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Is Overvaluation A Problem  For Private Companies?         Confidential ©2012 AppFolio, Inc.
About The FENGThe Financial Executives Network Group is thelargest group of senior financial executives in theworld.• Serv...
About AppFolio SecureDocsAppFolio SecureDocs is a virtual data room forsharing and storing sensitive documents withparties...
About Eric Nath& Associates, LLC• Eric Nath has been a  business appraiser since  1985• Formed Eric Nath &  Associates, LL...
Is overvaluation a problem for        private companies?Agenda:  • How overvaluation happens  • The many ways in which ove...
Is overvaluation a problem for         private companies?Overvaluation in:  • Stock options  • Mergers and Acquisitions  •...
How overvaluation happens
How overvaluation happens
How overvaluation happens  "Reason is the slave to the emotions“               David HumeBehavioral economics and the bias...
How overvaluation happensBehavioral economics    People often make decisions based on    approximate rules of thumb, not s...
How overvaluation happensBehavioral Finance  Market inefficiencies, mis-pricings, non-rational  decision making, and other...
How overvaluation happensBehavioral Finance  Extrapolation and overconfidence mean security  market under- and overreactio...
How overvaluation happens
How overvaluation happens• Notional value ("fair market value"), versus  the real world• FASB pronouncements and rules• Co...
Rumsfeld factors• Known unknowns
Rumsfeld factors• Unknown unknowns
The many ways in whichovervaluation creates problems
The many ways in which    overvaluation creates problems                  Facebook IPO•   Trading in the secondary markets...
The many ways in which  overvaluation creates problems            Mergers and Acquisitions• Majority of acquisitions by pu...
The many ways in which   overvaluation creates problemsStock option plans and incentive compensation                    (4...
The many ways in which   overvaluation creates problemsStock option plans and incentive compensation                    (4...
The many ways in which  overvaluation creates problems            Fair Value Measurement               Impairment Testing•...
The many ways in whichovervaluation creates problems             Shareholder buyoutsRole of buy-sell agreements can be cri...
The many ways in which  overvaluation creates problemsPaying too much estate and gift taxes – why give the government an u...
The many ways in which  overvaluation creates problemsDoes the form of the entity affect valuation (CCorp., S Corp., partn...
Can undervaluation also be a        problem?
Can undervaluation also be a            problem?• Dissenting shareholder lawsuits• Overly aggressive tax advice• Fairness ...
Tip-offs in an appraisal that suggest       potential overvaluation•   History-based cost of capital estimation•   Restric...
Review
Review• How overvaluation happens• The many ways in which overvaluation creates  problems• Can undervaluation also be a pr...
Review• Stock options• Mergers and Acquisitions• Buyouts• Fair value measurement & impairment testing• Busted IPOs (Facebo...
Thank YouFor Joining Us Questions?   Confidential ©2012 AppFolio, Inc.
Contact InformationEric Nath & Associates, LLCT 415.445.3031eric@ericnath.comWebsite: www.ericnath.comThe National FENGT 2...
Is Overvaluation Of Stock A Problem For Private Companies?
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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

Published in: Economy & Finance, Business
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Is Overvaluation Of Stock A Problem For Private Companies?

  1. 1. Is Overvaluation A Problem For Private Companies? Confidential ©2012 AppFolio, Inc.
  2. 2. About The FENGThe Financial Executives Network Group is thelargest group of senior financial executives in theworld.• Serves CFOs, Controllers, Treasurers, Managing Directors, Vice Presidents of Tax, M&A professionals, Auditors, and more• Chapters in nearly every major city in the U.S.• Job opportunities, career advice, and solid business connections
  3. 3. About AppFolio SecureDocsAppFolio SecureDocs is a virtual data room forsharing and storing sensitive documents withparties outside company walls.AppFolio, Inc. Company Basics• Founded by the team that created and launched GoToMyPC and GoToMeeting• Backed by leading technology companies and investors• Web-based business software for financial professionals Confidential ©2012 AppFolio, Inc.
  4. 4. About Eric Nath& Associates, LLC• Eric Nath has been a business appraiser since 1985• Formed Eric Nath & Associates, LLC in 1991• Specializing in private companies & minority interest valuations• See www.EricNath.com for more information, links and resources
  5. 5. Is overvaluation a problem for private companies?Agenda: • How overvaluation happens • The many ways in which overvaluation creates problems • Can undervaluation also be a problem? • Tip-offs in an appraisal that suggest potential overvaluation
  6. 6. Is overvaluation a problem for private companies?Overvaluation in: • Stock options • Mergers and Acquisitions • Buyouts • Fair value measurement & impairment testing • Busted IPOs (Facebook) • Estate and gift tax
  7. 7. How overvaluation happens
  8. 8. How overvaluation happens
  9. 9. How overvaluation happens "Reason is the slave to the emotions“ David HumeBehavioral economics and the bias toward optimism
  10. 10. How overvaluation happensBehavioral 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. 11. How overvaluation happensBehavioral Finance Market inefficiencies, mis-pricings, non-rational decision making, and other market anomalies. Richard Thaler (“Nudge”) 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. 12. How overvaluation happensBehavioral 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.
  13. 13. How overvaluation happens
  14. 14. How overvaluation happens• Notional value ("fair market value"), versus the real world• FASB pronouncements and rules• Cost of capital – myths – capital asset pricing model – control premium studies – restricted stock studies
  15. 15. Rumsfeld factors• Known unknowns
  16. 16. Rumsfeld factors• Unknown unknowns
  17. 17. The many ways in whichovervaluation creates problems
  18. 18. The many ways in which overvaluation creates problems Facebook IPO• Trading in the secondary markets pre-IPO• Valuation and IPOs are not a science, but…• Was it really a bust?• Amazon took nearly two months to get back to it’s IPO price
  19. 19. The many ways in which overvaluation creates problems Mergers and Acquisitions• Majority of acquisitions by public companies destroy shareholder value• System is designed to encourage overvaluation• Over optimism about potential synergies• Things usually takes longer than expected
  20. 20. The many ways in which overvaluation creates problemsStock option plans and incentive compensation (409A)• Unwittingly setting the strike price too high acts as a disincentive• Using control premiums and low required rates of return from history-based models
  21. 21. The many ways in which overvaluation creates problemsStock option plans and incentive compensation (409A)• Unwittingly setting the strike price too high acts as a disincentive• Using control premiums and low required rates of return from history-based models
  22. 22. The many ways in which overvaluation creates problems Fair Value Measurement Impairment Testing• Willingness to apply control premiums is a problem• Cost of capital estimation using history-based models is a problem• Results in misleading financial statements
  23. 23. The many ways in whichovervaluation creates problems Shareholder buyoutsRole 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
  24. 24. The many ways in which overvaluation creates problemsPaying too much estate and gift taxes – why give the government an unnecessary gift when you die? • Control premiums / discounts for lack of marketability and lack of liquidity • Court cases • Appraisers
  25. 25. The many ways in which overvaluation creates problemsDoes the form of the entity affect valuation (CCorp., 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.
  26. 26. Can undervaluation also be a problem?
  27. 27. Can undervaluation also be a problem?• Dissenting shareholder lawsuits• Overly aggressive tax advice• Fairness issues in buyouts
  28. 28. Tip-offs in an appraisal that suggest potential overvaluation• History-based cost of capital estimation• Restricted stock studies• Control premium studies• Conflicts of interest/investment banking• Buy – side analysts
  29. 29. Review
  30. 30. Review• How overvaluation happens• The many ways in which overvaluation creates problems• Can undervaluation also be a problem?• Tip-offs in an appraisal that suggest potential overvaluation
  31. 31. Review• Stock options• Mergers and Acquisitions• Buyouts• Fair value measurement & impairment testing• Busted IPOs (Facebook)• Estate and gift tax
  32. 32. Thank YouFor Joining Us Questions? Confidential ©2012 AppFolio, Inc.
  33. 33. Contact InformationEric Nath & Associates, LLCT 415.445.3031eric@ericnath.comWebsite: www.ericnath.comThe National FENGT 203.227.8965brucelynn@thefeng.orgWebsite: www.theFENG.orgAppFolio SecureDocs50 Castilian Dr.Goleta, CA 93117T 866.700.7975info@SecureDocs.comWebsite: www.SecureDocs.com

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