From the developers of Pratt’s Stats®
How…Components of Ancillary Reve n u e A f f e c t M e d i c a l Practice Values
INSIDE THIS ISSUE
Selecting Guideline Companies When Valuing
Unprofitable Banks . . . . 1
More Valuation Market Demographics From BVR’s BV Firm Economics Report . . . . 1
One Solution to the Option Pricing Overvaluation Problem: Using Down and Out Call Options . . . . 6
Report from ACG: Transaction Costs and Risks Rise, and Buyers Change . . . . 12
Let’s Build on the New NACVA/IBA Standards Unification . . . . 15
Impact of Government Contracts on Subject Company Risk . . . 17
Sources of International Reports on Economies and Industries . 19
Legal & Court Case Updates . . . . 21
–Insignia Systems, Inc. v. News America Marketing In-Store, Inc. . 21 –In re American Home Mortgage Holdings, Inc. . . . . 22
–In re Spansion . . . . 24
–Fulton Co. Employees’ Retirement System v. MGIC Investment Corp. . . . . 26
–In re Marriage of Meek-Duncomb . . . . 28
–Rolfe State Bank v. Gunderson . . . . 28
–Reis v. Hazelett Strip-Casting Corp. . . . . 29
–The Citrilite Co. v. Cott Beverages, Inc. . . . . 32
–Enpat, Inc. v. Budnic . . . . 34
–Linton v. United States . . . . 35
–Victory Records, Inc. v. Virgin Records America, Inc. . . . . 36
BVR’s Economic Outlook for the Month . . . . 38
CALENDAR . . . . 39
COST OF CAPITAL . . . . 40
Selecting Guideline
Companies When Valuing
Unprofitable Banks
The past couple of years have been hard on the banking industry. In fact, the number of institutions on the FDIC’s “problem list” rose from 860 to 884 in the fourth quarter of 2010. Many banks are bur-dened by high levels of non-performing assets, loan growth has been a challenge, many remain depen-dent on real estate lending, and there is greater regulatory scrutiny.
Mercer Capital’s Andrew Gibbs points out that the selection of guideline companies is unusually prob-lematic in the banking industry because a few large banks dominate, and the performance of those banks varies significantly from the smaller and unprofitable banks.
To get a better picture of which comparables provide the best valuation guidelines, Gibbs created a com-munity banking industry “universe” consisting of 3,800 banks with assets between $100 million and $5 billion. This universe “provides us a pretty fair representation of the state of the community banking industry,” he says. And Gibbs also has ana-lyzed the 354 banks in the SNL Financial database that trade on the NYSE or NASDAQ.
After these studies, and based on his professional experience, Gibbs recommends considering the following factors in selecting guideline public companies:
• Type of entity (whether it’s a bank or a thrift)
• Asset size
• Profitability (determined by the return on equity or return on assets)
More Valuation Market
Demographics From BVR’s
BV Firm Economics Report
How many BV firms are there? CPA firms with BV partners? How big are they, and what other ser-vices, if any, do they provide? These are critical questions for any strategic planning discussion. The answers to these and many other questions
appear in the 2011 BV Firm Economics and Best Practices Guide, released this month. The survey is conducted every two years, and reports on BV firm data for fiscal years ending in 2010. We’ve included some highlight data here as a benefit to
BVU readers.
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Timely news, analysis, and resources for defensible valuations Vol. 17, No. 5, May 2011
B
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™More Valuation Market Demographics From Bvr’s Bv Firm Economics Report
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usiness
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What is your primary business? Respondents’ primary business is reported in Table 1. The largest plurality of practice units continues to be CPA firms with business valuation services, fol-lowing by BV-only firms.Table 1. What Is Your Firm’s Primary Business?
2010 2008 2006 Public Accounting— Tax or A&A 37.3% 45.6% 36.3% Public Accounting— Forensic 6.0% NA NA Business Valuation 39.0% 32.8% 41.2% Management Consulting 6.7% 4.6% 2.5% M&A/Broker 6.0% 4.6% 8.3% Investment 0.7% 0.9% 0.5% Other 6.3% 11.4% 11.3%
Definition of small, mid-size, and large BV practices. Table 2 shows that, while there have not been formal definitions of small, mid-sized, or large business valuation firms, the BVR results fall neatly into groupings at around the $300,000 and $1,000,000 gross revenue marks.
Several patterns can be seen in these revenue classifications for business valuation firms. First, the small BV-only firms (less than $300,000 in revenues) tend to be solo practitioners or have a maximum of one partner. While there are pre-sumably some highly profitable mid-size BV firms with just one owner, the majority of firms in the $300,000 to $1,000,000 total revenues range begin to have multiple partners and some formal administrative structure. The largest BV firms (more than $1,000,000 in revenues) begin to show diversification of revenues, often into areas such as mergers and acquisitions, business con-sulting, forensic accounting, or financial planning. CPA firms with business appraisal partners simi-larly show natural size groupings, often aligned with their market position as small local firms, leading local firms, and then the largest regional
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More Valuation Market Demographics From Bvr’s Bv Firm Economics Report
and national practices. Some of these firms clearly do as few as one business valuation a year (one small CPA firm responded that it had $4,100 in total business valuation revenues in the preceding 12 months, and three CPA firms who responded and claimed to have business valua-tion practices reported no revenue from valuation activities in 2010). Thirteen other small CPA firms reported business appraisals totaling less than $30,000 during the preceding year.
The percent of total billings received from busi-ness valuation engagements is shown in Table 3. Some clear patterns can be seen here. First, as mentioned above, smaller and mid-sized busi-ness valuation firms receive the vast majority of their revenues from their core business. In fact, 64% of these firms report no other source of revenues. Those that do have multiple revenue sources offered comments such as “we got our first brokerage client this year” or “my val-uation business was down but I’ve had some forensic accounting engagements to fill the gaps.”
Second, the larger business valuation firms face either market opportunities or pressures to expand their services in order to grow. It’s at this size that business valuation firms develop material ancillary revenues. Typical of this trend is a comment from the managing director of a $2.9 million BV firm: “We added a partner who’s
a management consultant and her practice was the fastest growing for us this year.” This trend must be taken into account as part of the strategic planning for any growing BV practice.
CPA firms derive less than one-eighth of their revenues from business appraisals and related work—and this number has stayed relatively stable over the last years. Even at the smallest CPA firms, where BV work is most significant, the picture that emerges is, for example, similar to that of a Boston four-partner firm where one partner spends somewhat less than half of his time on business appraisals. The larger CPA firms, often with a business valuation “department,” seem to be stable from the data here. Business valuation at these large CPA firms is dwarfed by tax and audit and accounting revenues . . . but it’s still important. It appears that the much-discussed risks for large audit firms doing valuations have
not driven them out of the business.
Firms that reported businesses other than busi-ness valuation or public accounting as their prime business (brokers, bankers, etc.) indicated that about one-sixth of their revenue comes from busi-ness appraisals.
BVr’s 2011 BV Firm Economics and Best Pr ac tic es rep o r t is available at w w w .bvresources.com or from BVR at 503-291-7953
Table 2. Percent of BV Practice Units by Size Range—BV and CPa firms
2010 2008 Small BV firms (<$300K in total billings) 22.3% 13.5% Mid-size BV firms ($301K-$1MM in total billings) 10.8% 8.6% Large BV firms (>$1MM in total billings) 12.7% 12.6%
Small CPA firms with BV
prac-tice (<$1MM in total billings) 9.6% 11.3% Mid-size CPA firms with BV
practice ($1MM-5MM in total
billings) 17.2% 27.5%
Large CPA firms with BV
prac-tice (>$5MM in total billings) 27.4% 26.6%
Table 3. Percent of Revenue From BV activities
2010 2008 Small BV firms (<$300K in total billings) 87.9% 87.3% Mid-size BV firms ($300K-$1MM in total billings) 87.4% 88.2% Large BV firms (>$1MM in total billings) 81.1% 79.1% Small CPA firm (<$1MM in
total billings) 13.2% 14.6%
Mid-size CPA firms
($1MM-5MM in total billings) 7.8% 7.1% Large CPA firms (>$5MM in
total billings) 5.5% 5.4%
Other/M&A/Consulting/
Selecting Guideline Companies When Valuing Unprofitable Banks
Selecting Guideline Companies When Valuing Unprofitable Banks
...continued from front page
• location (for example, is the bank in a state with more distressed real estate conditions?)
• Composition of the loan portfolio (this often matters because there could be a concentra-tion of construcconcentra-tion loans versus other types of loans that are
consid-ered less risky)
• level of nonperforming assets
• Participation in TArP
(which can distinguish banks based on the mar-ket’s concern about the bank’s ability to redeem
that without issuing capital in a diluted transaction)
• repayment status and whether the dividends on TArP are in deferral
• dividend deferral
Sorting company data by return on equity, asset size, and asset quality can help valuation practi-tioners select the banks most comparable to their subject companies, Gibbs believes.
Table 1. Pricing Multiples Based on Return on Equity
Sorting the guideline company data by return on equity. A clear demarcation exists among the pricing multiples based on return on equity (see Table 1). Banks with higher levels of profit-ability measured by their return on tangible equity have the highest price-to-book multiples. Banks that have generated a return on equity over 10% have the highest price-to-book multiples and have generated a cumulative return of about 12% over three years based on their stock price and dividends. The worst banks— those with return on equities of less than negative 5% have lost 82% of their value during the same period. “The price to tangible book
multiples—74%—are a little bit skewed for the group with the lowest return on tangible equity,” says Gibbs. “I think that’s because some of those banks have lost most of their tangible equity so your denomina-tor is artificially low.” Another trend Gibbs has observed recently is that the smaller banks are more likely commanding lower price to tangible book value multiples, holding profitability constant.
Sorting the guideline company data by asset size. Controlling for profitability, pricing/tangible book value multiples tend to decrease as the bank’s size decreases. For example, Gibbs split the banks with return on tangible equities
“The smaller banks are more
likely commanding lower price
to tangible book value multiples,
holding profitability constant.”
Selecting Guideline Companies When Valuing Unprofitable Banks
Gibbs also points out there is a profitability dif-ference in the group presented in Table 2. The return on tangible equity is higher for the biggest banks, which reflects some of the efficiencies of banks that size. “But nonetheless, there’s a fairly big pricing discrepancy, and that continues even if you look at banks with lower levels of profitability,” he adds.
of greater than 10 percent into three categories by asset size: $5 to $10 billion; $1 to $5 billion; and less than $1 billion (Table 2 below). “The banks that are the biggest trade at the highest price to tangible book multiples, 252 percent. Then if you drop to the smallest group in
terms of assets, it’s only 112 percent,” Gibbs explains.
Table 2. Sorting by asset Size
One Solution to the Option Pricing Overvaluation Problem: Sorting the guideline company data by asset
quality. “Even if you control for profitability, price to tangible book value multiples still declines as the level of nonperforming assets increase,” Gibbs explains. We can measure nonperforming assets by the so-called Texas ratio—the level of nonperforming assets relative to tangible equity and loan loss reserves.
The top panel of banks in Table 3 shows the banks with return on tangible equity of greater
than 10%; if their non-performing assets are less than 10% of equity in reserves, the price to tan-gible book value multiple is 173%. When the mul-tiple falls to 83%, the banks have a higher level of nonperforming assets, even if they are profitable. The same correlation exists for banks with higher levels of nonperforming assets or higher Texas ratios. “You see a pretty much continued decline in price to tangible book value multiples,” says Gibbs.
one Solution to the option Pricing overvaluation Problem:
Using Down and out Call options
By ronald h. Schmidt and lawrence d.w. Schmidt Introduction
Recent articles have pointed to concerns about the validity of using option pricing models (OPM) to determine the value of common stock in 409(a) valuations.1 At issue is the question of whether OPMs provide appropriate methodologies to establish the appropriate fair market value of common stock.
The OPM approach has been embraced by the accounting community and the AICPA due to its mathematical elegance and the limited assump-tions required to operationalize the model. Unfortunately, the experience in much of the valu-ation profession is that the OPM approach, par-ticularly when used in “back-solving” to determine
1 James Walling and Cindy Moore, “Does Black Scholes Overvalue Early Stage Company Allocations?,” Business Valuation Update, Vol. 16, No. 1, January 2010; Scott Beauchene and Stillian Ghaidarov, “Lognormal Distributions vs. Empirical Observation—a Defense of the Option Pricing Method,” Business Valuation Update, Vol. 16, No. 3, March 2010; and Bruce Pollock and Ronald Schmidt, “Avoiding Distortion When Using An OPM to Allocate Value: Selecting the Option Term,” Business Valuation Update, Vol. 16, No. 5, May 2010.
enterprise value, appears to yield unrealistically high values for common stock.
As we discuss in this article, part of the problem involves the use of simple Black-Scholes assump-tions that do not properly account for path depen-dence of results. Specifically, use of standard Black-Scholes algorithms will overstate the value of common stock by not properly modeling the impact of failure scenarios. We argue that claims to equity of early-stage companies may be more appropriately modeled as “down and out” call options, rather than traditional European call options (as required by the Black-Scholes formula). Like Black-Scholes, these options still have the benefit of a simple, closed-form solu-tion, but they better account for the path depen-dence of enterprise value and allow for a higher probability of failure. We demonstrate that these alternative option pricing models can be used to either estimate enterprise value (back-solving) or to allocate value, and that their use can result in more reasonable estimates of common stock when compared with Black-Scholes.
Black-Scholes and Path Dependence
The Black-Scholes model (BSM) is not path dependent. By that, we mean that the value of an option in a BSM framework depends on the potential distribution of outcomes at a given end
One Solution To The Option Pricing Overvaluation Problem
Down and out Call options
So what is a “down and out call option” (DOC)? It is a contract that is like a standard call option except that it expires worthless if the stock price ever drops below a specified level, referred to as the barrier. In some cases, the seller will offer a rebate to the buyer, which is only payable if the barrier is breached. For example, if the barrier is $80 and the rebate is $5, the person who bought the option would receive $5 if the stock price dropped below $80. As we will discuss later, in the context of early-stage company valuations, the notion of a rebate will be quite useful for incorporating liquidation preferences into the barrier option pricing framework.
Essentially, the DOC pricing model modifies BSM (or binomial lattice models) to include a barrier. This barrier can be thought of as a value at which the controlling investors or creditors might choose to “pull the plug” on a company. It could also be considered an outcome in which the company is forced to head in a different direction, change management, and often change the capital struc-ture of the company. In these cases, the vast majority of the value of the firm would be trans-ferred to the pretrans-ferred stockholders, while those holding the common would receive nothing. The use of a DOC model allows for the reality that there are some paths that may be stopped in their tracks well before the term used in an OPM. Sufficiently poor results will not be allowed to continue, so that even if a BSM might ulti-mately revive that outcome through a string of subsequently positive results, those posi-tive results will not occur because the path is truncated.
Figure 1 provides a graphical illustration of how the DOC option works. We present three hypothetical price paths, calculated using the discretized version of Brownian motion com-monly used in binomial tree pricing models. point (the term). This distribution can be solved in
a closed form solution (i.e., there is a mathemati-cal solution) or through simulations involving mil-lions of paths, where each path involves taking a starting point (the price) and taking a random draw from a distribution described by Brownian motion over time. The BSM does not consider where those paths go along the way, simply the likely distribution of final results.
In many situations, however, the path matters, and this is well recognized
in the academic literature and in practice. A good example of this is the use of Hull-White trinomial lattice models in calculating the cost of options to a company for purposes of FAS 123(R) financial reporting. In those models, paths matter—for example, in cases where prices rise, option holders
may exercise before the term is reached.2 This approach is a simple form of “barrier option,” that is, an option in which individual paths can be truncated if they reach certain values.
In the case of valuing corporate securities, Brockman and Turtle present empirical evidence suggesting that the addition of barriers signifi-cantly improves the performance of an option pricing model.3 They employ a “down and out barrier” option pricing model (to be described below) that shows that barriers appear to be priced into actual option prices, with the barri-ers surprisingly high relative to the price of the asset.4
2 John Hull and Alan White, “How to Value Employee Stock Options,” Financial Analysts Journal, Vol. 60, No. 1, pp. 114-119, January/February 2004. 3 Paul Brockman and H.J. Turtle, “A Barrier Option
Framework for Corporate Security Valuation,” Journal of Financial Economics, 67 (2003), pp. 511-529. 4 Note that Wong and Choi (“Estimating Default
Barriers from Market Information,” Quantitative Finance, 9 (2009), pp. 187-196) address some econometric issues which could help explain the high implied barriers calculated by Brockman and Turtle.
“The use of a DOC model allows
for the reality that there are
some paths that may be stopped
in their tracks well before the
term used in an OPM.”
One Solution To The Option Pricing Overvaluation Problem
In this example, the current price is $50, the strike price is $75, and the barrier value is $35.
Path C is always above the barrier and ends in the money. Path B ends below the barrier, well out of the money. Both of these price paths would result in the same valuation in the BSM and DOC frameworks. However, path A goes below the barrier but ends in the money. In the DOC model, this path would result in the option expiring worth-less (or the buyer receiving a rebate), while the BSM would count this option as being in the money.
Including a barrier has direct implications for the distribution of final outcomes. Figure 2 demon-strates the impact of barriers on the distribution of
Figure 1. Examples of Hypothetical Stock Price Paths
$0 $20 $40 $60 $80 $100 $120 $140 $160 0.0 0.3 0.6 0.9 1.2 1.5 1.8 2.1 2.4 2.7 3.0 Stock Price Time Path A Path B Path C Barrier Price Strike Price
Figure 2. Simulated Distribution of Exit Multiples
Panel A: Volatility = 0.3 Panel B: Volatility = 0.5
Panel C: Volatility = 0.7 Panel D: Volatility = 0.9
58% 31% 8% 2% 1% 79% 13% 5% 2% 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Less than 1 1.0-2.0 2.0-3.0 3.0-4.0 Greater than 4.0 Black-Scholes 50% DOC 65% DOC 80% DOC 68% 18% 7% 3% 4% 91% 3% 2% 1% 2% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Less than 1 1.0-2.0 2.0-3.0 3.0-4.0 Greater than 4.0 Black-Scholes 50% DOC 65% DOC 80% DOC 76% 11% 5% 2% 5% 95% 1% 1% 1% 2% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Less than 1 1.0-2.0 2.0-3.0 3.0-4.0 Greater than 4.0 Black-Scholes 50% DOC 65% DOC 80% DOC 83% 7% 3% 2% 5% 97% 1% 0% 0% 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Less than 1 1.0-2.0 2.0-3.0 3.0-4.0 Greater than 4.0 Black-Scholes 50% DOC 65% DOC 80% DOC
One Solution To The Option Pricing Overvaluation Problem
exit multiples, assuming a lognormal distribution.5 Each bar represents the percentage of final outcomes with exit values at a given multiple of current value assuming a given barrier. For example, the results show that with 30% volatility, the BSM will generate values at the end of the term below the current value 58% of the time (a multiple less than 1), while a DOC model with an 80% barrier will yield exit multiples less than one
5 Each graph is calculated using 100,000 simulated paths assuming a lognormal distribution with an expected return equal to the risk-free rate of 2%. We assumed a five-year term, which was discretized into one thousand intervals. These simulations closely approximated the Black-Scholes option prices for all options of interest.
in 79% of the paths.6 (Detailed results are shown in Table 1).
Figure 2 points to two key results. First, DOC options result in a significantly higher proportion of outcomes in which the exit multiple is less than one. While this does not mean that it is necessar-ily predicting a higher failure rate than in a BSM,
6 The key advantage of maintaining the lognormal assumptions is that closed form solutions exist for these option prices. For these solutions, see Robert C. Merton, “Theory of Ration Option Pricing,” The Bell Journal of Economics and Management Science, Vol. 4, No. 1 (1973), pp. 141-183. However, this assump-tion can be relaxed using simulaassump-tion methods from alternative distributions.
Table 1. Simulated Distribution of Exit Multiples
Volatility Exit Multiple Range
Barrier Percentage BSM - 0% 50% 65% 80% 0.3 Less than 1 57.6% 59.3% 66.0% 78.8% 1.0-2.0 31.3% 29.8% 23.6% 13.3% 2.0-3.0 7.7% 7.6% 7.1% 5.2% 3.0-4.0 2.1% 2.1% 2.0% 1.6% Greater than 4.0 1.3% 1.3% 1.3% 1.1% 0.5 Less than 1 68.3% 75.5% 82.8% 90.5% 1.0-2.0 17.9% 12.3% 7.6% 3.5% 2.0-3.0 6.5% 5.5% 4.0% 2.3% 3.0-4.0 3.0% 2.7% 2.1% 1.3% Greater than 4.0 4.3% 4.0% 3.5% 2.4% 0.7 Less than 1 76.4% 86.2% 91.1% 95.2% 1.0-2.0 11.3% 5.1% 2.7% 1.2% 2.0-3.0 4.5% 2.8% 1.8% 1.0% 3.0-4.0 2.3% 1.6% 1.1% 0.6% Greater than 4.0 5.5% 4.3% 3.2% 2.0% 0.9 Less than 1 83.2% 92.4% 95.2% 97.4% 1.0-2.0 7.2% 2.3% 1.2% 0.5% 2.0-3.0 3.0% 1.3% 0.8% 0.4% 3.0-4.0 1.7% 0.8% 0.5% 0.3% Greater than 4.0 4.9% 3.2% 2.3% 1.3%
Notes: Calculated using 100,000 simulated paths of Brownian motion, where a 3 year term was divided into 1,000 discrete intervals. We used a risk-free rate of 2.0%.
One Solution To The Option Pricing Overvaluation Problem
it is consistent with observation that investors tend to intervene frequently when the situation is deteriorating, and they seldom will simply let the company go along without such interven-tion. Second, as volatility rises, the percentage of cases where the exit multiple was less than one rises sharply for all cases.
The implication of these results is that a BSM, by not incorporating the option of the control-ling investors to pull the plug early or force other changes, will tend to overvalue the upside poten-tial. Consequently, using an OPM without barriers will (a) overstate estimated value of the company in a back-solving model, and (b) overstate the value of the least preferred shares—common stock—in an allocation context.
Note further that this methodology could easily be extended to allow for upside barriers (i.e.,
allowing for the “home run”) as well as down-side barriers. One could think of our model as being the continuous analogue to the probabil-ity weighted expected return method (PWERM), where the upper and lower thresholds are chosen to represent the “home run” and failure scenarios, respectively.
Barriers and Control
In the context of business valuation using a DOC or BSM, determining the appropriate barrier becomes a key factor in either estimating the value of the firm’s equity based on a recent invest-ment or in allocating value among classes of equity. If the barrier is set at zero, the DOC result collapses to the BSM value.
In our view, the magnitude of the barrier can be linked with the degree of control held by investors,
Figure 3. option Prices (with Rebates) by Strike Price and Barrier Level
Panel A: Volatility = 0.3 Panel B: Volatility = 0.5
Panel C: Volatility = 0.7 Panel D: Volatility = 0.9
Notes:
Option values calculated using a current price of $50, a risk-free rate of 2%, and a term of 3 years.
We account for liquidation preferences by adding a rebate equal to max(barrier-strike price,0). This causes the kink in each graph around the barrier level.
$0 $5 $10 $15 $20 $25 $30 $35 $40 $15 $23 $31 $39 $47 $55 $63 $71 $79 $87 $95 $103 $111 $119 $127 $135 Option Value Strike Price Black-Scholes 50% DOC 65% DOC 80% DOC $0 $5 $10 $15 $20 $25 $30 $35 $40 $15 $23 $31 $39 $47 $55 $63 $71 $79 $87 $95 $103 $111 $119 $127 $135 Option Value Strike Price Black-Scholes 50% DOC 65% DOC 80% DOC $0 $5 $10 $15 $20 $25 $30 $35 $40 $15 $23 $31 $39 $47 $55 $63 $71 $79 $87 $95 $103 $111 $119 $127 $135 Option Value Strike Price Black-Scholes 50% DOC 65% DOC 80% DOC $0 $10 $20 $30 $40 $50 $15 $23 $31 $39 $47 $55 $63 $71 $79 $87 $95 $103 $111 $119 $127 $135 Option Value Strike Price Black-Scholes 50% DOC 65% DOC 80% DOC
One Solution To The Option Pricing Overvaluation Problem
particularly the most recent investors. In cases where the investors have significant control, they are more likely to set a higher barrier, whereas when they have no control, the barrier may approach zero.
To illustrate this point, consider preferred share-holders in a Series A round who have been granted a high level of control. Those sharehold-ers will be more likely to act
in situations where the value of the firm is dropping: they might change management, force a change in product development or business model, force a liquidation, or demand a greater share of equity in restructuring asso-ciated with new financing. In any of these cases, the DOC approach would recognize that on those paths where
the company is spiraling downward, the investors are likely to act before value drops to zero. In the case of no control, on the other hand, the investor may have no recourse if the company is heading toward failure other than to not reinvest. In that case, the DOC would have a zero barrier and the model would collapse to BSM. Intuitively, setting a non-zero barrier implies that investors value the control options they receive, recogniz-ing that they have some ability to minimize losses if the company appears headed for failure. When using the barrier option pricing model for early-stage equity valuations, practitioners must determine how the value of the firm should be allocated when the barrier is imposed. The simplest possible assumption would be that the company’s assets are liquidated, with the pro-ceeds from the sale (equal to the value of the firm) distributed among the stakeholders accord-ing to the payoff matrix. This approach is easy to implement by adding a rebate equal to each tier’s payoff in the event of a liquidation worth the barrier amount.
As an example, consider a company that is cur-rently worth $5 million. Let Series B stakeholders
have a claim on the first $2 million in the event of a liquidation and Series A stakeholders have a claim on the next $5 million. Above $7 million, both series would convert to common stock. If the barrier is $2.5 million, Series B would have a barrier option with rebate of $2 million while Series A would have a rebate of $0.5 million. Common stockholders and any other lower prior-ity claims would receive no rebate.7
Figure 3 demonstrates the impact of the barrier on the resulting option prices, assuming a current price of $50, a risk-free rate of 2%, and a term of three years. If the strike price is less than the barrier, we add a rebate equal to the dif ference between the barrier and the strike price in order to account for liquidation pref-erences. One can observe that values of options with higher strike prices (i.e., common stock) are monotonically decreasing with respect to the barrier level, and the effect of the barrier becomes more pronounced as volatility increases.
Impacts of DoC on Valuing Common Stock BSM approaches are frequently used in business valuation both to infer the value of a company based on a recent investment and to allocate value among classes of equity. The use of the DOC approach directly impacts both of these uses.
In the case of back-solving, in which a recent financing transaction is used to infer the value of the company, the BSM takes into consider-ation the economic claims to value received by the most recent investors. By taking into account those rights, the BSM approach can calculate the market value of equity of the firm that would 7 It is also straightforward to use the model to allow for
the possibility that the firm’s assets can only be sold for a fraction of the barrier value in the case of liquida-tion. One simply needs to modify the rebate amounts accordingly.
“In the case of no control, on the
other hand, the investor may
have no recourse if the company is
heading toward failure other than
to not reinvest.”
Report from ACG: Transaction Costs and Risks Rise, Buyers Change
justify the value they invested given the rights they received.8 However, by ignoring the additional rights, such as those to intervene and change directions of the company in certain adverse situations, represented by a barrier option, the BSM overvalues the company by undervaluing the barrier option to that class. In the case of a DOC, the company will need to have less value to justify the investment if the investor has more control rights, since the investor with those rights places value on the ability to make changes if conditions deteriorate. Consequently, if there is greater control given to the investors, the back-solved value for the company will be lower than one in which there is little or no control.
8 The OPM approach incorporates economic rights for each class, but does not directly include other control features, such as participation on the Board and the ability to force changes in management or force a sale.
In the case of allocating value, a DOC model will allocate a greater proportion of value to more preferential claims. The DOC allocates value to the additional option granted claimants with higher priority who can exercise control. The higher priority claims get the additional value allo-cated to them associated with the DOC option, and less is allocated to the lower priority claims since they do not have the control residing with the highest priority claimants (and in fact may be the victims of actions taken by the higher priority claims, as in a “cram down”). Consequently, use of a DOC model will result in less value being allo-cated to the common than when using a standard BSM.
Ronald Schmidt, Ph.d., AVA, is CEo of Schmidt Associates, llC, and Lawrence Schmidt, M.A., is a senior consultant for Schmidt Associates and a Ph.d. student at UC San diego.
Report from aCG: Transaction Costs
and Risks Rise, and Buyers Change
BVU has attended three of the major “intermedi-ary” meetings in the last several months, begin-ning with the IBBA and AM&AA annual meetings. But the dean of the group is InterGrowth, held last month in San Diego. This is the largest gathering of members and leaders of the Association of Corporate Growth (ACG).
Different market segments, different mes-sages. At the most general level, IBBA members deal with the smaller main street deals, AM&AA members focus on the lower end of the middle market, and ACG members include the VC’s, private equity, and I-bankers who drive upper middle market M&A activity. So it’s no surprise that the IBBA membership is suffering and many are leaving the business; the AM&AA membership is struggling but hopeful, and the ACG membership believes that boom times have returned. This reflects the North American economy generally—PitchBook and many others confirm that more and more investment capital continues to pour into private equity firms (those
institutional investors have to do something with their money)—but have you tried to get a loan for your corner restaurant in the last three years? If you haven’t been to an ACG meeting recently, it’s an impressive affair. Good suits and good haircuts abound; these are the private market buyers, sellers, funders, and brokers for some of the biggest deals in the country, so the tone of success is strong. There are more networking meetings on the agenda than there are educa-tional sessions, and the large law, private capital, and CPA firms who are key sponsors to the ACG invest a lot to reach these movers and shakers (note: BVR’s partners PitchBook and Duff & Phelps were waving their flags strongly too). The ACG’s motto is “Driving Middle Market Growth,” and BVU readers who want to build their PPA or M&A valuation practices would benefit from attending either local or national meetings of the association. Here are some of the trends from the intermediary events BVU covered this spring,
Report From Acg: Transaction Costs And Risks Rise, And Buyers Change
“The ACG’s motto is ‘Driving
Middle Market Growth,’ and
BVU readers who want to build
their PPA or M&A valuation
practices would benefit from
attending either local or national
meetings of the association.”
particularly from the “movers and shakers” at the ACG Intergrowth session—trends that influence the best practices in business valuation:
• Strategics are paying more. Many of the discussions BVU shared confirmed that strategic buyers are often the highest bidders if they can see a clear
synergy. “You’re seeing some high multiples to EBITDA or return on acquired assets from these buyers,” one private equity manager told BVU. “They’re paying for future earn-ings like the old days.” • That being said, PE
firms are laden with cash. The time of PE firms “hunkering down” is past. First, as PitchBook
reported, total cash flows to major PE firms since 2002 are cash positive; they’ve brought in over a trillion dollars in investment funds, and only distributed $750 billion. In addition, PE firms sold and took losses last year. Said one ACG attendee, for example: “Our PE firm was an active seller in 2010, but now we have cash and we’re on the other side of the table.”
• Bidding has increased, so sellers are starting to control deal terms again. “In the last year we’re avoiding seller notes,” a partner from a big Philadelphia law firm told
BVU. “Buyers are demanding all cash and, for the most part, getting it.” Is there still room for contingent terms in negotiations? Another investment banker said, “Yes, but the contin-gencies are looking more like the last cre-ative options to give the deal the final carrot for sellers who stay on.”
• Lower middle market deal financing is less complicated. A number of ACG buyers said that they were doing deals with afford-able coupons, often free of warrants, so com-plications like mezzanine financing (or “mezz,”
as everyone at intermediary meetings is fond of saying) or preferred stocks are diminishing. “Competition for deals is tough, but at least the financing terms are simpler than they had been,” another AM&AA attendee said.
• Lenders are looking at smaller deals again. On the lender side—after too much exuberance followed by two years of withdrawal, middle market lenders are at least coming back to the table and will consider the smaller transactions that make up the vast majority of dealflow again. “You may get restrictive terms but at least the lenders aren’t locking their doors when they hear you have a deal with less than $5 million EBITDA,” a business broker at ACG told BVU.
• Even mezzanine financing at perhaps 12% cost of capital has returned for smaller deals. “It’s very active now in the less than $10M EBITDA market. The stable mezz lenders are definitely back. If the senior piece is less than $5M, with the mezz, you’re seeing 11.5% to 12% all in.” LIBOR floors are still there, but a banker who spoke on financ-ing at ACG predicts they’ll start to go away as the recovery extends.
• Industry is even more of a factor than it has been. Despite the optimism of the two points above, all bets are off if an industry is unfamiliar or problematic: senior lenders aren’t attracted, and mezz pricing goes through the roof. It becomes necessary to find the specialized lenders who work only in these industries.
• Transaction effort, and cost, is increas-ing. A number of new issues can affect value. First, there’s increasing business regu-lation, which makes due diligence in those industries more costly than ever. Second,
Report From Acg: Transaction Costs And Risks Rise, And Buyers Change
accounting person is a spouse. This means that the quality of earnings “team” will require higher-level staff. As one ACG attendee explained:
We delegate bigger deals to more junior staff working off a checklist—there’s a CFO, audited statements, and all the stuff you’d expect to see. In the smaller deals, you may have to explain GAAP. And, you have systems that don’t correlate. The GL may not match the AR system, or you may not have any way to measure product line profits, typi-cally. Gross margins by product may be so far beyond the capabilities of the accounting staff that it’s not worth asking.
• Carveouts of bigger companies are a bigger part of the dealflow now. One of the hardest analytical parts of carveouts is that you’re dealing with accounting allocations, all of which need to be replaced by standalone costs. Uncoupling of assets, particularly human resources, is hugely time consum-ing. And uncoupling brands with transition services agreements takes a ton of service times. Corporate parents are also very tough on reps and warranties, so expect higher legal costs if nothing else.
• Private equity firm registration will put more pressure on due diligence teams. The Dodd-Frank Act includes a provision requiring private equity funds with more than $150 million in total assets under manage-ment to register with the SEC. This require-ment is scheduled to begin in July 2011, though, as usual, the SEC may push off implementation of this rule for one year. Not surprisingly, the ACG has come out strongly against this provision.
many people commented that the begin-ning transition of baby boomer family busi-nesses means high costs for non-competes, key employee lockdowns, key customer contract negotiations—and just managing the emotional issues of a family transition. “There’s a class of companies run by baby boomers who do not have family members ready to take it to the next level, and these transactions are beginning to percolate,” said one attendee in San Diego. Small business unionization is a final issue that increases transaction costs and risks, several people commented.
• More businesses are passthroughs, so asset transfers are even more common. So many of the small companies formed in the last 20 years are LLCs and S corps— these companies are now coming to market. • Customer concentration and seasonality seem to be more common.There’s often one customer that causes all the EBITDA, or you have a company that’s done 60% of the business in the first nine months, but no busi-ness in the final three—that’s always a worry. • The lawyers keep running up bills on
the same topics. You can expect the same negotiations on escrow (the buyers want 18 to 24 months and the sellers want zero to 12—and the lawyers battle over whether it turns out to be 5% or 20% of deal value). And costly legal negotiations about indemnifica-tion caps (still most frequently in the 10% to 50% range after all the legal wrangling every time) continue, particularly for fraud, where “all bets are off these days,” in the words of a lawyer at the AM&AA meeting earlier this year. Deductibles on escrow are 1% to 2%, typically, but these points are being fought as strongly as ever. One bit of advice from a PE firm director—“go for a true deductible to avoid arguing over little stuff.”
• Don’t expect lower transaction costs just because it’s a smaller deal. For middle market companies, you may be dealing with compiled statements or even worse. The top
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Let’s Build On The New Nacva/iba Standards Unification
By Ed dupke, Mark hanson, and nancy Fannon Business valuation standards provide guidance to practitioners on practice issues and the application of valuation techniques. Perhaps more importantly, however, standards are necessary to uphold, maintain, and support the interests of users. Each of the U.S.’s four primary valuation organi-zations has had its own set
of professional standards. Members of NACVA and the IBA have recently agreed on a unified set of business valuation standards that are principles-based and com-patible with the Statement on Standards for Valuation Services 1 (SSVS1), the
val-uation standards of the AICPA released in 2007. Each organization plans to have implementation guidance to support the standards, which will be effective June 1, 2011.
Evolution of Unification Efforts by appraisal organizations
Standards unification has been addressed in some form over a number of years.
During the 1990s, an ASA business valuation pioneer, Jack Bakken from Colorado, assem-bled a group of practitioners from ASA, AICPA, NACVA, IBA, and the CICBV to discuss valu-ation standards. Jack named the practitio-ner group CLARENCE. He described the group as a Coalition of Loyal Associations, Resource Exchanging, but Not Communicating Elsewhere. (Jack, please forgive us if we have some of the terminology mixed up). The over-riding focus of the CLARENCE group meetings was that our organizations had much more in common than in competition. It was this group that produced the now commonly referenced International Glossary of Business Valuation Terms.
In 2000 and again in 2004, the Appraisal Foundation solicited input from business valu-ation credentialing organizvalu-ations regarding USPAP (Uniform Standards of Professional Appraisal Practice) changes by creating the Business Valuation Professional Task Force. Representatives from the AICPA, ASA, IBA, and NACVA provided comments and recommen-dations to the Appraisal Standards Board on
changes to the business val-uation standards of USPAP. The feasibility and desire to move to a common set of industry standards was also discussed in other meetings such as the 2008 AICPA/ ASA Business Valuation Conference.
Successful Unification of NaCVa and IBa Standards
This most recent effort was prompted by discus-sions between Parnell Black, CEO of NACVA, and Howard Lewis, executive director of IBA. Many of the accredited members of both NACVA and IBA are also certified public accountants (CPAs). A conscious effort was made by NACVA and by IBA to have their common professional standards be in conformity with SSVS1. It is our belief that the unification and resulting conformity with AICPA will enhance clarity for both prepar-ers and usprepar-ers of valuation reports. If a valuation analyst adheres to either of these two sets of professional standards in performing the valua-tion or calculavalua-tion engagement, then the valuavalua-tion analyst will likely be in compliance with both sets of standards.
Standardization by other Interested Parties Professional valuation organizations have not been the only groups interested in standard-ization. The IRS, FASB, and the SEC have all
Let’s Build on the New NaCVa/IBa Standards Unification
“Each of the U.S.’s four primary
valuation organizations has
had its own set of professional
standards.”
Let’s Build On The New Nacva/iba Standards Unification
considered and commented on guidance for the process of valuing a business.
The Internal Revenue Service released the IRS Business Valuation Guidelines in 2006. Still in effect today, these guidelines, developed with ref-erence to the available sets of standards from the various appraisal organizations, were designed to improve the consistency and enhance the quality of valuation reports throughout their program. Recently, the IRS issued
Internal Revenue Code Sec. 6695A, which provides guid-ance on the administration of the penalty process for substantial and gross valua-tion misstatements attribut-able to incorrect appraisals. In 2007, the Financial Ac- counting Standards Board (FASB) considered whether and how it should get involved in providing
valua-tion guidance for financial reporting. The FASB issued an Invitation to Comment on Jan. 15, 2007, which included questions assessing the need for valuation guidance and the level of participation existing appraisal organizations should have in the process. Some of their constituents believed that existing appraisal organizations should not have a role in establishing valuation guidance for financial reporting issues because they are the principal individuals or organizations applying the guidance, which creates a conflict of interest. Others believed that existing appraisal organiza-tions should set the principal standards because of their experience.
In addition, the Securities and Exchange Com-mission has been active in commenting on the
importance of standards and the standard-setting process. The SEC notes that standards must be crafted in the interest of investors, and that the standard-setting process must be transparent, objective, and consistently applied.
In recent years, there has been much discussion in the valuation profession about international business valuation standards. Such international standards would be similar to the effort
cur-rently under way to develop Inter national Financ ial Reporting Standards (IFRS). The focus of this discussion on international business valuation standards is pri-marily on fair value financial reporting rather than on the broad spectrum of business valuation work performed in North America.
Where do we go from here? In order for these financial reporting-related valuation standards to succeed, the development team should include not only valuation analysts from the collective North American organizations, but also Appraisal Foundation representatives and international valu-ation experts. In addition, this development effort should include auditors, preparers of financial statements, and users of financial statements, ensuring that all interested parties are represented. On the positive side, the similarity of the NACVA/ IBA valuation standards and the AICPA valuation standard is a testament to the efforts these orga-nizations have made in the development process. Such efforts provide strong encouragement for the valuation profession moving forward.
Edward J. Dupke CPA/ABV, CFF, ASA, is a senior consultant at Clifton Gunderson llP in the firm’s Phoenix office. Mark A. Hanson, CPA, CVA, ABV, is a shareholder with Schenck Valuation & litigation Support Services in Appleton, wisconsin. Nancy J. Fannon, ASA, CPA/ABV, MCBA, is the owner of Fannon Valuation Group, a business valuation and litiga-tion support services firm in Portland, Maine.
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“The development team should
include not only valuation
analysts from the collective
North American organizations,
but also Appraisal Foundation
representatives and international
valuation experts.”
Impact Of Government Contracts On Subject Company Risk
the level of stability of future cash flows and the expectation of that benefit. So that’s one of the bigger challenges.
On the other hand, there is risk associated with the concentration in a single source of revenue. The federal government is a very reliable cus-tomer—it typically pays its bills. But budgets change with new administrations, so in election years you have to contemplate risk a little bit differently than you would in nonelection years. Thus it is important when you are putting together projections that you con-sider that concentration in a primary customer and that customer’s ability to pay. And, if things change, such as when a new admin-istration takes office, actual cash flows can be very, very different from what may be projected under the current administration. Another consideration is the barriers to entry, which can vary depending on the nature of the work. Some firms offer services that are highly classified in nature. The relationship between the government and the contractor is so tight that the government is unlikely to “shop the work” because the current contractor has such signifi-cant internal knowledge. These barriers to entry can really drive down the risk rate and, in turn, drive up the value of the business. In addition, the subject company typically needs to have very sophisticated and educated personnel, along with great relationships, to get those projects with high authorization levels. Depending on the nature of the work, the required security clearance levels can vary. While some government contractors may only generate modest cash flows, there can be meaningful value in these businesses due to strong backlogs, stability in earnings, and high barriers to entry. These factors really drive down the risk rate, resulting in higher values.
Companies that generate a large part of their revenues from the federal government have dif-ferent characteristics than those that don’t—par-ticularly regarding risk factors. BVU asked Dan Golish, CPA/ABV, CVA, CFF, of Skoda Minotti about engagements in this market segment. BVU: What are some of the unique factors that you should consider when valuing these types of companies? Dan Golish: Most of the
firms we’ve valued in this category are consulting firms, such as informa-tion technology (IT) firms, or engineering firms, that provide mission-based or project-based consulting services. But there are all types of firms that fall into this category—manufac-turing or otherwise. So the first challenge, as with any
valuation engagement, is that you really have to understand the nature of the business you are valuing. As we valuation practitioners are well aware, consulting work is generally project-based, so there is an additional risk factor due to the uncertainty of consistent work. But the interesting dynamic we’ve found with government contrac-tors is that there is a lot more stability in reve-nues because there are long-term budget-based contractual agreements. Many firms are able to secure longer-term contracts with the government and can lock in future cash flows, which has a very meaningful downward impact on the dis-count rate. In the traditional consulting world, you may have a specific company risk rate in the 5% or 10% range due to the uncertainty in future cash flows associated with the project-based nature of the business. With government contractors, the specific company risk can be much lower as that uncertainty in cash flows is much less sig-nificant. I’ve even seen people argue for a nega-tive specific company risk, so it’s just a matter of
Impact of Government Contracts on Subject Company Risk
“The relationship between the
government and the contractor
is so tight that the government is
unlikely to ‘shop the work’ because
the current contractor has such
significant internal knowledge.”
Impact Of Government Contracts On Subject Company Risk
BVU: How long is the typical government contract?
DG: We valued one firm that had locked in over 90% of its projected revenue for the next three years. As I mentioned, this really drove down the risk rate because there was so much stability in the expected cash flows.
One might argue that, from a risk perspective, owner-ship interest in a business with such stable cash flows more closely resembles a bond than an equity interest!
We’ve also valued firms with shorter year-to-year contracts. In many cases, there are still longstanding relationships between the
key decision makers at the subject company and the relevant decision makers in the government. Such a scenario, while not necessarily creating a significant backlog, can still result in a lower risk rate. We have to be more mindful of govern-ment budgetary concerns in these situations, however, because the nature of the relationship is not contractual. This leaves more exposure to uncertainty in cash flows due to changes in budgets. On balance, however, these relation-ships generally create more stability than your typical business or consulting firm.
BVU: How important are government budgets when developing projections? DG: We’ll consider the budget in as much detail as we can, particularly when we are applying a projected cash flow methodology. What is more important, though, is that management’s projec-tions are realistic and they can back up those pro-jections with support in the form of explanations, documentation, or other. We will ask management tough questions if we need to, like “how are you going to sustain X% revenue growth from now until 2015?” They may respond by saying they have 96% of their revenues for that period locked in and all they need to do is sell a little more—and we can believe that, especially if they have shown
this to be attainable using historical results. But where it gets interesting is as you move down the income statement—what happens to margins over that period? A lot of the employees for these firms are highly educated professionals, and if the company is highly profitable, there may be more demands on salary expense, benefits, and so forth. You can get a lot of volatility or noise in the margins depending on how you look at it.
Government spending cer-tainly has an impact on a company, but in our reports we speak to the issue in more general terms, such as “more spending is expected and therefore we’re going to have a marginal decrease in the risk rate from a specific company or industry perspective.” We really try to capture that concept in the cash flows that we use if we can, rather than playing too much into that black box of a risk rate. In some scenarios, however, the cash flows are not locked in, and thus you have no choice but to use the risk rate. The way that we contemplate the speculative nature of projections in our risk rate is key. We often anticipate that management is overly opti-mistic with their projections because they’ve locked in contracts. It is not unusual, however, to find that they’re often quite conservative because they only consider what they’ve locked in and not any additional sales efforts they might imple-ment. Therefore, these projections are pretty sound, which is not common in our experience in other industries. Many times when we value a “typical” company using projections, we’ll add a meaningful component to the risk rate simply because we are using projections, depending on how aggressive those projections are in light of past performance. We just see that there’s some inherent risk with using that methodology due to the speculative nature of projections. We’ll add a little bit of risk on most cases, but we wouldn’t be as likely to do so in the case of a government contractor if it has contracts to back it up or a meaningful backlog, because we have found that
“Many times when we value a
‘typical’ company using projections,
we’ll add a meaningful component
to the risk rate simply because we
are using projections, depending on
how aggressive those projections are
in light of past performance.”
Sources of International Reports on Economies and Industries
there’s more precision in projections for govern-ment contractors than other industries.
BVU: Can you use the market approach? DG: You can apply a market approach, but we always focus on the nature of the business first and make the government contracting compo-nent secondary. We haven’t had a lot of success finding a lot of comparables. There are transac-tions out there, but you have to be very careful with the multiples and make a compelling argu-ment as to why you think they are comparable. Say you can find 15 comparable transactions in IT consulting. You can work off a median, then move the needle off of the median based on the qualitative and quantitative analysis you’ve performed, such as considering the barriers to entry and the company’s stability and earnings
performance. It is most common for us to use the market approach as a sanity check as opposed to a primary indicator of value in these engage-ments. We still believe expected cash flows provide the most meaningful indictor of value in this industry.
BVR: What words of advice do you give to someone who has never valued this type of company before?
DG: Valuing a company that generates most of its revenue from government contracts requires a dif-ferent perspective—the perspective by which you apply a risk rate and related benefit stream. You need to do your homework on the industry, under-stand the line of work that they’re in, and don’t forget about the reality of concentrations and back-logs and what they do to the value of a business.
Sources of International Reports on
Economies and Industries
Valuation practitioners preparing reports for businesses with operations outside of the United States need industry and economic data. BVU
staff pulled together some of the best sources of international industry and economic data. While it is not a comprehensive list, the sources serve as a good starting point for your research. Some of this data is available for free; however much of it is for a fee.
Business Monitor International (BMI)
www.businessmonitor.com
UK-based BMI is a leading provider of proprietary data, analysis, ratings, rankings, and forecasts covering 175 countries and 22 industry sectors. Industry reports contain analyses, 5- and 10-year industry forecasts, and competitive intelligence on leading multinational companies.
Report examples: Algeria Agribusiness report
and Belgium oil & Gas report
Datamonitor
www.datamonitor.com
The Datamonitor Group is an established provider of premium global business information for the following industry groups: automotive, consumer packaged goods, energy & sustainability, finan-cial services, logistics & express, pharmaceutical & healthcare, retail, sourcing, technology and telecoms.
Report examples: Construction & Engineering in italy and Control Systems industry Profile: Asia-Pacific
Economist Intelligence Unit (EIU)
store.eiu.com/
From the publisher of the Economist, the EIU provides country analysis and forecasts for over 200 countries. Each report highlights political,
Sources Of International Reports On Economies And Industries
some full-text titles, but many content areas are freely available to any site visitor, such as the
OECD Factbook, Working Papers, OECD Key Tables, and more.
Example of data series available: wheat produc-tion by country and world prison population rate
World Bank
data.worldbank.org/
The World Bank provides profiles for over 200 countries and economies and data for over 1,200 economic indicators. Most indicators cover several decades.
economic, and business developments in all sig-nificant markets, both established and emerg-ing. The EIU also publishes analysis, data and forecasts for six key strategic industries and 26 subsectors. Reports are available through the Online Store.
Report examples: Consumer Goods and Retail Forecast Finland and Automotive Report Mexico. Factiva
www.factiva.com
Owned by Dow Jones, Factiva.com provides articles from more than 28,500 global news and information sources from 200 countries in 25 languages.
Sample publications: iSi Emerging Markets Africa wire and Valor Economico
Freedonia Group
www.freedoniagroup.com
Since 1985 the Freedonia Group has been pub-lishing industry research studies. Each report contains analysis on market forecasts, indus-try trends, threats and opportunities, competi-tive strategies, market share determinations and company profiles.
Report examples: world hVAC Equipment to 2012 and world Emulsion Polymers to 2014
organisation for Economic Co-operation and Development (oECD)
www.oecd-ilibrary.org
The OECD iLibrary is the gateway to OECD’s analysis and data and contains all the pub-lications and datasets released by the OECD, International Energy Agency (IEA), Nuclear Energy Agency (NEA), OECD Development Centre, PISA (Programme for International Student Assessment), and the International Transport Forum. The iLibrary is a subscription-based service and requires proper access to view
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