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Allocation of purchase price

I was recently involved in an exercise to allocate the purchase price following an acquisition, and got involved in a debate with the client, as to how much could be realistically allocated to certain intangibles, and how much would end up in goodwill. One asset that seemed very judgmental was the value of an acquired email customer list: the number of names was very extensive, and the addresses were valid, but the response rates experienced in varioous prior mailing campagns had been very low. The question was, do non responsive "customer" email addresses have value if they havnt responded, and even worse, have not opened the emails they have received?

This valuation challenge was miles away from the usual accounting  problems we financial types normally face, and it was an interesting debate.  And we concluded that even non responsive email addresses have value!  I have posted a summary of our discussions on the resource page. I would be interested to hear of any thoughts on this valuation challenge.

Answers

Scott Lane
Title: CFO and CRO
Company: TPG Credit Management
(CFO and CRO, TPG Credit Management) |

I would have gone with an expected value approach. For example: say there were 100 customers, each could be worth up to 5k with a full response, but your history suggests you will get a 20% response. The result would be value of $100,000 (100 x $5,000 x 20%) ignoring time value of money. You could of course make that a more granular analysis with different probabilities and values for different cohorts / types of customers.

Peter Rennard
Title: Principal
Company: SBR Group
(Principal, SBR Group) |

There is perhaps a more fundamental issue with these customer lists if there value is being determined for their "emailability." There are now in place extensive restrictions on how mass mailings using email are permitted to happen including the requirement that the addressee be allowed to opt out of receiving the email (has to be allowed to unsubscribe). There are other restrictions on using email lists that could severely impact the claimed value of this list.

If the client is claiming a value due to these lists, I believe you'll need to consult with an expert on the legal use of such lists. The guidance provided by Constant Contact is a good place to start.

Topic Expert
Marc Schwartz
Title: Partner
Company: Schwartz International
(Partner, Schwartz International) |

I think there have been some very good points made. Another issue is that the intangibles acquired should be amortizable for tax purposes while some intangibles, such as goodwill, are not expensed for financial statement purposes unless impaired. In many of our transactions, the amortization can yield significant cash-tax benefits.

Topic Expert
Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

Hi Mark,

I wanted to thank you for your inputs on this subject, and I accept your points about conversion ratio, and potential value of revenue flows that may be derived from a customer list. The fact is that traditional customer lists have a historic acquisition cost of sales rep salaries, expenses, and advertising, and will have significant costs to pursue post acquisition revenue opportunities, resulting in a lower present value of the contribution and limited appetite for repeated unsuccessful sales attempts. With email lists, the cost of pursuing opportunities is so minimal that there is no reason not to continue mailing, even if only one incremental contact is established per mailing. Because the cost is so low, and the economics allow repeated mailings to the unresponsive tail, the present value of the email list may well exceed a traditional mailing list. Is this spam or persistant customer communication? So long as there is a chance of catching a potential customer at the right time on the right day, in the right mood and with five seconds to respond to the message, then I say there is value.

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