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Ian Brewer, Partner

90 Long Acre, London WC2E 9RA

Tel: +44 (0)20 7420 0007 Fax: +44 (0)20 7836 3339

ianbrewer@valuationconsulting.com

www.valuationconsulting.com

WHO ARE VALUATION CONSULTING

Many years experience within Government, Investment Banks and the accountancy profession

Members of the Society of Share and Business Valuers, authors, lecturers

RICS Chartered Valuation Surveyors and Registered Business Valuers

Law Society Registered Expert Witness accreditation/membership of the Expert Witness Institute

Four Directors have experience in presenting testimony with many compliments in Judgements

Dedicated valuers – we only value shares, businesses, intangibles and IPR worldwide for a variety of non-contentious and contentious purposes

VALUATION FOR M&As – THE BIG ISSUES

What IP is involved in the transaction

Worth to Vendor/Purchaser

Accounting Standards – Purchase Price Allocation

Valuation – Art not a Science

80% OF CORPORATE WORTH IS INVISIBLE

The US FASB has created a list of what it considers to be a firms intangibles:

Recognition under IFRS is only allowed when there is a merger or purchase of one company by another. You CANNOT under most Standards value own-grown IP for accounting statements

Category Examples

Market-related

Trademarks, trade names, service marks, trade dress, newspaper mastheads, internet domain names.

Customer-related Customer lists, customer contracts, customer relationships, customer agreements

Artistic related Ballets, books, plays, articles, other literary works, musical words, opera, pictures, photographs, video and audio-visual material.

Contract-based

Licensing agreements, advertising or service contracts, lease agreements, construction permits, operating and broadcast rights, employment contracts.

Technology-based

Patented technology, computer software, unpatented technology, databases, trade secrets, secret formulae

IDENTIFYING THE IP

However many Finance Directors haven’t a clue about the above

Any Company looking to sell itself should have an IP Audit

Any Company wishing to make an acquisition should have an IP Audit as part of their Due

Diligence

Item most often overlooked is the workforce

VALUE IS IN THE EYE OF THE BEHOLDER

Obviously Vendor and Purchaser have different agenda not only over price but quite often

over what is being bought and sold. If purchaser only wants the IP may not want the

Company

Vendor has a problem – might know what IP is worth to them but probably no idea what it

is worth to Purchaser

Purchaser should have calculated what IP is worth to them taking into account synergies

Purchaser carries out expensive due diligence and Vendor possibly has valuation carried

out - still both end up with values that don’t meet

Can the Valuer help to square the circle? In reality no as it degenerates into a horse trade

and the Purchaser often ends up paying more than its worth. Ego gets in the way of

common sense

So what is the real role of the Valuer in the M&A process?

PURCHASE PRICE ALLOCATION

At present Company’s not allowed to put home grown IP on balance sheet

However latest accounting standards require that purchasers allocate the total

consideration paid in a business combination to the identified acquired assets and

liabilities according to their fair value.

Any remainder of consideration above the fair value of identifiable net assets acquired is

to be allocated to goodwill.

Two problems:

Most consideration still allocated to Goodwill - ? Overpaid

End up accounting for IP that will not be used

In many tax jurisdictions intangibles can be amortised reducing a taxpayer’s burden. It may be appropriate to include the value of TAB in valuation of the intangible

Valuation Approaches

Cost Approach

Market Approach

Income Approach

“mark-to market” “mark-to model”

Replacement Cost Method

Reproduction Cost Method

Market Pricing

Multiples

Relief from Royalty Method

Multi-period excess-earnings method

Incremental Cashflow Method

Contingent Claims / Real Option Models

“mark-to cost”

Apply most appropriate method considering economic benefits and valuation inputs available

TOOLS

HOW MUCH – IDENTIFYING CASHFLOWS?

Company Forecasts – Why were they Prepared?

• Is it likely that a set of forecasts produced for tax purposes is going to

be the same if produced for an M&A

Are they reasonable from a market viewpoint?

N.B. Synergies – Can’t use for a Purchase Price allocation

USEFUL LIFE

HOW LONG FOR – TIME PERIODS?

Physical Life

Functional Life

Technological Life

Economic Life

Legal Life

THE DISCOUNT OR CAPITALISATION RATE AND FINANCIAL/MARKET DUE-DILIGENCE

AT WHAT RISK AND COST OF CAPITAL?

Derive the appropriate cost of capital – for an investment and asset to be worthwhile the expected return

on capital (equity and debt) should be greater that the cost of capital

Risk free profile and risk factors

Caveats

Immense difficulty in forecasting well into the future

Future distant growth is often significantly discounted in the perpetuity calculation

Most seed invention does not reach the market – less than 20% - how do we deal with that

In Pharma Preclinical discount rates 55-80%, Phase 1 40% + etc

DISCOUNT RATE

An appropriate discount rate should be utilised based on the risk profile, IP analytics and

landscaping of underlying asset, liability or business

Guideline benchmarks for selecting appropriate discount rates: Weighted average cost of capital (WACC) Internal rate of return (IRR) Weighted average return on assets (WARA)

Discount rate and cashflows need to be a like for like basis

Taxes in cashflows, use a post tax rate Risk in cashflows, use a risk free rate