In a recent bankruptcy case, a plaintiff valuation expert provided, without proper justification, 70% reliance on what the Court described as a biased application of the discounted cash flow (DCF) approach to value (an income approach) to determine her appraisal conclusions. The discounted cash flow analysis is a commonly-used, and conceptually excellent method of performing a business valuation in which a projection is made of expected future results. However, it is possible to manipulate the inputs into the future projection to arrive at specifically-desired results. Recent court cases have more frequently underscored the need for appropriate use and consideration of both the income and market approach.
One such recent case is U.S. Bank National Association vs. Verizon Communications Inc in the US District Court for the Northern District of Texas (Civil Action No. 3:10-CV-1842-G, January 22, 2013). In this ten-day bench trial, the only issue was the value of a Verizon spinoff (Idearc) on the day of the spinoff. In this case, the court found that plaintiff’s witness “is highly qualified to offer an opinion”. However, the Court was not impressed with the witness’s conclusions, stating in summary:
“At nearly every step in the DCF analysis, Taylor selected inputs that forced Idearc’s value lower. From her selection of only the most pessimistic projections of Idearc’s future performance, to her reliance on a “commercially unreasonable” terminal value projection and calculation, to her selection of a remarkably high discount rate, the method produced a valuation that is low in the extreme and that implied an incredibly low trading multiple for Idearc.”
The market approaches to value all provided substantially higher value indications, but the plaintiff’s appraiser gave these 2 alternatives only 15% weight each. In this case, there were both appropriate (i) publicly-traded comparable companies, and (ii) comparable sales of entire companies to use for the market approach(es), yet the appraiser failed to address the value discrepancies between what she primarily used, and the market approach that she gave lesser weight.
Data supporting each appraisal is different, and so customized decisions are needed for each assignment. But this example warns parties not to embrace an “outlier” because it provides a desired result, as plaintiffs attempted to do here.
