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Key Note Speaker - Mastering our Craft: Using Insights from the Trenches to Shape the Future of Valuation Practice

John K. Paglia, Ph.D.- Associate Dean and Associate Professor of Finance, Graziadio School of Business and Management Pepperdine University, CA

John K. Paglia, Founder and Former Director of the Pepperdine Private Capital Markets Project, and Associate Professor of Finance at Pepperdine University, will discuss his journey towards market relevancy and share data on recent activities, trends, and outlooks in the private capital markets, their impacts on business owners and valuations, and how valuation professionals can better align themselves to become strategic advisors and win business.

Valuation Hot Topics in a Dispute Setting

David J. Margules – Partner, Bouchard Margules & Friedlander, P.A. – Wilmington, DE

Lawrence A. Hamermesh- Ruby R. Vale Professor of Corporate and Business Law, Widener University School of Law – Wilmington, DE

Roger Grabowkski – Managing Partner, Duff & Phelps – Chicago, IL

Shannon Pratt – Chairman & CEO, Shannon Pratt Valuations, Inc., – Beaverton

Justice Donald Bowman – Dentons Canada LLP, Toronto, ON

o Company specific risk premium – Ch. 16 from the Cost of Capital: Applications and Examples, 5th edition – How do courts view company specific risk? – How can a valuation expert better support their use of company specific risk? – What makes up company specific risk? o Cost of capital in general from various courts – How does Delaware differ from Canadian tax courts, US tax courts, state courts, etc.? o How does the court deal with modern valuation techniques and data from market transactions? – To what extent must modern valuation techniques give credence to valuation evidence from relevant market transactions? – What are relevant market transactions? – What does the current case law suggest? – How do courts use valuation experts? – Is there much benefit to the courts beyond the facts and assumptions used by the expert? In other words, will the court, more often than not, make its own quantification? – Is it appropriate for the court to appoint its own valuation expert? • If so, how do attorneys view a court-appointed expert? • Can/will they be cross-examined? • What are the prospects for this initiative in a judicial system built on adversarial argumentation? – What can an expert do to deal with a judge’s limited competency in a technical matter (i.e. provide the court with a model, agree with other side on the specific areas of agreement/disagreement, and so on)? o Independence/conflict issues regarding issuing a valuation opinion – How do you/can you coordinate a valuation opinion/fairness opinion/financing, etc.? – Current Delaware court case addresses the issue – How do you coordinate a fee structure? o How to avoid a Daubert challenge – What are the things that keep an expert up at night? • Specific valuation assumptions, client provided information, math errors, market forces, etc. – What are things that keep attorneys up at night with regards to working with experts? – How would an attorney and expert deal with a Daubert challenge – Is a Daubert challenge a career ender?

Technology Company Valuation Drivers and Trends

Dan Knappenberger, CFA, ASA – Principal, Deloitte Transactions and Business Analytics LLP, San Jose, CA

Duncan Stewart – Director of Research, Deloitte Canada, Toronto, ON

Sid Paquette – Director, OMERS Ventures, Toronto, ON

This panel discussion will focus on valuation issues in the technology sector. The panelists will discuss important industry and sector trends that are driving valuations for today’s technology companies. The panelists will look at “old line” technology companies and compare them to companies in newer, thriving, sectors (ie., cloud computing, dig data, social media). The panelists will explore certain industry trends that impact the valuations within these various sectors.

Deferred Revenue: Accountants Meet Appraisers

Amy Ripepi, Managing Director Financial Reporting Advisors, LLC, Chicago, IL

Raymond Rath, ASA, CFA – Managing Director, Globalview Advisors, Irvine, CA

Not all deferred revenue accounts are created equal! This session will help you bridge the ‘gap of misunderstanding’ that often arises when appraisers and accountants discuss the nebulous concept of deferred revenue.  Ray and Amy will identify the situations that result in deferred revenues on the target’s balance sheet, address how those amounts are computed, distinguish between deferred revenue balances that require fair value estimates and those that do not, and discuss some of the valuation methods and assumptions used to estimate fair value, including the intersection of deferred revenue with customer related intangibles. Attention will be give to the recent developments in both the accounting and appraisal professions, including recently released changes in revenue recognition rules under US GAAP and IFRS and the Appraisal Foundation’s 2014 Exposure Draft “Valuation of Customer Related Assets.”

Forget Everything You Thought You Knew About Discounts (DLOC, DLOM, DLOL)!

Eric W. Nath, ASA – Eric Nath & Associates, LLC, San Francisco, CA

Ideally, an appraisal should mirror how markets actually work if the appraiser is opining as to fair value or fair market value. It turns out that real buyers and sellers of private minority interests do not value these types of interests based upon discounts, but rather based upon economics. Mr. Nath will discuss new research and findings in some of the darker corners of the private markets and will combine this information with other recent threads of innovation in business valuation to present a more integrated, scientific and defensible process for valuing noncontrolling, illiquid interests than just applying discounts for lack of control and lack of marketability.

ASA BV Chair and CICBV Chair - State of the Union

Rob Doran, CBV – CICBV Chair

Bob Morrison, ASA – ASA BV Chair

Price and Value: Determinants, Divergence and Convergence

Aswath Damodaran, MBA, Ph.D. – Professor of Finance, Stern School of Business at New York University

Investors, analysts, bankers, accounting rule writers and academics are all guilty of using price and value as interchangeable terms, when they often are different in both what they measure and what they mean.  The value of an asset is a function of its fundamentals: its cash flows, growth and risk.  The price of an asset is set by demand and supply, and while it may be influenced by fundamentals, it is also determined by a multitude of other factors, including mood and momentum.  It is the failure to make this distinction that causes heartburn for analysts who are often asked to price assets, using valuation tools, or value assets, using pricing tools.  In this session, Dr. Damodaran will look at the deteminants of value and how as they change, the value changes over time, and then at the the determinants of price, and why those determinants can make price diverge from value.  He will also look at the forces that cause eventual convergence and the consequences for investors.

Fairness Opinions as Magic Pieces of Paper

Steven M. Davidoff, Professor,University of California, Berkeley School of Law

What is the worth of a fairness opinion? I assess the legal role that fairness opinions play in takeover and other significant financial transactions.  I also discuss the Delaware courts’ increasing focus on fairness opinions as well as several recent cases which appear to have enhanced the liability of bankers’ for fairness opinions.  Does this regulation makes sense or even jibe with the common understanding of what is a fairness opinion?  How should fairness opinions be changed to meet this new regulation?  I discuss these and other current issues in fairness opinion practice.

Volatility: A Practitioner’s Overview for Options, Warrants, OPMs and Contingent Consideration

Summer Parrish, CFA, – Valuation Research Corporation, Princeton, NJ

Dwight Grant – Principal, PricewaterhouseCoopers LLP – San Francisco, CA

Volatility is a central component of risk. It defines the expected playing field. Most business valuation professionals deal with it on a daily basis yet the assumptions that account for it often receive all of the care and attention that is ascribed to developing risk-free interest rates. Alas, volatility is not observable! It is calculated, or even implied, but never known with certainty. In this session, we will discuss volatility in its many and most common contexts in valuation for financial reporting. For example, participants will learn the differences between what is applicable when estimating volatility for an employee stock option valuation and a warrant liability valuation. We will cover the basics: historical volatility, implied volatility, and re-levering volatility, along with the not-so basics: various volatility haircuts, estimating volatility when the underlying is not an equity security (e.g., What if I am simulating revenue?), and correlating volatilities (when the performance of multiple assets underlies your option value).

Less Familiar Applications of Option Pricing Methodology: 1) Contingent Consideration and 2) Valuation of Options Embedded in Tranche Financing and of Early Stage Capital Structures where Outcomes are Not Lognormally Distributed

Dwight Grant, Prinicpal, PricewaterhouseCoopers LLP, San Francisco, CA

In this presentation we begin by reviewing approaches to the valuation of contingent consideration that are sometimes problematic. We illustrate our preferred solution to most of the problems that arise, the application of option pricing methodology. The second two-thirds of the presentation illustrates how to use option pricing methodology when future outcomes are more reasonably described as a small set of discrete outcomes rather than as a continuous lognormal distribution. We use the cases of options embedded in tranche financing as one illustration of the application of this idea. We use the valuation of complex capital structures of early stage companies whose future values are more reasonably characterized by discrete distribution than by continuous distributions – Dwight Grant -Prinicpal, PricewaterhouseCoopers LLP, San Francisco, CA

IIBV Update

Michael Badham, CBV

Market Risk Premium and Risk Free Rate used in 51 countries in 2013: a survey with 6,237 answers

Dr. Pablo Lopez Fernandez – Professor of Financial Management and holder of IESE’s PricewaterhouseCoopers Corporate Finance Chair – Navarra, Spain

Dr. Fernandez will review his survey which contains the statistics of the Risk-Free Rate and of the Equity Premium or Market Risk Premium (MRP) used in 2013 for 51 countries. Answers were received from 78 countries, however results were only reported for 51 countries with more than 5 answers. Most previous surveys have been interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references used to justify the MRP, comments from persons that do not use MRP, and comments from persons that do use MRP. The paper shows the differences for the countries that had at least 2 answers for each category (professors, analysts, managers of companies and managers of financial companies).

How to measure cost of capital (an academic view)

Dr. Partha Mohanram

Business Value Stability Across Stock Market Corrections - an Update

William F. Pittock, Executive Director, Ernst & Young LLP, New York, NY

Following the October 1987 “Black Monday” market crash, the first dramatic correction of the modern era, appraisers began to examine what such stock market volatility meant for establishing valuations on both minority and control bases.  Early research focused on trends in control premiums as a linkage between volatility in stock market prices and those observed in the transaction market.  Were business values as equally volatile as those observed in the stock markets undergoing correction?   The presenter updates an article he presented in 1988 to examine such trends across subsequent stock market corrections.


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