The "Five Stages of Grief" are the steps of the psychologicalprocess by which people deal with unfortunate circumstances. Andnowadays we have seen this process, and the psychological character ofour clients, reflected during our valuation engagements.
Mostly we have experienced this in impairment reviews. AsDr. Valuation, we have seen the typical process play out in variousways:
Stage 1: Denial. "Just because my stock is down 82percent, we are not impaired because I met plan." Or, "My Level 3assets are fine because the only trades happening are not at 'realprices,' and are only distressed sales that don't apply to me."
Stage 2: Anger. "It's not fair! I'm outperforming all ofmy peer group." And, "Why me? I never levered up my balance sheet ordid crazy acquisitions like those guys!"
Stage 3: Bargaining. "If we just suspend mark-to-marketaccounting, my balance sheet will be fine." Or, "My stock price is onlytemporarily 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 mostcommonly: "That's all? I was thinking [or hoping!] for more of awrite-down while we're at it. Are you sure your discount rate is highenough?"
These impairment studies - whether at the entity orreporting unit level (most often for FAS 142 goodwill impairmentreviews) 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 havingto wrestle with our clients about the extent of the impairment. ManyCEOs were not going to readily take an impairment charge on their petacquisition. Now, there has been much less resistance in what wouldpreviously have been Stages 1 to 3. (Not quite enough that many nowthink of us as the "good cop," but at least there is less contention.)
The recent run-up in most stock prices has definitely beena 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 - wasquite a shock to the system. Not only did they have to present theirwrite-offs to their boards, but they also had to wrestle with theirexternal auditors about them, adding enough insult to injury to depressjust about anyone.
There is also certainly a "misery loves company" sentimentnow being experienced in Stage 5. Like a type of collective financialschadenfreude - or the emotional upside of another's misfortune - Stage5 today might also be described as "paired impairment," or "relief incommon impairment."
What stage are you in?
Raymond Weisner is senior vice president at Milwaukee-basedValuation Research Corp. and is responsible for the development andexecution of client engagements.
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