Opinion ID: 2604259
Heading Depth: 1
Heading Rank: 19

Heading: The Department's Stock Value Calculations

Text: The Department's experts, Goodwin and Ifflander, did not attempt to identify a figure for the value of UPC's common stock as a whole and then, derivatively, a figure for the value of the portion of that common stock that represented UP, by going directly to the applicable figures for stock prices. Instead, the two took an indirect approach to the problem by creating two scenarios, Case I and Case II. Under Case I, the appraisers did not start with stock or stock prices. Instead, they derived P/E multiples for the railroad only, based on an average of P/E multiples derived from what they considered to be comparable railroads. Goodwin and Ifflander described the process this way: [The Case I approach d]irectly value[s] the rail equity of the subject [UP] by applying financial ratios from a group of comparable companies. Comparable companies are those in the same line of business (and therefore business risk) as the subject company   . Comparable companies are other railroads as determined by financial services such as Value Line and Standard and Poor's. (Exhibit D-3, p 59.) Goodwin and Ifflander also developed three other multiples, based on cash flow, revenue, and book value for what they deemed to be comparable railroad companies. The appraisers then applied those respective industry-derived ratios to the analogous financial data for UP ( i.e., to UP's reported earnings, revenues, cash flows, and book value). The results were then averaged to obtain an equity value for UP's common stock under Case I. The following tables illustrate the process and the outcome: CASE I: UNION PACIFIC EQUITY VALUE1983 Unit Railroad Data Multiple Value Cash Flow 407,745,000 5.00 2,038,725,000 Revenue 3,623,897,000 0.70 2,536,727,900 Book Value 2,690,118,000 0.80 2,152,094,400 Earnings 209,598,000 8.00 2,101,082,825 Average Railroad Equity Value = 2,061,671,248 CASE I: UNION PACIFIC EQUITY VALUE1984 Unit Railroad Data Multiple Value Cash Flow 375,462,000 7.50 2,815,965,000 Revenue 3,608,709,000 1.10 3,969,579,900 Book Value 2,861,086,000 1.15 3,290,248,900 Earnings 175,502,000 12.50 2,193,775,000 Average Railroad Equity Value = 3,067,392,200 (Exhibit D-3, p 60.) [16] In Case II, the appraisers valued each subsidiary of UPC by calculating a P/E multiple for that subsidiary and then applying that multiple to the previous year's earnings (as reported by UPC to its stockholders) for that subsidiary. The individual subsidiaries' values were then totalled and scaled up or down proportionately to a point at which their total value equalled the estimated value of all the outstanding shares of UPC common stock. The UPC stock price then was calculated by multiplying the average monthly price from the fourth quarter of each year by the shares outstanding on December 31 of 1982 and 1983. These calculations produced the following results: CASE II: UNION PACIFIC EQUITY VALUE1983 Segment Earnings P/E Price RR 209,598,000 8.0 1,676,784,000 Oil and Gas 125,156,000 11.6 1,451,809,600 Mining 47,289,000 10.9 515,450,100 Land 21,896,000 8.0 175,168,000 Corporate 285,125,000 Calculated UPC Equity Value 4,104,336,700 Shares Outstanding 114,318,556 Average Monthly Price $44.90 ____________ Average Price of UPC Common 5,132,903,164 Market Price to Computed Price 125.06% Calculated Railroad PriceAdjusted 2,096,986,070 CASE II: UNION PACIFIC EQUITY VALUE1984 Segment Earnings P/E Price RR 175,502,000 12.5 2,193,775,000 Oil and Gas 131,000,000 16.3 2,135,300,000 Mining 57,000,000 22.3 1,271,100,000 Land 8,000,000 8.0 64,000,000 Corporate 688,000,000 Calculated UPC Equity Value 6,352,175,000 Shares Outstanding 114,761,691 Average Monthly Price $52.60 ____________ Market Price to Computed Price 95.03% Calculated Railroad PriceAdjusted 2,084,744,383 (Exhibit D-3, pp 63, 64). After the values from Case I and Case II were derived, Goodwin and Ifflander then compared and correlated the two into a railroad equity value. To that value they added the values for the preferred stock and long-term debt, and subtracted from the result the estimated value of non-operating property. The result was their value for the taxable railroad subsidiary of UPC: $3,822,789,572 for 1983; $4,414,415,141 for 1984. Goodwin and Ifflander's calculations raised a number of issues: