“This Court has consistently recognized the importance of management’s contemporaneous projections because the outcome of a DCF analysis depends heavily on the projections used in the model,” declared the Delaware Chancery Court in S. Muoio & Co. LLC v. Hallmark Entertainment Investments, 2011 WL 863007 (March 9, 2011). “Valuations that have ignored or altered management’s contemporaneous projections are sometimes completely discounted,” the court warned. Indeed, here the financial expert “had no legitimate reason for abandoning management projections in favor of his own more optimistic estimates,” simply because management’s numbers were “too low,” the court said, and rejected the expert’s DCF in its entirety.
In all cases, trust, but verify. In another case, the DE Bankruptcy Court applauded the debtors’ experts for analyzing two sets of management projections developed during reorganization, one that focused on “base case” estimates and another that assumed “worst” or contingency estimates, and then weighting them accordingly. (See In re Spansion, Inc., 426 B.R. 114 (2010)). Finally, in a third case concerning lost profits calculations, a federal district court faulted the damages expert for failing to independently analyze management sale estimates, citing several 7th Circuit cases that excluded evidence when the expert “relied on the party’s own internal financial projections without knowing the validity of the underlying data and assumptions upon which [they] were based.” (See Victory Records, Inc. v. Virgin Records Amer., Inc., 2011 WL 382743 (N.D. Ill.)(Feb. 3, 2011). Read the digests of all three cases in the June 2011 Business Valuation Update; the courts’ opinions will be posted soon at BVLaw.
Get the hands-on tools for analyzing the all-important management projections. Join Christine Baker (ParenteBeard) for the May 5th “Advanced Workshop on Management Projections and Forecasts.” Through BVR’s exclusive interactive web-workshop format, attendees can follow Baker’s in-depth tutorial, case-studies, and examples via a live, interactive web connection. Cynthia Rubin, Esq. (Flemming Zulack Williamson Zauderer) will provide insights into relevant case law as well as what the courts and attorneys are looking for when financial experts adopt, adjust, or substitute alternatives for management’s projections. CPE and CLE are available.
Please let us know
if you have any comments about this article or enhancements you would like to see.