Transcript of Steve Heumann’s Interview
Interview with Steve Heumann
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio interview between Andrew Zezas, CEO of New Jersey based Real Estate Strategies Corporation and finance executive, Steve Heumann, Finance Executive.
Visit www.CFOstudio.com to read about this interview and to watch the entire on-camera interview.
M&A and Fair Value
Zezas: Hi this is Andrew Zezas, your host at CFO studio. I have the pleasure of being joined today by Steve Heumann. Steve is Vice President of SEC reporting and Sox Compliance at a publicly held New Jersey based wireless communications company. Steve’s background includes having led 200 million dollars in IPO and secondary offerings and completed two recent acquisitions. He also has a background in complex equity transactions including preferred and convertible debt, budget & treasury, and has worked for both startup and growth companies. Steve’s here today to talk to us about “M&A and Fair Value.” Steve, it’s wonderful to have you here on CFO studio.
Heumann: Nice to be here, Andy.
Zezas: So Steve, the concept of fair value for those of our viewers who don’t understand it; what is it and why is it important?
Heumann: Well, it’s the methodology used to value the assets of a business based on market considerations or conditions based on the timing of the acquisition.
Zezas: And specifically as it relates to M&A?
Zezas: Ok so, who establishes the principles of fair value?
Heumann: It’s the Financial Accountings Standards board.
Zezas: Ok, so FASB promulgates guidance and those who are involved in the M&A transaction are expected to value the assets based upon the methodology known as fair value.
Zezas: Got it. Ok, so how is fair value determined in an M&A transaction? Is there a particular process?
Heumann: Well, it’s based on market participants. A market participant is an independent, willing-able, and acknowledgeable person.
Zezas: Person or entity?
Heuman: Person or any party.
Zezas: Okay and so market participants, why are they important to the process, and are there different types of market participants?
Heumann: Well, it’s very critical, because the net assets acquired are based on the fair values of the assets acquired. The market participant is the foundation of the fair value measurements. It’s not the assets acquired, not based on what the buyer intends to do with the assets, it’s based on what a market participant plans to do with the asset. There are two types of market participants: there is a strategic and financial buyer. A strategic buyer is a buyer that has related complementary or substitute assets and generally engage in the same line of business, most likely peer group companies or competitors. A financial buyer is typically a VC buyer you know VC, private equity, money buyer.
Zezas: So, give me an example of how those two differ?
Heumann: A strategic buyer usually has overlapping synergies because they use the same people. A financial buyer doesn’t have overlapping synergies, because they are looking to improve the operating efficiencies of the target on a standalone basis. I’ll give you a perfect example. Company A is a technology company that enquires company B, a technology company. Company A has software, company B has software. Company A does not intend to use the software. As a strategic buyer, company A intends to integrate their own software with company B’s software. So, based on a strategic buyer there is no value that would be assigned to company B’s software. On the other hand, if you are a financial buyer, they don’t have their own software so based on valuation there would be a value assigned to that software.
Zezas: So, for the same component asset depending upon who is doing the buying, that component or that asset or sub asset, can have a very different value?
Heumann: Correct. And, also it depends on how the use of an asset may vary versus a strategic and financial buyer.
Zezas: Specifically, in the case of a strategic buyer and your software example, if they both have software and the buyer A intends not to use the software that comes along with the acquisition can they value that asset at zero?
Heumann: Yes. What would happen is that would be allocated more toward goodwill.
Zezas: Understood, understood.
Heumann: Because you are using the synergies of company A the strategic buyer.
Zezas: So, I’ve got to believe that in this whole process of utilizing fair value as it relates to M&A transactions, that identifying market participant assumptions, it’s got to be incredibly challenging.
Heumann: It’s quite challenging because when you are finding the opportunity, negotiating the price, and closing the deal, it’s just the beginning. You know, companies must now confront with the pain and complexities of fair value accounting. Fair value accounting principles entails concepts and definitions, which may seem very distant from the company’s strategic business and strategy objectives that lead to the acquisition in the first place. And as a result, the company puts together a deal model. Most companies usually take into account headcount reductions. Well now, you have to take in market participants, and as a result you may have intangible assets creeping up on your opening balance sheet, which may drag subsequent earnings.
Zezas: And this is all happening not before closing, not at closing, but during integration?
Heumann: Integration, correct. So, to determine market participants, it requires significant judgments. An astute buyer, most likely, you’re identifying the due diligence process. You also look at prior bids, you look at competitors, so there’s no surprises at end.
Zezas: But, the rubber hits the road after you close?
Heumann: Correct. Just imagine doing a deal model and presenting it to your board and headcount reductions are done, eliminated. And all of a sudden, you have a 10 million dollar asset that’s being dragged on, running through your P&L, as result of the amortization.
Zezas: Anyone who I know who is heavily involved in the M&A says exactly what you’re saying; that you have to do a great job on the due diligence, you’ve got to make your money when you buy the company, but you can lose it all in the integration if you don’t do a great job on the integration.
Heumann: You’re 100% correct.
Zezas: Steve, this has been fascinating. The whole concept of fair value is something we can talk about for hours, but I would like to thank you for joining us here on CFO studio, and I hope you’ll come back and see us again.
Heumann: Thank you, I would like to come back and see you again.
Zezas: It’s been a pleasure.
Zezas: This is Andrew Zezas, your host at CFO Studio with Steve Heumann, talking about M&A and Fair Value, saying thank you very much for watching.
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