Valuation and analysis for financial investors

The supervisory board of a listed stock corporation engaged us to prepare a fairness opinion as part of its assessment of a potential acquisition. The objective was to provide a well-founded, objective and transparent assessment of whether the proposed transaction was fair to the company from a financial perspective, in the context of the supervisory board's duties of care under sections 93 and 116 of the German Stock Corporation Act (AktG).

Our approach followed the established capital markets process for preparing fairness opinions. We began with a detailed analysis of the target, covering historical and forecast financial performance, its competitive position, market conditions and relevant strategic synergies. This was supplemented by a qualitative assessment of management, operational scalability and the target's risk profile, providing the basis for assessing the reasonableness of management's financial plan. We then developed an integrated valuation model incorporating both discounted cash flow analysis and valuation multiples. Valuation parameters were derived from capital market and transaction data and critically assessed for comparability and market relevance. The proposed transaction structure, including the purchase price, payment terms and earn-out components, was also incorporated into the overall assessment. We identified potential valuation ranges and positioned the proposed transaction within them.

The fairness opinion was documented in a formal report discussing the financial fairness of the transaction in light of shareholders' interests. The report was clearly structured and tailored to its audience, providing the supervisory board with a sound basis for decisions within its oversight and approval responsibilities.

A financial investor engaged us to conduct a forensic analysis of the financial statements and develop adjusted forecasts of short-term earnings and cash flows, together with their medium-term potential, for a listed company being considered for a major investment. The analysis followed persistent criticism by sell-side analysts of the company's reporting practices, particularly transparency, accounting judgements and governance structures. Our objective was to develop an evidence-based, in-depth outside-in understanding of the company's actual economic position and a well-founded set of questions for an investor meeting with its executive board.

Our analysis centred on numerous accounting and financial reporting issues which, taken together, suggested systematic weaknesses in the picture presented by the financial statements. The reporting of operating performance had lacked transparency for years. This was evident in repeated changes to segment reporting, highly aggregated metrics and inconsistent non-GAAP disclosures. Analysts had repeatedly criticised these features, but a detailed forensic examination had not previously been undertaken.

A second central area was the extensive use of leases, whose accounting under IFRS 16 involved complex valuation judgements. The distinction between operating and financing components, and the lease terms and discount rates used, proved inconsistent and raised questions about their effects on reported leverage. We also identified related party transactions under IAS 24 that were mentioned in the notes but explained only superficially, particularly their economic substance, pricing and contractual terms. The revenue recognition model under IFRS 15 also required clarification. The company used a structurally complex delineation of performance obligations, making reported revenue difficult to understand. In some cases, it was unclear whether the criteria for identifying and satisfying performance obligations had been applied consistently, particularly for long-term customer contracts.

Our detailed analysis identified specific problematic accounting decisions relating to assets and liabilities. The more significant finding, however, was a structurally aggressive accounting and reporting system. By taking an integrated approach that included corporate governance, incentive systems and disclosure practices, we identified a consistent pattern: accounting decisions that appeared individually defensible interacted systematically to present an overstated picture of earnings and financial strength.

Our analysis resulted in a fully documented analytical model that assessed individual risks systematically and supported adjusted forecasts of future cash flows. This provided a sound and transparent decision tool, enabling our client to understand the economic reality behind the published figures and identify critical topics for the forthcoming executive board meeting. A set of questions addressing the principal uncertainties completed the assignment.

Investors regularly consult us on financial and accounting analysis, often seeking analytical checks before a planned investment. A notable case arose on 15 August 2019, when a research report alleged that the US conglomerate General Electric was concealing approximately USD 38 billion in losses, equivalent to around 40% of its market capitalisation at the time, in its accounts. Despite the shares' high liquidity and extensive analyst coverage, General Electric's share price fell by 10% on the day the report was published.

Shortly after publication, investors engaged us to assess the allegations from a financial statement analysis perspective. The report included numerous claims that could not be examined through external financial statement analysis, a common feature of such short-seller reports, but also enough claims that could be assessed analytically. One concerned the consolidation of certain assets of Baker Hughes. The report alleged that those assets should never have been consolidated and that the incorrect consolidation had overstated General Electric's reported position by approximately USD 9 billion.

Following detailed analysis, we were able to allay concerns on this and several other points, at least as far as the accounting was concerned. There was no Enron-style accounting fraud of the kind alleged in the report. Nevertheless, General Electric was facing underlying economic difficulties at the time.

A more detailed technical discussion of our findings is available in the article on this case.