MERGER ARBITRAGE DISCOUNT
Appraisal Economics has valued a business in the process of being sold. We performed an analysis of the appropriate discount from a proposed transaction price to account for the time and uncertainty associated with the transaction being consummated as proposed, often referred to as “merger arbitrage.” A potential acquirer submitted a letter of intent to purchase a privately held company; however, there was substantial uncertainty whether the transaction would actually occur and, if so, what the ultimate price and terms would be after due diligence and final negotiations. Another consideration is how long shareholders of the target company would have to wait to realize the proceeds from a sale. To determine the fair market value of the company being sold shortly after the target company received a letter of intent, we performed research and analysis to determine the appropriate discount from the proposed transaction price. Appraisal Economics valued the subject interest for gift and estate tax planning purposes.
NON-COMPETE AGREEMENT (NCA) VALUATION
Appraisal Economics has valued the non-compete agreements (NCAs or covenants not to compete) of the senior executives of a publicly traded real estate investment trust (REIT) that merged with another public REIT. As part of the merger, certain executive officers entered into covenants not to compete with the merged entity during, and for a period of time after, their employment. Section 280G and Section 4999 of the Internal Revenue Code relate to excess parachute payments upon certain corporate events, such as a change in control. Amounts that executives receive in exchange for committing to perform and abstain from certain activities specified in the NCAs are generally taxed at lower rates than amounts considered to be “golden parachutes”; however, only amounts that are “reasonable compensation” qualify for this favorable treatment. Appraisal Economics valued each non-compete agreement as part of our 280G analysis to determine the reasonable compensation of each executive.
MAJOR LEAGUE SPORTS TEAM
Appraisal Economics Inc. has performed a valuation analysis of a U.S. major league sports team and its related regional sports network. As part of our analysis, we also determined the value of derivative interests in various entities that own the team and network. Our valuation included the discounted cash flow method of the income approach and elements of the market approach, including the application of market multiples. We also determined the value of preferred securities associated with the aforementioned entities, based on a full credit analysis and examination of prevailing market interest rates for similar securities. Finally, we determined appropriate minority discounts and discounts for lack of marketability.
PREFERRED STOCK WITH EMBEDDED DERIVATIVE
Appraisal Economics Inc. has determined the value of the “embedded derivative” in convertible preferred securities issued by the operating partnership of a large publicly traded real estate investment trust (REIT). The preferred securities receive quarterly dividend payments and also contain an embedded derivative to convert into shares of the publicly traded REIT’s common stock, which is effectively a call option. We determined the fair value of the embedded derivative using binomial models and a “with and without” valuation method. We used a binomial model to determine the fair value of the aggregate preferred security and a second binomial model to determine the value of the preferred assuming that it was not convertible into common stock. The value of the embedded derivative is the difference in value indicated by the two models.
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