Remember our recent report regarding the Delaware Chancery Court’s recommendation in the In re Hanover case to use more than one valuation methodology in business appraisal actions? (See BVWire #98-1) Well, now a new “entire fairness” decision expands on the dicta in Hanover. Even if the DCF is a commonly accepted and perhaps even “generally preferred” valuation methodology, the DE Chancery said, (in an opinion written by Vice Chancellor Chandler, who also wrote Hanover), “it is only reliable when it can be verified by alternative methods…or by real world valuations, including especially, valuations performed by potential third-party buyers,” the court explained:
Thus, it is preferable to take a more robust approach involving multiple techniques—such as a DCF analysis, a comparable transaction analysis…and a comparable companies analysis…to triangulate a value range, as all three methodologies individually have their own limitations.
In this case, the plaintiff’s expert had rejected a comparable companies and comparable transactions analysis, because he said their conclusions were “absurdly low” in comparison to his DCF. The court ended up rejecting his DCF in its entirety, however, because its “outlier” results reinforced the court’s concerns that it lacked credibility; so did its rejection of management projections and protracted growth assumptions. Read the entire digest of S. Muoio & Co., LLC v. Hallmark Entertainment Investments, 2011 WL 863007 (Del. Ch.)(March 9, 2011) in the June 2011 BVUpdate; the court’s decision is currently posted at BVLaw.
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