Provocative Delaware Chancery decision favors stock price over other fair value indicators
After the Delaware Supreme Court struck down the Court of Chancery’s fair value determinations in DFC Global and Dell, the lower court recently sought to apply the high court’s directives in another statutory appraisal proceeding. The Supreme Court said that, when there’s an efficient market, “the collective judgment of the many,” reflected in the deal price, provides a better gauge of fair value than a single analyst’s discounted cash flow analysis. But what if there is more than one market indicator, as happened in the recent Court of Chancery case? Neither DFC Global nor Dell addressed this possibility, and the Court of Chancery’s resolution of the issue is likely to trigger more litigation.
Synergy-driven merger: In May 2015, Hewlett-Packard (HP) acquired Aruba Networks for $24.67 per share. This was a synergy-driven transaction. As part of the statutory appraisal proceeding, the Court of Chancery found the deal price minus synergies was $18.20 per share. In contrast, the 30-day average unaffected market price was $17.13 per share.
The parties’ trial experts offered DCF-based valuations. While the petitioner expert’s model “appears to be sound,” the court was concerned about the degree to which the $32.57-per-share price diverged from market indicators. The company’s expert prepared a number of valuations. While his final value—$19.75 per share—was relatively close to the market evidence, the court questioned the “methodological underpinnings” of the analyses. It disregarded the experts’ DCF results and did not perform its own valuation.
The choice of most reliable indicator of fair value came down to stock price versus deal price minus synergies. The court, finding this was an arm’s-length deal and there was an efficient market, said the stock price represented “direct evidence of the collective view of market participants as to Aruba’s fair value.” It was preferable to the deal price, which required adjusting for synergistic value as well as value related to the “reverse agency costs.” Vice Chancellor Laster, who wrote this opinion, as well as the original Dell opinion, thought the high court’s recent opinions militated against the “judgment-laden exercise of backing out synergies.” However, Vice Chancellor Laster also acknowledged that “no one argued for this result.” The court’s fair value was below the deal-price-minus-synergies and the company expert’s DCF-based result, not to mention the petitioners’ proposed value. Stay tuned.
A digest of Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 2018 Del. Ch. LEXIS 52 (Feb. 15, 2018), and the court’s opinion will be available at BVLaw. For a discussion of Aruba, DFC Global, Dell, and other noteworthy recent cases, tune into BVLaw Case Update, March 27, featuring Jim Alerding (Alerding Consulting LLC) and BVR’s legal editor, Sylvia Golden.
“We do not foresee any material change in the risk-free rate or equity risk premiums,” writes Chris Mellen, a managing director at Valuation Research Corp., in the April issue of Business Valuation Update. The article, which is in Q&A format, is part of a series on impacts of the new tax law on business valuation.
D&P’s view: During a recentwebcast, Roger Grabowski and Carla Nunes (both with Duff & Phelps) discussed the impact of the new tax law on the cost of capital. A question from the audience was: Do you expect to increase the D&P recommended U.S. equity risk premium (ERP), which is currently 5.0%, as a result of tax reform? The ERP has “held pretty steady” since the end of 2017, according to Grabowski, who pointed out Duff & Phelps is constantly monitoring it and will let everyone know whether and when there is a change. The other speakers on the webcast were D&P’s Nate Levin and Michelle Johnson, who talked about other valuation implications of the new tax law. To watch a free replay of the webcast, click here.
Extra: Attend a free webinar: Duff & Phelps Cost of Capital Navigator: Q&A with Jim Harrington, on March 29 from 10 a.m.-11:15 a.m. PT
(1 p.m.-2:15 p.m. ET). More details soon on BVR’s Upcoming Training Events page.
The website of Professor Aswath Damodaran (New York University Stern School of Business) has been converted into an app for the iPad and the iPhone (download it here). You’ll find a treasure trove of valuation data (updated annually), tools, and the classes he teaches. There’s a YouTube video where he talks about the new app, and he welcomes any and all feedback!
NACVA to launch certificate in healthcare valuation
Health Capital Consultants (HCC) is developing a healthcare valuation training program for the National Association of Certified Valuation Analysts (NACVA) that will launch in 2018. The Certificate of Educational Achievement (CEA) for Advanced Education in Healthcare Valuation training program will consist of 10 four-hour course modules (eight core courses and two electives). For more details, click here.
Unlike accountants and lawyers, valuation professionals do not have common education requirements, a single identification in the marketplace, a single set of standards, nor a disciplinary mechanism, pointed out Mark Zyla (Acuitas) at the Southeast Chapter of Business Appraisers (SECBA) conference in Atlanta. In response to criticisms about fragmentation of the profession, the new Certified in Entity and Intangible Valuations (CEIV) credential for fair value for financial reporting has been developed to bring more consistency to the profession and reduce the number of questions auditors raise about the valuations. Plus, new guidance is being issued that addresses fair value measurements. Zyla is the author of Fair Value Measurements: Practical Guidance and Implementation, 2nd edition (Wiley) among other publications and articles on fair value.
Upcoming workshop: Zyla will conduct the AICPA Fair Value Measurements Workshop, a two-day event, on April 26-27 in New York City. He will give an update on the new exposure drafts from the PCAOB, changes to testing goodwill for impairment, latest best practices for valuing intangible assets in a business combination, measuring fair value for alternative investments and other equity instruments, and more. Plus, the workshop will qualify for a substantial part of the credit for the education requirements for the CEIV credential—you can complete the credential with some online modules. We attended this workshop last year and plan to do so again this year. For more information, click here.
Owners of small and midsize enterprises (SMEs) are getting good prices for their companies even though they're not spending a lot of time preparing their firms for sale. That's the finding of the “Q4 2017 Market Pulse Report,” which was released by researchers at Pepperdine University's Graziadio School of Business and two industry groups, the International Business Brokers Association and the M&A Source. Owners who sold their companies for less than $500,000 got 3% more than they originally asked for, according to the survey. Small and midsize businesses overall, with sales prices ranging up to $50 million, fetched 99% of their asking price compared with 90% a year earlier. The survey questioned 264 business brokers and M&A advisers.
Improvements needed to business combinations reporting in U.K.
In its annual review of corporate reporting, the UK Financial Reporting Council (FRC) has highlighted a number of areas in which it is looking for future improvements, including business combinations. The areas of particular difficulty are:
The disclosure of estimation uncertainty on the measurement of contingent consideration;
The completeness of intangible assets other than goodwill identified; and
The treatment of contingent consideration linked to future employment as remuneration rather than contingent consideration (as required by IFRS 3.B55).
Preview of the April 2018 issue of Business Valuation Update
Here’s what you’ll see:
“Tax Reform Puts Broader Spotlight on Reasonable Comp” (BVR Editor). Ron Seigneur and Kevin Yeanoplos, the co-authors of a guide on reasonable compensation, explain how tax reform has put more focus on the matter.
“New Twists and Turns in BV Highlight Annual SECBA Conference” (BVR Editor). Topics you don’t see at other conferences (such as Bitcoin and business insurance) and top-notch speakers added up to an excellent event hosted by the Southeast Chapter of Business Appraisers (SECBA) in Atlanta.
“Valuation Experts Clash Over Analysis of Transactional Data” (BVR Editor). Ronald D. Rudich (Gorfine Schiller & Gardyn) and Howard A. Lewis (ENVRS and RiskGuidance Co. LLC) take issue with a number of points Toby Tatum (Alliance Business Appraisal) presented during a BVR webinar that he presented on the use of the BIZCOMPS database of private company transactions. Tatum responds to each counterpoint.
People: Robert Cunningham has been named managing member of Ridgeland, Miss.-based GranthamPoole, succeeding Gregory Markow, who was managing member since 2013; Cunningham is a founding member of the firm … Kevin Dancey has been named the next CEO of The International Federation of Accountants (IFAC), succeeding FayezChoudhury, whose term expires at the end of the year … Jeffrey Tarbell (Houlihan Lokey) will host a forum, “The Past, Present and Future of the Business Valuation Profession,” at the ASA NorCal chapter in San Francisco on May 3; speakers are Robert Schweihs (Willamette Management Associates), Roger Grabowski (Duff & Phelps), and Mark Zyla (Acuitas Inc.) … Leanne Robison was recently promoted to data analytics manager at Workman Forensics (Tulsa, Okla.).
Firms: Stephens Inc. (Little Rock, Ark.) announced that Dallas-based Blackhill Partners has joined the firm to lead its new North American restructuring advisory business … Briggs & Veselka expands in Houston with the acquisition of William M. Shields there; Bill Shields will join the firm as a shareholder, and all the firm’s professional employees will come on board … Naperville, Ill.-based Sikich opened a new, expanded office in Chicago to house the firm’s forensic and valuation services practice along with the investment banking and public relations practices … Mazars USA LLP has opened a new office in Los Angeles, expanding its existing footprint in California.
An overview of the regulatory environment governing the transfer pricing of intangibles, the valuation methods used by transfer pricing specialists, enforcement and controversy related to intangibles transfer pricing, and specific case studies.
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