The "Five Stages of Grief" are the steps of the psychological process by which people deal with unfortunate circumstances. And nowadays we have seen this process, and the psychological character of our clients, reflected during our valuation engagements.
Mostly we have experienced this in impairment reviews. As Dr. Valuation, we have seen the typical process play out in various ways:
Stage 1: Denial. "Just because my stock is down 82 percent, we are not impaired because I met plan." Or, "My Level 3 assets are fine because the only trades happening are not at 'real prices,' and are only distressed sales that don't apply to me."
Stage 2: Anger. "It's not fair! I'm outperforming all of my peer group." And, "Why me? I never levered up my balance sheet or did crazy acquisitions like those guys!"
Stage 3: Bargaining. "If we just suspend mark-to-market accounting, my balance sheet will be fine." Or, "My stock price is only temporarily depressed - just give me till Q3."
Stage 4: Depression. "My bank covenants! My bonus pool! My board member who never liked that deal anyway!"
Stage 5: Acceptance. "We'll bite the bullet." And, "Everyone's in the same boat, so I'm feeling OK about it." And most commonly: "That's all? I was thinking [or hoping!] for more of a write-down while we're at it. Are you sure your discount rate is high enough?"
These impairment studies - whether at the entity or reporting unit level (most often for FAS 142 goodwill impairment reviews) or at the individual asset levels (under FAS 144 and FAS 157) - have definitely seen the shifting tides of time.
Two years ago, we wore the hat of "bad cop," often having to wrestle with our clients about the extent of the impairment. Many CEOs were not going to readily take an impairment charge on their pet acquisition. Now, there has been much less resistance in what would previously have been Stages 1 to 3. (Not quite enough that many now think of us as the "good cop," but at least there is less contention.)
The recent run-up in most stock prices has definitely been a relief to many, and taken many back from the edge of Stage 4, Depression. But for many, their first-quarter reporting of impairment - often driven by stock prices that were then at multi-year lows - was quite a shock to the system. Not only did they have to present their write-offs to their boards, but they also had to wrestle with their external auditors about them, adding enough insult to injury to depress just about anyone.
There is also certainly a "misery loves company" sentiment now being experienced in Stage 5. Like a type of collective financial schadenfreude - or the emotional upside of another's misfortune - Stage 5 today might also be described as "paired impairment," or "relief in common impairment."
What stage are you in?
Raymond Weisner is senior vice president at Milwaukee-based Valuation Research Corp. and is responsible for the development and execution of client engagements.
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