Question
From:(redacted)
Sent:Wednesday, March 28, 2007 1:10 PM
To:Verne, B. Michael
Subject:Query (16690-00219)
Mike:
Iam assessing the applicability of 16 C.F.R. 802.4 to a particular situation. The US assets remaining after exempting non-US assets under16 C.F.R. 802.50 include at least two categories I think we can exclude:
Cash and cash equivalents: Under 16 C.F.R. 801.21
Cash-- restricted: This represents cash collected by the acquired entity on behalfof its customers, essentially in the form of prepayments against contractperformance. There is a directly offsetting liability in the same amount,presumably on the basis that if the company was unable to complete performance,the prepayments would be refundable to the customers. I believe this is anotherform of "cash equivalent" reasonably treated as exempt under 16 C.F.R. 801.21, in part to be consistent with how I understand you have treated"unearned premiums" in the insurance context. Even if this"asset" has to be included in the valuation (and recognizing thatliabilities are irrelevant to a "total asset" calculation for"size" purposes), in the fair market valuation context I would expectthat the directly and fully offsetting liability in this case makes itreasonable to assign this "asset" zero value.
Themost recent balance sheet (at year end 12/31/06, awaiting auditors' finalapproval) of the target group showing US assets reveals that after netting outthe above two figures, the "total assets" in the US are valued below$59.8 million. I realize the acquiring person must make a fair market valuationthat could differ from book value, but given the relatively recent nature ofthis balance sheet I believe it would be reasonable for the acquiring person tobase a fair market valuation on those figures, absent manifest evidence thevalues are understated.
Alternatively,applying an EBITDA multiple deemed appropriate for a fair market valuation ofthe US assets also results in a figure below $59.8 million, but because it isbased on earnings, it also effectively excludes the above two categories. (Themultiple is also lower than that which has been applied to the business as awhole, but we expect the fair market valuation to conclude that this isreasonable given particular attributes of the US business distinguishing itfrom non-US elements of the target group.)
Wemight have other arguments to explore as to goodwill (described to us as theexcess of cost over fair value of certain acquired businesses), but if youagree with the ability to exclude the above two categories this point becomesunnecessary.