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 ยฉ2012 AppFolio, Inc.
2. About The FENG
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AppFolio, Inc. Company Basics
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4. About Eric Nath& Associates, LLC
โข Eric Nath has been a
business appraiser since
1985
โข Formed Eric Nath &
Associates, LLC in 1991
โข Specializing in private
companies & minority
interest valuations
โข See www.EricNath.com
for more
information, links and
resources
5. Is overvaluation a problem for
private companies?
Agenda:
โข How overvaluation happens
โข The many ways in which overvaluation creates
problems
โข Can undervaluation also be a problem?
โข Tip-offs in an appraisal that suggest potential
overvaluation
6. Is overvaluation a problem for
private companies?
Overvaluation in:
โข Stock options
โข Mergers and Acquisitions
โข Buyouts
โข Fair value measurement & impairment testing
โข Busted IPOs (Facebook)
โข Estate and gift tax
9. How overvaluation happens
"Reason is the slave to the emotionsโ
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 (โNudgeโ) 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
โข Notional value ("fair market value"), versus
the real world
โข FASB pronouncements and rules
โข Cost of capital
โ myths โ capital asset pricing model โ control
premium studies โ restricted stock studies
17. The many ways in which
overvaluation creates problems
18. The many ways in which
overvaluation creates problems
Facebook IPO
โข Trading in the secondary markets pre-IPO
โข Valuation and IPOs are not a science, butโฆ
โข Was it really a bust?
โข Amazon took nearly two months to get back
to itโs IPO price
19. The many ways in which
overvaluation creates problems
Mergers and Acquisitions
โข Majority of acquisitions by public companies
destroy shareholder value
โข System is designed to encourage overvaluation
โข Over optimism about potential synergies
โข Things usually takes longer than expected
20. The many ways in which
overvaluation creates problems
Stock option plans and incentive compensation
(409A)
โข Unwittingly setting the strike price too high
acts as a disincentive
โข 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)
โข Unwittingly setting the strike price too high
acts as a disincentive
โข Using control premiums and low required
rates of return from history-based models
22.
23. The many ways in which
overvaluation creates problems
Fair Value Measurement
Impairment Testing
โข Willingness to apply control premiums is a
problem
โข Cost of capital estimation using history-based
models is a problem
โข 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 โ why give
the government an unnecessary gift when you
die?
โข Control premiums / discounts for lack of
marketability and lack of liquidity
โข Court cases
โข 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.
28. Can undervaluation also be a
problem?
โข Dissenting shareholder lawsuits
โข Overly aggressive tax advice
โข Fairness issues in buyouts
29. Tip-offs in an appraisal that suggest
potential overvaluation
โข History-based cost of capital estimation
โข Restricted stock studies
โข Control premium studies
โข Conflicts of interest/investment banking
โข Buy โ side analysts
31. Review
โข How overvaluation happens
โข The many ways in which overvaluation creates
problems
โข Can undervaluation also be a problem?
โข Tip-offs in an appraisal that suggest potential
overvaluation
32. Review
โข Stock options
โข Mergers and Acquisitions
โข Buyouts
โข Fair value measurement & impairment testing
โข Busted IPOs (Facebook)
โข Estate and gift tax
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
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