February 18, 2020

Appraisal: Score One for DCF!

Every now and again, the Delaware Chancery Court issues an appraisal decision that reminds everybody that despite the trend toward a “deal price minus synergies” approach to fair value, discounted cash flow analysis isn’t dead yet. Vice Chancellor Slights’ decision in Manichaean Capital v. SourceHOV Holdings, (Del. Ch.; 1/20), is a case in point.  This recent post on the “Appraisal Rights Litigation Blog” summarizes his ruling:

In a recent appraisal decision, Delaware Vice Chancellor Slights III awarded investors a 12% premium above deal price, fully adopting the discounted cash flow analysis Petitioners tendered, except for one minor adjustment. The case involved a three-way business combination of a privately held target turned public without minority shareholder approval.

The court eschewed the use of market evidence because SourceHOV did not trade in an efficient market, and there was no “real effort to run a ‘sale process.’” Instead, the Vice Chancellor wrote, “I have more confidence in Petitioners’ presentation than I have in my own ability to translate any doubts I may have about it into a more accurate DCF valuation.”

At one point in his opinion, the Vice Chancellor commented on just how much courts detest sorting through competing DCF analyses.  In doing so, he may have also provided an insight into one of the reasons why this analytical technique has fallen out of favor in Delaware appraisal cases:

After completing their valuation analyses based on several approaches, the experts agree that a discounted cash flow analysis (“DCF”) is the most reliable tool to determine SourceHOV’s fair value. Of course, they disagree on multiple crucial inputs in their DCF analyses, and these disagreements have placed the Court in the now familiar position of grappling with expert-generated valuation conclusions that are solar systems apart. Good times. . . .

John Jenkins