for their opinion rather than for the client. We’ve heard judges say they perceive testifying experts to be hired guns, but a recent case actually cites some studies that they believe back up their feelings. In the Cellular case (see below for citation), the court wrote: “As this court’s experience with appraisal cases demonstrates plainly, valuation professionals reach outcomes that are influenced by the interests of the party that retains them, even when ostensibly acting as disinterested experts. Scholars have reached the same conclusions.” The first sentence contained a footnote to the Dole Food case (In re Appraisal of Dole Food Co., Inc., 114 A.3d 541, 557 & n.10 (Del. Ch.2014)) that cited cases “recognizing the omnipresent ‘widely divergent, litigation-driven expert valuations’ this court sees in appraisal proceedings.” The second sentence footnoted two studies, “An Analysis of Private Versus Public Firm Valuations and the Contribution of Financial Experts,” and “On the Added Value of Firm Valuation by Financial Experts,” that the court says present evidence of bias in expert valuations.

Later in the Cellular opinion, another, more recent, study was cited: “Are Business Valuators Biased? A Psychological Perspective on the Causes of Valuation Disputes.” That study, the court writes, “found ‘clear evidence for the existence of … engagement bias’ in purportedly neutral valuation professionals who were assigned randomly to perform valuation tasks on behalf of a buyer or a seller.”

Unless these studies are refuted, they may keep showing up in future opinions. In the meantime, testifying experts may have to deal with the hired-gun perception a judge may have.

An analysis and full opinion of the case, In Re Cellular Tel. P’ship Litig., 2022 Del. Ch. LEXIS 56, are available on the BVLaw platform. Also, there is commentary on the case in two articles by Gil Matthews (Sutter Securities) and BVR legal editor Jim Alerding (Alerding Consulting) in the June 2022 issue of Business Valuation Update.

Divorce Highlight: Forging the attorney-expert relationship

“One of the things I suggest to younger family lawyers is to make relationships with experts,” says Jay Fishman (Financial Research Associates) in a recent interview with Family Lawyer Magazine. Attorneys need a stable of valuation experts who have expertise in different areas, he says, and they want experts who are not just competent technically, but ones who can effectively explain things, especially to a trier of fact.

Fishman will co-present a session, Untangling the Web of Complex and Startup Businesses, at the AAML/BVR Divorce Conference—where valuation experts and attorneys will meet up over three days in Las Vegas (Sept. 18-20). The AAML is the American Academy of Matrimonial Lawyers, so this is the perfect event to forge some relationships! Attendance is expected to be half experts and half attorneys. To see the full agenda and to register, click here.

Global BV News

Continued slowdown in global equity capital market activity, per S&P Global

S&P Capital IQ released its mid-2022 summary of major global capital investment activity, which includes IPOs, SPACs, reverse SPACs, and the other usual categories. These transactions are rarely helpful in business valuations (even for larger enterprises), but all market participants follow them as a proxy for general business conditions. The first half of the year has shown dramatic drops in capital flow in all sectors compared to 2021. S&P notes that the UK and US have largely dropped out of the IPO market. The largest global IPO in the first half was LG Energy, in South Korea. The UAE had three deals in the top 10, led by Dubai Electricity and Water Authority; China had two; and India, the US, and Indonesia had one