Valuation of Unquoted Shares in the U.S. Financial Accounts

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Valuation of Unquoted Shares in the U.S.
Financial Accounts

• Prepared by Susan Hume McIntosh and Erik Johnson
• Taskforce on the Valuation and Measurement of
  Equity
• April 14, 2005
• Statistics Canada, Ottawa

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Relative Importance of Unquoted Shares

• Not a major issue in U.S.
• Vast majority of mid-size and nearly all large
  U.S. corporations have publicly traded shares.
• Unquoted shares at year-end 2003 estimated at
  only 12 of the total market value of equity of
  domestic corporations.

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Current Valuation Method

• Annual data from estate tax returns.
• Gives split between closely held stock (unquoted
  shares) and publicly traded shares (including
  mutual funds).
• Assume same ratio of unquoted to publicly traded
  shares for aggregate household sector.

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Advantages

• Estate tax data specifically reports on unquoted
  shares.
• Method ties this value of unquoted shares to a
  market value of quoted shares.

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Disadvantages

• Incentive to have low value on unquoted shares to
  hold down estate taxes.
• Only estates over 1.5 million must file.
• Threshold rising.
• Assumes aggregate household sector holds same
  proportion as wealthy decedents.

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Method Proposed by WGUS

• Use balance sheet information and equity market
  valuations for publicly traded corporations to
  estimate median market-to-book ratios by
  industry.
• Book value of own funds paid-in capital and
  accumulated retained earnings.
• Apply industry market-to-book ratios to own funds
  of non-publicly traded corporations
  (S-corporations).

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Aggregation of Closely Held Equity
(Exhibit 1)

• Market value of S-corps
• Market value of private C-corps
• Leveraged buyouts (LBOs)
• (quoted to unquoted)
• - Initial public offerings (IPOs)
• (unquoted to quoted)
• ------------------------------------------
  --
• Market value of closely held equity
• (unquoted)

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New Valuation Method S-corps
(Exhibit 2)

• Used IRS Statistics of Income (SOI) tax data.
• Latest annual tax data available is for 2001.
• For 2001, 2.9 million returns, 1.8 trillion in
  assets, 535 billion in stockholders equity.
• Divided into 14 industries.
• 2001 growth rate of stockholders equity used for
  2002-2004.
• Linear interpolation of annual stockholders
  equity to obtain quarterly values.

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New Valuation Method S-corps
(Exhibit 2)

• Calculate market value to stockholders equity
  for public companies for the 14 industries
  quarterly from 1996-2004 from Compustat data.
• Use the median market-to-book ratio.
• S-corps stockholders equity
• x Median market-to-book ratio of public corps
• S-corps market value

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New Valuation Method C-corps
(Exhibit 3)

• List of private C-corps with greater than 1
  billion in revenue from Forbes magazine.
• Find a comparable public company by matching
  industry and revenue with each private C-corp.
• Compute market-to-revenue ratio for comparable
  public company.
• Revenue of private C-corp
• x Market-to-revenue ratio of public company
• Market value of private C-corp

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New Valuation Method C-corps
(Exhibit 3)

• For 2003, 281 private C-corps with revenues
  greater than 1 billion.
• Able to obtain the Forbes list back to 1996.
• Will still miss smaller private C-corps.
• Only information available in Forbes is revenue,
  industry classification, and number of employees.
  
• No balance sheet information on private C-corps
  is available.
• Matching of companies is time consuming.

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Leveraged Buyouts and Initial Public Offerings

• Leveraged Buyouts (LBOs)
• Corporations converting from public to private.
• Data from Securities Data Company.
• Market value of LBOs calculated as Last public
  price x number of shares outstanding
• Initial Public Offerings (IPOs)
• Corporations converting from private to public.
• Data from Securities Data Company.
• Market value of IPOs calculated as Initial
  market price x number of shrs. outstanding

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