Is Overvaluation Of Stock A Problem For Private Companies?
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With stock option pricing getting a lot of attention in the headlines lately we thought it would be beneficial to our fellow financial professionals to find out more about how overvaluation happens, the many ways in which overvaluation creates problems, and tip-offs in an appraisal that suggest a potential overvaluation. This webinar was presented by valuation expert Eric Nath ASA (Eric Nath & Associates, LLC). The slides cover the latest financial theories and pronouncements affecting valuation as they relate to private companies. Learn more about overvaluation problems with: Stock options Analysis of acquisition opportunities Buyouts FAS 157 and fair value accounting Busted IPOs (Facebook) Estate and gift tax
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Is Overvaluation Of Stock A Problem For Private Companies?
- 1. Is Overvaluation A Problem For Private Companies? Confidential Β©2012 AppFolio, Inc.
- 2. About The FENG The Financial Executives Network Group is the largest group of senior financial executives in the world. β’ Serves CFOs, Controllers, Treasurers, Managing Directors, Vice Presidents of Tax, M&A professionals, Auditors, and more β’ Chapters in nearly every major city in the U.S. β’ Job opportunities, career advice, and solid business connections
- 3. About AppFolio SecureDocs AppFolio SecureDocs is a virtual data room for sharing and storing sensitive documents with parties outside company walls. AppFolio, Inc. Company Basics β’ Founded by the team that created and launched GoToMyPC and GoToMeeting β’ Backed by leading technology companies and investors β’ Web-based business software for financial professionals Confidential Β©2012 AppFolio, Inc.
- 4. About Eric Nath& Associates, LLC β’ Eric Nath has been a business appraiser since 1985 β’ Formed Eric Nath & Associates, LLC in 1991 β’ Specializing in private companies & minority interest valuations β’ See www.EricNath.com for more information, links and resources
- 5. Is overvaluation a problem for private companies? Agenda: β’ How overvaluation happens β’ The many ways in which overvaluation creates problems β’ Can undervaluation also be a problem? β’ Tip-offs in an appraisal that suggest potential overvaluation
- 6. Is overvaluation a problem for private companies? Overvaluation in: β’ Stock options β’ Mergers and Acquisitions β’ Buyouts β’ Fair value measurement & impairment testing β’ Busted IPOs (Facebook) β’ Estate and gift tax
- 9. How overvaluation happens "Reason is the slave to the emotionsβ David Hume Behavioral economics and the bias toward optimism
- 10. How overvaluation happens Behavioral economics People often make decisions based on approximate rules of thumb, not strict logic. People operate based on anecdotes and stereotypes that make up the mental emotional filters individuals rely on to understand and respond to events.
- 11. How overvaluation happens Behavioral Finance Market inefficiencies, mis-pricings, non-rational decision making, and other market anomalies. Richard Thaler (βNudgeβ) has described specific market anomalies from a behavioral perspective: "conventional economics assumes that people are highly- rational - super-rational - and unemotional. They can calculate like a computer and have no self-control problems"
- 12. How overvaluation happens Behavioral Finance Extrapolation and overconfidence mean security market under- and overreactions. Cognitive biases: in the aggregate if there is social contagion of ideas and emotions (causing collective euphoria or fear) leading to phenomena such as herding and groupthink.
- 14. How overvaluation happens β’ Notional value ("fair market value"), versus the real world β’ FASB pronouncements and rules β’ Cost of capital β myths β capital asset pricing model β control premium studies β restricted stock studies
- 15. Rumsfeld factors β’ Known unknowns
- 16. Rumsfeld factors β’ Unknown unknowns
- 17. The many ways in which overvaluation creates problems
- 18. The many ways in which overvaluation creates problems Facebook IPO β’ Trading in the secondary markets pre-IPO β’ Valuation and IPOs are not a science, butβ¦ β’ Was it really a bust? β’ Amazon took nearly two months to get back to itβs IPO price
- 19. The many ways in which overvaluation creates problems Mergers and Acquisitions β’ Majority of acquisitions by public companies destroy shareholder value β’ System is designed to encourage overvaluation β’ Over optimism about potential synergies β’ Things usually takes longer than expected
- 20. The many ways in which overvaluation creates problems Stock option plans and incentive compensation (409A) β’ Unwittingly setting the strike price too high acts as a disincentive β’ Using control premiums and low required rates of return from history-based models
- 21. The many ways in which overvaluation creates problems Stock option plans and incentive compensation (409A) β’ Unwittingly setting the strike price too high acts as a disincentive β’ Using control premiums and low required rates of return from history-based models
- 23. The many ways in which overvaluation creates problems Fair Value Measurement Impairment Testing β’ Willingness to apply control premiums is a problem β’ Cost of capital estimation using history-based models is a problem β’ Results in misleading financial statements
- 24. The many ways in which overvaluation creates problems Shareholder buyouts Role of buy-sell agreements can be critical! Ambiguity creates disputes and can lead to litigation Can be many highly adverse unintended consequences of a poorly drafted buy-sell
- 25. The many ways in which overvaluation creates problems Paying too much estate and gift taxes β why give the government an unnecessary gift when you die? β’ Control premiums / discounts for lack of marketability and lack of liquidity β’ Court cases β’ Appraisers
- 26. The many ways in which overvaluation creates problems Does the form of the entity affect valuation (C Corp., S Corp., partnership, LLC)? Theory is that C-Corp., partnership and LLC could be worth more because there is only one level of tax instead of two.
- 27. Can undervaluation also be a problem?
- 28. Can undervaluation also be a problem? β’ Dissenting shareholder lawsuits β’ Overly aggressive tax advice β’ Fairness issues in buyouts
- 29. Tip-offs in an appraisal that suggest potential overvaluation β’ History-based cost of capital estimation β’ Restricted stock studies β’ Control premium studies β’ Conflicts of interest/investment banking β’ Buy β side analysts
- 30. Review
- 31. Review β’ How overvaluation happens β’ The many ways in which overvaluation creates problems β’ Can undervaluation also be a problem? β’ Tip-offs in an appraisal that suggest potential overvaluation
- 32. Review β’ Stock options β’ Mergers and Acquisitions β’ Buyouts β’ Fair value measurement & impairment testing β’ Busted IPOs (Facebook) β’ Estate and gift tax
- 33. Thank You For Joining Us Questions? Confidential Β©2012 AppFolio, Inc.
- 34. Contact Information Eric Nath & Associates, LLC T 415.445.3031 eric@ericnath.com Website: www.ericnath.com The National FENG T 203.227.8965 brucelynn@thefeng.org Website: www.theFENG.org AppFolio SecureDocs 50 Castilian Dr. Goleta, CA 93117 T 866.700.7975 info@SecureDocs.com Website: www.SecureDocs.com