ERP update – delayed response to a blog reader

I reader asked why so many practitioners use high Equity Risk Premiums in their valuations and fairness opinions.

In particular, he mentioned a specific assumption set he had seen including:

  • ERP of 6.8%
  • company specific risk premium of 4%

He also commented on how haphazard the use of risk premiums can be and referenced a few sources I’ve used myself.

The ERP of 6.8% does seem high. However, it really isn’t possible to comment on the specifics of the company specific risk premium without knowing the company.

Although I haven’t updated my research on this in a few years, in my own work I still generally stick with a range of 3% to 5% for an ERP, before considering company specific factors, liquidity, and so on. Historically / empirically estimated ERPs shouldn’t change frequently since the time series used is long. Another few years on a 20 year estimation period shouldn’t have much impact.

Why some practitioners persist in using too-high ERP estimates

This delves into the area of philosophy, but here are my top reasons (a post from 2011 also covers this): Continue reading “ERP update – delayed response to a blog reader”

Skype Employee Share Options That Weren’t

I deal with employee share options frequently. Mostly from a valuation perspective, but also from structuring performance and vesting conditions to retain an incentivise key staff. Now I can’t say these decisions are never controversial, but without fail the intention of the employer is to provide a fair deal to staff.

That is until I heard about Skype’s apparent shenanigans. Not only does it appear they may have fired several executives prior to the purchase by Microsoft (allegedly to escape paying on unvested options as part of typical corporate takeover provisions in Employee Share Option agreements), but if you read this article about Skype employees who left and received no value for in-the-money, vested options, you start to wonder whether anyone will ever work for or with Silver Lake again. Continue reading “Skype Employee Share Options That Weren’t”