FINANCIAL REPORTING ISSUES
SFAS No. 141/142
We have performed acquisition purchase price allocations for clients in such diverse industries as professional sports franchises, consumer products, health care, entertainment, publishing, insurance, banking and financial services, broadcasting, construction, telecommunications, technology, and defense contractors. After the purchase price allocation, we routinely perform the step one/step two annual goodwill impairment tests for the acquirer company. In fact, our analysts have written extensively in professional journals and lectured extensively at professional conferences on the valuation implications of SFAS Nos. 141 and 142.
SFAS No. 143
We have estimated asset retirement obligations for client properties/facilities in such diverse industries as telecommunications, transportation, mining, chemical processing, hospitality, oil and gas, waste management, manufacturing, and public utilities. In addition, our analysts have provided expert testimony as to the effect of SFAS No. 143 on fair market valuations of operating assets performed for property taxation, eminent domain, and various other purposes.
SFAS No. 144
We have performed asset impairment studies (and the related asset fair value appraisals) for clients in numerous capital-intensive industries. We have also reviewed and opined on asset impairment analyses performed by client company managements. In addition, our analysts have provided expert testimony on the differences between (1) asset impairment analyses for SFAS No. 144 purposes and (2) cost approach economic obsolescence analyses for property taxation, eminent domain, and other various purposes.
SFAS No. 123R
We have valued executive/employee stock options for substantial closely held corporations and for publicly traded companies of all sizes. We have also valued the compensation elements of other options, warrants, grants, and rights. Using all allowable option pricing models, our analysts have quantified the fair value of share-based payment awards for client financial reporting purposes. Our clients have ranged in size from development stage companies to multinational Fortune 500 corporations.
SFAS No. 153
Exchanges of nonmonetary assets should be measured according to the fair value of those assets. For financial accounting purposes, we have valued nonmonetary assets in such diverse industries as hospitality, transportation, telecommunications, broadcasting, financial services, technology, construction, health care, public utility, manufacturing, energy, retail, distribution, and other industries.
VALUATION DISCOUNTS AND PREMIUMS
Discount for lack of control (DLOC)
We have performed proprietary studies of a client/industry-specific DLOC by analyzing and comparing acquisition price premiums paid by (1) strategic buyers (i.e., strategic or total acquisition price premiums) versus (2) financial buyers (i.e., the control premium component of total acquisition price premiums). We have performed such studies for clients in the financial services, health care, transportation, hospitality, financial services, entertainment, travel services, publishing, telecommunications, and other industries.
Discount for lack of marketability (DLOM)
We have published the results of our Willamette Management Associates restricted stock DLOM studies and our series (from 1980 to 2004) of Willamette Management Associates Pre-IPO DLOM studies. In fact, these studies are widely cited in valuation texts and journal articles, business appraisal course materials, and published judicial precedent of numerous state, federal, and international courts. While the overall results of these Willamette Management Associates DLOM studies are widely known, our analysts use our proprietary transactional databases to customize DLOM studies for our client's (1) industry, (2) size of company, and (3) size of the subject stock block.
Discount for lack of voting rights (DLVR)
We have published the results of our Willamette Management Associates DLVR studies. While the overall results of these Willamette Management associates DLVR studies are widely known, our analysts use our proprietary databases to customize DLVR studies for our clients based on the subject company (1) industry, (2) size, (3) dividend policy, and (4) relative stock ownership concentration.
Blockage discount
Our analysts have provided expert testimony with regard to the appropriate blockage discount (i.e., the discount associated with the effect of selling a large block of stock in a publicly traded company) in numerous industries. These industries include cable television, health care, hospitality, manufacturing, technology, retail, textiles, publishing, and others. Our analysts have provided expert testimony in litigation matters involving gift and estate taxation, income taxation, family law, fraud and misrepresentation, and shareholder litigation matters.
Contractual transferability restriction discounts
Our analysts have quantified transfer restriction discounts related to buy/sell agreements, franchise agreements, shareholder agreements, and partnership agreements. Our analysts have provided expert testimony regarding the impact of such agreements in the following industries and professions: food service, consumer products, accounting, travel and leisure, law, education, manufacturing, real estate development, financial services, advertising, and insurance. This expert testimony related to income taxation, gift and estate taxation, family law, lender liability, shareholder oppression, and dissenting shareholder appraisal rights matters.
Legal/regulatory transferability restriction discounts
These restrictions relate to SEC Rule 144 or other federal/state regulations with regard to the transfer of founder stock, letter/legend stock, insider stock, etc. Our analysts have quantified legal/regulatory restriction discounts related to equity securities in the following industries: oil and gas, defense contractor, hospitality, leisure products, mining, natural resources, manufacturing, energy, entertainment, health care, steel, printing, technology, plastics, and others.
Nonsystematic risk/key dependence discount
These business valuation/security analysis discounts relate to: key employee dependence, key customer dependence, key supplier dependence, key technology dependence, and key intellectual property dependence. We have quantified these valuation discounts in such diverse industries as agriculture, communications, entertainment, real estate development, pharmaceuticals, hospitality, retail, publishing, and professional services. Our analysts have quantified these discounts for purposes of gift and estate tax, contract disputes and other commercial litigation, condemnation and eminent domain, bankruptcy, fraud and misrepresentation, family law disputes, lender liability, and shareholder oppression/dissenting shareholder rights litigation.
GIFT AND ESTATE TAXATION ISSUES
We were retained by tax counsel representing a large shareholder in a national media company. Our analysts estimated the fair market value of an approximately 10 percent block of the outstanding common stock for gift tax purposes. This company operated in the following industries: newspaper publishing, cable television, and book publishing. The company operated as an S corporation for federal income tax purposes. The value of the gifted interest was approximately $50 million. Our stock valuation report was audited by the Internal Revenue Service and accepted without any material changes.
We provided valuation advisory services to a professional basketball franchise owner as part of a sophisticated estate plan and business succession plan. To assist our client with his overall estate planning objectives, our analysts estimated the value of both the NBA franchise and a partial ownership interest in the NBA franchise.
INCOME TAXATION ISSUES
Purchase price allocation
We were retained to conduct a purchase price allocation for a national manufacturer of health and fitness products related to the approximate $75 million acquisition of a high-performance fitness apparel company. The transaction was structured as a taxable purchase of assets. As part of the purchase price allocation, we separately identified and valued the following Section 197 intangible assets: (1) trademarks and trade names, (2) customer relationships, (3) proprietary technology and technical documentation, (4) contracts and contract renewals, (5) computer software, (6) trained and assembled workforce, and (7) licenses and permits.
Intercompany transfer price
We estimated the value of the trademarks and trade names for an upscale national women's fashion designer and retailer. Based on that value, the client transferred its trademarks and trade names to a Delaware subsidiary. The client intended to manage, protect, and commercialize all of its trademark-related intellectual property through the Delaware subsidiary. We also estimated the appropriate royalty rate transfer price for the intercompany license of the trademarks from the Delaware subsidiary to the operating companies. Based on that royalty rate analysis, the operating company entered into an agreement to license the use of the trademarks in other states across the country.
We were retained by a leading oil and gas exploration and production company located in eastern Texas. The purpose of the engagement was twofold. First, our analysts assisted in the structuring of a newly formed services company. The services company was created to provide management, administrative, and other services to the primary operating company. As part of this structuring, our analysts estimated the fair, arm's-length intercompany transfer price for the services to be performed by the services company. Second, our analysts estimated the fair market value of an ownership interest in the operating company, following the restructuring, for gift tax planning purposes. Our valuation included an analysis of the operating company's oil and gas properties, related production equipment, and investments in other privately held ventures.
AD VALOREM PROPERTY TAXATION ISSUES
Exempt intangible assets
Our analysts have valued discrete intangible assets for centrally assessed clients so that the value of these intangible assets, which are exempt from taxation in many jurisdictions, may be excluded from the total value of the taxable unit. In addition, our analysts have provided expert testimony as to (1) the value of these discrete intangible assets and (2) the manner in which the unit value should be adjusted to ensure that these exempt assets are not taxed. We have performed exempt intangible asset valuation analyses for taxpayers in the transportation, telecommunications, oil and gas, water and wastewater, pipeline, electric, food processing, chemical processing, paper products, natural resources, hospitality, and timber industries.
We valued the tax-exempt intangible assets of a major Texas Gulf Coast oil refinery. These exempt intangible assets included: proprietary technologies, computer software, engineering drawings and technical documentation, licenses and permits, contracts and contract renewals, and a trained and assembled workforce. At trial, the principal dispute related to the extraction of the intangible asset values from the overall value of the taxpayer total unit of operating refinery assets. Our expert testimony related to the valuation of the exempt intangible assets.
For an electric generation facility in New York, the taxing authority assessed the property based on a recent acquisition price. Our client was the corporate acquirer, a publicly traded energy company. We valued the discrete intangible assets of the acquired electric generation facility, including power purchase and sale contracts, environmental credits, and operating manuals and procedures. After an audit of our valuation, the taxing authority reduced the amount of the assessments by the amount of the tax-exempt intangible assets.
Tangible personal property
Our analysts have performed reproduction cost new less depreciation analyses to estimate the value of tangible personal property for ad valorem property taxation purposes. We have also identified and valued tangible personal property that is exempt-or partially exempt-from taxation in certain jurisdictions, such as pollution control equipment, inventories, construction work in progress, tools, and tangible personal property used in research and development.
Obsolescence adjustments
Our analysts have quantified tangible property value adjustments due to functional (including technological) and external obsolescence for both locally assessed and centrally assessed taxpayer clients. These obsolescence analyses typically include inutility analyses, excess operating cost analyses, and return on investment analyses. In addition, our analysts have provided expert testimony related to obsolescence adjustments. We have performed obsolescence analyses for companies in the transportation, electricity, pipeline, retailing, wholesaling, distribution, manufacturing, energy, and communications industries.
Using a cost approach (and a reproduction cost new less depreciation method), we valued the real estate and tangible personal property of a rocket motor manufacturing company. In particular, we focused on the obsolescence analysis component of our cost approach analysis. The taxpayer was both a major defense contractor and an integral component of our nation's civilian space program. At trial in the State of Utah, the major issues in the dispute (and the focus of our expert testimony) involved the quantification of both functional obsolescence and economic obsolescence.
Valuation discounts/premiums
Our analysts have performed dozens of studies and analyses related to valuation adjustments (discounts and/or premiums) applicable in the valuation of operating assets for ad valorem taxation purposes. We have estimated valuation adjustments applicable to value indications that rely on capital market data (e.g., valuation pricing multiples, direct capitalization rates, and market prices derived from negotiable securities). These valuation adjustments are based on the different risk and return characteristics of an investment in operating assets as compared to an investment in negotiable securities. Our analysts have also estimated valuation adjustments related to special circumstances, such as joint ownership of operating assets. We have performed these studies and analyses for both centrally assessed and locally assessed companies.
Remaining useful life analysis
The New York State property tax authority was involved in an ad valorem assessment dispute with taxpayer Brooklyn Union Gas Company. Both parties valued the taxpayer real estate and tangible personal property using a cost approach. The principal dispute in the taxpayer's property tax appeal related to (1) the expected remaining useful life (RUL) of the taxpayer assets and (2) the effect of the asset life on the accrued depreciation estimate. Our analysts performed a survivor curve RUL analysis in order to quantify the reproduction cost new less depreciation of the taxpayer assets. Our analysts provided expert testimony on behalf of our client, the State of New York.
Unit valuation
Our analysts have performed valuations of the taxable units of centrally assessed taxpayers. We consider all generally accepted approaches, methods, and procedures to estimate the unit value, and we consider all applicable value adjustments (depending on the particular valuation methods used). For example, our analysts always consider the value effects of functional obsolescence and economic obsolescence when we perform a cost approach analysis.
Litigation support
Our analysts routinely provide litigation support and expert witness services related to ad valorem property taxation disputes. These services include the review and critique of opposing expert/assessor/taxpayer appraisals; the review of client-prepared or other-expert-prepared appraisals; industry, market, and literature research assignments; performance of alternative/supplemental value analyses; deposition and trial preparation assistance; and expert witness testimony.
BANKRUPTCY AND REORGANIZATION ISSUES
We were retained by legal counsel for the secured creditors' committee. Our assignment was to estimate the fair market value of the total equity of an oil pipeline company debtor in possession (DIP). Based on the discounted cash flow valuation method and the guideline publicly traded company valuation method, we valued the DIP equity at a positive $50 million. This positive equity value supported the creditors' proposed plan for reorganization. We testified in U.S. Bankruptcy Court on behalf of the creditor committee, and the case settled favorably before the conclusion of the trial.
In the Bankruptcy Court, we testified as to the fair market value of a Florida residential real estate developer. A principal dispute in this bankruptcy matter involved the proposed plan of reorganization. Specifically, the principal dispute regarding the proposed plan of reorganization related to the value of the DIP business enterprise on a going-concern basis versus the value of the DIP business enterprise on an orderly liquidation basis.
In the Weirton Steel Corporation bankruptcy case, our client was one of the secured creditors. We valued the secured creditor's claim on the collateral asset, an electric and steam generation facility. Our fair market value valuation supported the amount of the secured creditor's claim, and our analysts provided expert testimony in support of our collateral interest valuation.
In the American Classic Voyages company bankruptcy, we performed a solvency analysis of the cruise and vacation industry company at various points in time prior to the bankruptcy filing. We were retained by counsel for several creditors. Our solvency analyses were used to overcome presumptions of fraudulent conveyance and preference payments with regard to prebankruptcy payments to our clients. Our analysts provided expert testimony in support of our prefiling date solvency analyses.
BUSINESS VALUATION/SECURITY ANALYSIS CONTROVERSY ISSUES
Dissenting shareholder appraisal rights
We were retained by legal counsel representing the Pennzoil Corporation board of directors to provide an expert opinion and expert witness testimony with regard to the acquisition of Pennzoil by Shell Oil. A dissenting shareholders appraisal rights action was filed by several former Pennzoil shareholders. The plaintiffs claimed, among other allegations, that the board accepted a price below the fair value of the shares when it ratified the transaction. The agreed upon price-$22 per share, or approximately $1.7 billion-produced a total Pennzoil acquisition value of approximately $3 billion. We concluded that the $22 per share price accepted by the Pennzoil board was a fair price, based on our independent fair value conclusion of $21.41 per share. The dissenters claimed that the fair price was $34.26 per share. After a three-week trial, the jury ruled in favor of the Pennzoil board of directors, agreeing with us that the transaction was priced fairly.
We were retained by legal counsel in a dissenting shareholder appraisal rights case on behalf of a company that operates a one-mile racetrack. The racetrack hosts two annual NASCAR Winston Cup Series races along with other motor sports events. We testified in state court as to the fair value of the subject company equity. The court accepted our fair value conclusion with no material adjustment.
A publicly traded health care corporation owned a controlling interest in a high technology medical products company. After the medical products company commercialized a few successful products, the controlling stockholder squeezed out the minority stockholder company founders. The minority stockholders exercised their dissenting shareholder appraisal rights and sued in state court for the fair value of their equity interest. Our analysts estimated the fair value of the dissenter's shares, and our analysts testified in state court in support of the minority stockholders fair value claim.
Pacific Guardian Life Insurance Company was majority owned by a Japanese financial services institution. Through the implementation of a reverse stock split, the Japanese parent corporation cashed out all of the minority stockholders. Certain stockholders exercised their dissenting shareholder appraisal rights. Our analysts independently estimated the fair value of the Pacific Guardian stock in support of the parent company's cash out price. And, our analysts provided expert testimony in state court in support of our fair value appraisal.
Shareholder disputes
Disputes between shareholders of a closely held corporation occur frequently. This is particularly true when the dispute involves a corporate formation (and equity allocation issues) or a corporation dissolution (and asset allocation issues). Our analysts have quantified the shareholder asset contributions and asset distributions in dozens of corporate formations and dissolutions.
ERISA litigation
We were retained by the U.S. Department of Labor (DOL) to provide independent financial advisory services related to an ESOP plan sponsor company. An issue in the dispute related to the fair market value of the common stock of a printing equipment distributor employer corporation. Over the course of approximately 18 months, the sponsor company operations failed. During that period, the employer corporation made distributions to the key management/controlling shareholders. The ESOP owned approximately 40 percent of the outstanding employer stock. On audit, the DOL questioned (1) the amount of the distributions and (2) the most recent valuation prior to the discontinuation of the company operations. Our analysts advised the DOL in negotiations leading to a successful settlement of the dispute.
illamette Management Associates analysts routinely perform valuation analyses of businesses, business interests, family limited partnership interests, debt and equity securities, intangible assets and intellectual properties, units of operating business assets, and special purpose properties. These analyses are performed for purposes of:
SAMPLE ENGAGEMENTS