Valuation Effect of Losing a Large Customer Contract

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In an acquisition in the heavy manufacturing sector, the purchaser sued the seller seeking rescission damages.

In an acquisition in the heavy manufacturing sector, the purchaser sued the seller seeking rescission damages. The plaintiff retained Cornerstone Research and Professor Gordon Klein of the University of California, Los Angeles, to estimate the economic impact of the plaintiff’s claims.

To evaluate the effects of the loss, Professor Klein modified the plaintiff’s valuation model by introducing various sensitivities to determine the appropriate purchase price had the relevant information been disclosed. Professor Klein also collected data on and analyzed comparable transactions (in terms of both size and time frame) to further support his valuation.

Professor Klein’s analysis demonstrated that the loss of the contract substantially changed the financial outlook of the acquired company and significantly damaged the value proposition for the plaintiff going forward. Professor Klein also estimated the financial impact on the plaintiff of rescission of the purchase agreement.