New Delaware chancellor bucks trend away from DCF

BVWireIssue #155-4
August 26, 2015

Valuators know that, in statutory appraisal actions, the discounted cash flow (DCF) method is the method of choice in the Delaware Court of Chancery. The court’s recent decision in Owen v. Cannon, written by the new chancellor, Andre Bouchard (see the August 19 issue of BVWire), fits the pattern. At the same time, it runs counter to a recent trend of favoring a market-based analysis to arrive at a reliable indicator of value.

Against recent practice: In Owen, Chancellor Bouchard notes that the DCF methodology “has featured prominently in this Court because it is the [valuation] approach that merits the greatest confidence within the financial community.” Of course, the DCF approach only works when there are reliable cash flow projections, as the court found there were in this case. Here, both experts proposed a DCF model but differed on several inputs. The two most important factors responsible for the substantial value gap were the appropriate projections and tax affecting. Rather than adopting one expert’s analysis in its entirety, the court decided to conduct its own analysis.

Owen contrasts with a suite of recent decisions, including LongPath Capital v. Ramtron International Corp., In re, and Merlin Partners LP v. AutoInfo Inc., in which the Chancery rejected both the income and market approaches and pegged fair value to merger prices. Whether Owen assumes a greater meaning in terms of valuation methodology remains to be seen. Its significance in terms of tax affecting is already clear.

Find an extended discussion of Owen v. Cannon, 2015 Del. Ch. LEXIS 165 (June 17, 2015), in the October issue of Business Valuation Update. The court’s opinion will be available soon at BVLaw.

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