Nath comments on Hitchner v. Damodaran
The author of a number of seminal articles on control premiums, minority interest valuation issues, and cost of capital, Eric Nath (Eric Nath & Associates) comments on a recent article in Business Valuation Update. The article covered a webinar Jim Hitchner (Valuation Products and Services) presented in which he challenged the views of Aswath Damodaran (New York University Stern School of Business) concerning the cost of capital.
“Your article ‘Hitchner Rebuts Damodaran’s Attacks on Cost of Capital Inputs’ might perhaps have been titled ‘Hitchner Attempts to Rebut Damodaran.’ My understanding is that probably 35% to 40% of appraisers (never mind academics) agree with Damodaran in whole or in part. Many of us never use historical data at all for ERP, size premiums or much of anything else. See the following article for detailed reasons why: The Big Myth. At this point the Pepperdine Survey is the best source of forward-looking required rates of return. Implied rates of return based on forecasts for some public companies is also a forward-looking approach, but it doesn’t really deal with lack of control or marketability/liquidity that impairs value for minority ownership positions in small private companies. It would be great to see the Pepperdine researchers figure out a way to get into the deeper, darker recesses of minority interests in smaller closely-held businesses, but at least for now the Survey’s venture capital and private equity segments get closer than anything else to what we need.” (signed) Eric Nath, ASA.
BVR surveys confirm Nath’s belief that over a third of appraisers look to Damodaran for estimating cost of capital. Also, BVR surveys have shown that about 30% of appraisers look to the Pepperdine Survey (the 2022 edition is now available if you click here).
Expert can’t testify regarding legal and state of mind opinions
In a case in Delaware Chancery Court concerning breach of fiduciary duty surrounding an acquisition, a well-known expert has had the court partially exclude his testimony. For example, one aspect of the report provided his opinions on facts omitted from the proxy statement. The court noted that this amounted to a legal opinion of materiality, which is an issue for the court, so he was precluded from testifying in that regard. Some other aspects of his report fell into a gray area, but it did not provide a meaningful basis for evaluation and was largely personal thinking and judgment, the court noted. The expert had testified in the high-profile Dell case presided by the same judge, Laster, who wrote: “His opinions on the sale process in this case thus differ from the helpful analysis he offered about the management-led buyout in Dell, which rested not only on his thinking and judgment, but also on a data set of management buyouts he collected.” The court ruled that the expert may not testify on certain subjects of his report.
The case is In re Columbia Pipeline Group, 2022 Del. Ch. LEXIS 180, and a case analysis and full opinion can be found on the BVLaw platform.
Survey regarding young ASA BV practitioners
The American Society of Appraisers, together with Business Valuation Resources (BVR) and the recruiting firm Borrowman Baker, is conducting a survey of ASA members under the age of 40 whose primary discipline is business valuation. The goal is to gain some insights and perspectives to help the profession better attract and develop the younger generation of practitioners. If you are an ASA member under 40 in the BV discipline, you should have received a link to the survey. If you have not, send a note to info@bvresources.com and we will send you a link. Responses are strictly confidential and anonymous and will contribute to the continued advancement of the profession. The survey will be open until September 30. Thank you in advance for participating!
Paper explores IPP investments in the US
An interesting paper examines the types of intellectual property products (IPP) capital employed by various sectors as measured in the National Income and Product Accounts (NIPAs) by the Bureau of Economic Analysis (BEA). The paper finds (not surprisingly) that investments in hard assets (e.g., plant and equipment) have decreased and have been replaced by investments in IPP. Also, there “still is a lot of heterogeneity in the types” of IP used among sectors, the paper says. For example, software capital is more prevalent in sectors such as information, finance and insurance, or management of companies than in sectors such as professional, scientific, and technical services, which continue to “invest heavily in the relatively more expensive R&D capital, as they had been doing since the 1980s,” the paper says. Consumer services and healthcare continue to be heavily invested in buildings (“expensive nonresidential structures”) but have also “increased their investments in a balanced mix of software and R&D capital but at much more modest levels compared to the rest of the capital-intensive sectors analyzed in this paper.”
The paper, “Understanding the Uneven Growth of Intellectual Property Products Investment in the U.S.,” is by Dennis Fixler and Eva de Francisco, U.S. Bureau of Economic Analysis, and can be accessed if you click here.
Global BV News
European BV conference in Vienna November 3-4
The 15th annual conference of the European Association of Certified Valuators and Analysts will be held in Vienna on November 3-4. More than 300 attendees are expected to hear from some of the most renowned speakers in the business valuation field while connecting and networking with other valuation professionals. Keynote speeches will be presented by Professor Dr. Dr. h.c. Ulrich Blum on Outright Economic Warfare: Can It Be Contained? and Bradford Cornell, Ph.D., on ESG and valuation. For more information and to register, click here.
What’s in the October 2022 issue of Business Valuation Update
Here’s what you’ll see:
The International Association of Certified Valuation Specialists