Opening Keynote by Prof. Mauro Bini

More than 100 business valuation professionals from 21 countries joined EACVA’s Virtual Business Valuation Conference titled Opportunities and Challenges for Business Valuation Professionals During Crisis on 12 March.

The opening keynote presentation entitled „Early Warning Signs (Value Based) of Imbalances in Troubled Firms“ was held by Prof. Mauro Bini, Bocconi University Milan. The keynote emphasized the importance that valuations play in the diagnostic and early resolution phases due to their ability to identify structural imbalances, regardless of the accounting choices made by the troubled firm. Prof. Bini pointed out examples of financial and operating imbalances and their consequences on firm’s value and discussed analytical tools to classify troubled firms based on different values/value drivers. Additionally a decision framework for using these analytical tools was provided. He finished his keynote session with a focus on „zombie“ firms with a structural imbalance that continue to survive (Bini, Business Valuation OIV Journal Vol 2 Issue 1, Spring 2020, S. 22 ff.).

Dr. Holger Himmel: ESG – Environmental, Social and Governance Aspects Will Become „Must Have“ Value Drivers in Company Valuations

Environmental, social and governance (ESG) aspects have already become essential value drivers and is gaining even more momentum for investors. Hence, it ultimately needs to be considered in valuations. Key question is whether the subject company is en route to smoothly transform the current business model into a sustainable business model – securing its „licence to operate“. To provide answers a sound analysis of how ESG factors impact companies’ financial performance becomes necessary, reflected in financial projections. Additionally, it is important to assess the effect of actions taken by management to minimise risks and to maximise market opportunities related to ESG issues.

Since most of the ESG activities will show their positive impacts in the long-term, the quantification of the terminal value becomes a crucial topic. The key question to be answered is: can a terminal value always be automatically assumed or does the respective business model has a finite lifetime?

Especially the dynamics of transformation processes of companies within a specific industry towards a sustainable business model need to be analysed in the light of companies’ ESG status as is – is it an ESG leader or an ESG laggard?

To ref lect ESG impacts in valuations, established valuation methodologies can be applied. The challenging part is on the level of relevant and appropriate input data. Essential ESG factors and their respective non-financial KPIs need to be identified and translated in financial KPIs applying transparent impact pathways that can be clearly understood by addressees.

Today’s state-of-the-art valuations explicitly incorporating ESG aspects require substantial additional analyses. The following questions need to be answered:

• What are the main ESG factors in a specific industry?
• What are respective non-financial KPIs which need to be further analysed?
• How strong is the management committed to its ESG strategy?
• How can the ESG status of the company assessed in comparison with its competitors?
• How does the ESG status impact the underlying assumptions of the terminal value, focussing on longterm growth?
• How does the ESG status impact the riskiness of future Cashflows?

Since ESG in valuations is a relatively new topic established guidances and procedures currently do not exist. This presentation is an invitation to appraisers to join the „ESG in valuations“ community on this exciting ESG journey.

Michael G. Kaplan, CPA/ABV/CFF, CVA, MAFF: Sizzle on the Witness Stand: The Art of Delivering Compelling and Persuasive Expert Testimony

Serving as an expert witness is an intersection of technical skills, communication skills and strategic skills. It involves an understanding of the legal parameters governing expert witnesses and the ability to work with counsel and persuade the judge or jury that the expert’s opinions should be embraced. In this sessionwe explored the dynamics and challenges of giving expert testimony – and provided guidance that will enable to be more effective in on the witness stand. We addressed the intersection of truth and advocacy, the importance of how triers of fact perceive expert witnesses, the importance of storytelling, and ways that attorneys approach experts in the courtroom.

Dr. Anke Nestler, CLP, CVA: Data as the New „Oil“? The Valuation of Data as an Intangible Asset

Data is the basis for business models since many years, e.g. Bloomberg or Shutterstock. Because of new IT systems, big data and artificial intelligence data is now the basis for many newbusiness models, e.g. content farms, internet portals and providing ‚training data‘ for AI. In addition, companies use data e.g. about their clients to better understand the clients‘ needs, to improve internal processes andmeet the expectations of the market. Important value drivers of data are exclusivity, timeliness, accuracy, completeness and other features that have to be analysed carefully when valuing data as an internal asset. Especially ownership, liabilities and external regulations are crucial for the financial value of data. The financial valuation of data is – similar to other intangibles – based on the market approach, the income approach and the cost approach. While usually the income approach is often the only applicable and reasonable approach, it might be different with data. Based on new data driven business models market price points might exist and also the cost approach shall be considered as an appropriate valuation approach. Important principles are for example to identify properly the valuation object, to determine the valuation date, the purpose of the valuation and the searation from other assets.

Prof. Dr. Andreas Schüler: Cross-Border DCF Valuation: Discounting Cashflows in Foreign Currency

The presentation dealt with the valuation of Cashflows in foreign currency. Valuation practitioners face several choices: Should one use the foreign currency (FC) or the home currency (HC) approach? How can we deal with the relation between Cashf lows in FC and exchange rates? How can we come up with estimated future exchange rates? Although these questions are not easy to answer, the presentation provided a few recommendations. More details can be found in Schüler, JBE 2021. It was pointed out as well that additional tax effects need to be considered besides the well-known tax shields on interest expenses, if a domestic company uses debt denominated in FC. Cost of capital need to consistent to the approach – FC or HC approach, and APV, WACC or FTE – chosen and also to the method for estimating future exchange rates. A common argument in favor of the WACC (and the FTE) approach is the alleged ease of use for companies following a target debt ratio. This argument is weakened for cross-border valuation, because exchange rate risk might lead to varying debt ratios. The use of forward exchange rates is recommended. The growth rate used for calculating the terminal value must ref lect the growth in FC-Cashf lows and the expected change of exchange rates. Forward interest rates ensure the reconciliation between FC and HC approach, a constant risk-free rate does not.

Roger Grabowski, FASA: Closing Keynote: Evidence of Size Premia in Europe

The conference concluded with the keynote presentation „Evidence of Size Premia in Europe“ by Roger J. Grabowski, FASA Managing Director with Duff & Phelps. As an introduction to the topic Roger presented a short history of the size effect with the result that it exists after controlling for quality.

New research has shown a possibility that the size effect was masked by other factors. Building on this, a methodology to measure an overall quality factor – based on profitability, growth and safety factors were illustrated. At the end, the findings of a study of differences in returns between large and small companies in Europe have presented with the final conclusion that the size effect matters much more than previously thought.

Grabowski concluded with the following points:

• Size effect may be due to mismeasurement of beta – sum beta corrects for lagged effect for smaller companies – but
  does it measure beta risk correctly.
• Size effect may be due to the greater financial strength of large companies vs. small companies beyond the risk
  captured by beta.
• Decreasing operatingmargin as size decreases.
• Increasing variability of operating margin as size decreases.

Is the size effect at least in part the result of liquidity differences?

More research needs to be done.