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earnings from 1990-92. According to Ms. Walker, three of the
seven comparable companies had also suffered recent earnings
declines; it therefore made more sense to determine the
applicable multiples by reference to those companies, rather than
by reference to the comparable companies as a whole.
Ms. Walker’s use of the two or three lower multiple
companies is inconsistent with the conclusion expressed elsewhere
in her report that, even after the decline in Demco’s earnings
had been taken into account, Demco’s profitability and risk
levels were close to or at the industry norm. It also may be
inconsistent with her conclusion that the seven companies she
identified as comparable were in fact comparable to Demco. For
these reasons we believe that the multiples used by Ms. Walker
resulted in an understatement of the value of the Demco stock.
See Pratt et al., Valuing Small Businesses and Professional
Practices 276 (3d ed. 1998) (warning the analyst that she should
be cautious and careful, when using the guideline public company
method, to ensure that the use of certain companies for some
measures but not for others does not introduce bias or distortion
into the value indications).
If the mean multiples of the comparable companies had been
applied to Demco’s historical performance measures instead of the
multiples used by Ms. Walker, then the value of the Demco stock
under Ms. Walker’s historical performance measures approach would
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