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Recent Changes to Market
Participant Acquisition Premium
Guidance
Valuation Vantage
Fall 2016 | 6
In November 2015, The Appraisal Foundation’s Working Group
on Control Premiums (“Working Group”) issued an exposure
draft on the measurement and application of market participant
acquisition premiums (“MPAP”) after receiving feedback
pertaining to its discussion draft questions. The exposure draft
provides a more defined framework to determine how and when
to use control premiums as there is significant diversity in how
control premiums currently are applied for goodwill impairment
step 1 test purposes and other financial reporting purposes. In
2008, the SEC raised concerns that control premiums may be
inflated by public companies to avoid goodwill impairments. The
SEC requires justification when control premiums appear to be
inflated.
The Working Group added to the exposure draft further discussion
regarding the economic benefits to analyze in determining an
MPAP. This includes possible economic benefits to analyze in
determining a required rate of return/discount rate. In particular,
the Working Group added the following concepts that valuation
specialists may consider analyzing to reflect the appropriate
market participant’s perspective when estimating a size premium
to build to a required rate of return/discount rate:
1. As a practical expedient, valuation specialists could
bookend their income approach using the differing possible
perspectives of market participant’s risk to generate two
valuation indications—one reflecting the target’s size and
another reflecting the combined entity’s size. The valuation
specialist selects a point within the range, taking into
consideration the accounting standards requiring the analysis.
2. The valuation specialist may apply other valuation techniques
under the market or cost approaches to reveal a point
in a range where there is the greatest consensus across
approaches thereby implying the stronger size premium case.
3. The valuation specialist may calibrate the risk measure by
reviewing the accounting exercise (e.g. business combination
valuation) that was recorded for the subject company.
4. The valuation specialist may calibrate the risk measure by
reviewing the accounting exercise (e.g. business combination
valuation) that was recorded for comparable companies.
In analyzing observed transaction premiums from public
companies, the following factors to consider in determining an
MPAP were added to the exposure draft:
1. Stated Rationale for Transaction - When available,
analysts should review press releases and other
corporate announcements describing the transaction
to determine if the price paid (and therefore the multiples
and premiums observed) reflects any buyer-specific
synergies, or if any other characteristics of the transaction
render it unsuitable for use in a fair value measurement.
2. Stock Price and Volume Fluctuations Prior to Announcement
- In some cases, the stock of the target company may
exhibit unusual volatility and/or increased trading volume
prior to the formal announcement of the transaction. The
existence of such phenomena may indicate that the implied
acquisition premium should be calculated with reference to
an earlier, unaffected stock price.
The Working Group also replaced its MPAP selection and
assessment example with the following examples:
1. The first example addresses a case in which an MPAP
is critical to the pass/fail result of the test.
2. The second example addresses the same company and
basic fact pattern, but assumes a significantly lower
carrying value, resulting in a test for which the MPAP is
not a determining factor.
Both examples’ tests are the same in terms of the main
methods considered. However, the level of detail provided
in support of MPAP-related assumptions in the second
example is reduced to reflect the lack of MPAP significance
in relationship to the test result. The final MPAP guidance is
expected to be issued in early 2017.
The final guidance is expected to be issued within the next year.