With the election of Donald Trump as the 45th President of the United States, the stock market has rallied in what has come to be called the Trump Rally. The Trump Rally has been fueled in part by the anticipation of cuts in corporate taxes, which was a campaign and early-presidency goal. Something is happening with the multiples of earnings placed on public shares. So what is likely to happen to multiples for successful private companies if the Trump tax cut is implemented? Let’s take a look.
In mid-2015, I commented on the apparent anomaly of a financing round for Uber that had an implied market value of equity (MVE) in excess of that of FedEx (FDX). At the time, Uber’s implied MVE was $51 billion, and that of FedEx was $48 billion. My post addressed some of the issues that I saw at the time. Similarly, last week, I read an article in the Wall Street Journal titled “Tesla, on a Hot Streak, Passes Ford in Investor Value”. That caught my attention, because Tesla is young and quite small and Ford is 100 years old and quite large. Why then does Tesla have such a high valuation?
I have used this blog (and my former blogs) as a place to develop new materials. In late 2014, I began a series of posts to develop a means of building multiples of EBITDA using what I call the Adjusted Capital Asset Pricing Model. After peer review, I was encouraged to submit an article to the Business Valuation Review, which readers of this blog can obtain convenient access to.
Buy-sell agreements have been likened to business owners’ prenup agreements. They are certainly not romantic, but buy-sell agreements are among the most important and most neglected of corporate and legal agreements. What is not clearly understood, however, is that they are also business and valuation documents.
It is clear that the DOT/IRS are attempting, through Proposed Changes to Section 2704 of the Internal Revenue Code, to eliminate minority interest discounts and marketability discounts (DLOMs), even though those terms are not mentioned at all. I have read the Proposed Changes as a business appraiser and a businessman. They may have succeeded in eliminating “minority interest discounts” and “marketability discounts” as those terms are currently used. However, I do not think they have succeeded in eliminating valuation discounts in fair market value determinations for family partnerships or other family entities.
My thoughts are compiled in a new whitepaper, “Valuation Implications of the Proposed Changes to Section 2704”.
On November 4, 2016, I will be speaking at the AAML Annual Meeting addressing a topic that is near to my heart as a business appraiser: An Integrated Theory for the Major Valuation Issues of Today. While each of these issues is worthy of hours of coverage, I provide an overview these issues in my post today.
On Monday, July 25, 2016, Verizon announced the acquisition of the operations of Yahoo for $4.8 billion. I waited on this post because it really isn’t about Yahoo, but about lessons for closely held business owners and their advisers. In any event, that $4.8 billion value for Yahoo’s operation was a far cry from previous indications of value for Yahoo.