Extract from KPMG Peat Marwick’s report on business valuations: Introduction and background
(Still a highlight from the British 1994 report on recorded music by the Ministry of Mergers and Competition)
- As part of the Monopolies and Mergers Commission’s (`MMC’) inquiry into the recorded music industry, this paper sets out possible methodologies for evaluating profits and assets not recorded in the accounts of the UK recorded music businesses of the major recorded music companies (the `Companies’).
- Having recommended the most appropriate valuation method based on the information available, this paper provides a rough gauge estimate of corresponding adjustments over three years to the underlying profitability and build-up of value in respect of each company’s operating results and provides calculations of the return on turnover and on capital employed which reflect these adjustments, together with any qualifications on their usefulness.
- In the initial brief prepared by the MMC in connection with this exercise the MMC noted that: `the effect of the companies’ prudent accounting policies was that their profits do not reflect any change in the value of their copyrights.’
- There have been a number of major international acquisitions of music businesses in recent years. In all cases the acquiring company was prepared to pay a significant amount in excess of the acquired company’s assets. Inter alia, this excess represents the value of the copyrights of recorded music which is not reflected on the balance sheet.
- [Not reproduced].
- It must be emphasized that the methodologies, and therefore any calculations, are limited by the extent of the information provided to us and by what is possible within any desk top exercise. In order to perform a more detailed and more rigorous evaluation of the underlying profits and assets of the Companies, we would require access to the financial records and catalogues of the Companies.
- In particular we would seek to obtain from the Companies projections of the future earnings of individual copyrights, together with their revenue history. Having established future earnings of the catalogue as a whole, its value would be calculated by discounting the future net earnings stream to obtain its net present value.
- However, given the inherent uncertainty in any projections of future earnings, particularly in respect of popular recorded music, a desk top exercise based on appropriate assumptions can provide a workable solution.
- We have not independently verified any of the information included within this report and express no opinion on its accuracy. Where appropriate we have included an indication of the source of information provided.