In last week’s BVWire, we reported on the Delaware Chancery’s decision in Laidler v. Hesco Bastion Environmental, Inc. The case arose out of a short-form merger (incorrectly identified as a “short-term” merger) and drew attention because of the court’s adoption of the DCCF analysis.
Readers’ comments: In its ruling, the court acknowledges its lack of familiarity with the methodology involved in a DCCF analysis. Jay B. Abrams (Abrams Valuation Group Inc.) points out that, even if the methodology is not familiar to the court, it is a familiar methodology. The DCCF “is merely a DCF with the assumption that growth in cash flow is a constant percentage after the year 1 forecast,” he says. “It is no different than applying the Gordon Model multiple to the year n forecast (where n is most often equal to 6) to calculate the PV of the reversion period, except that in the DCCF, the reversion period starts immediately. Thus, the DCCF is a DCF for an already mature firm, where there is no need to calculate the PV of Cash Flows of the first n years separate from n + 1 to infinity.”
Also, the point was made that there was no reliable market price because this was a short-form merger, but that’s not so. "There was no market simply because it was a private company,” says Gil Matthews (Sutter Securities Inc.). “In Glassman v. Unocal Exploration, it was a short-form merger squeezing out a 2% minority, but there was an active public market for the minority shares. Short-form mergers are frequently used to squeeze out publicly-traded minorities in second-stage mergers after tender offers.”
Matthews also says that “the court applied an industry risk premium in its discount rate calculation. I believe this is only the second time that the Court of Chancery explicitly used it—the other was in Del. Open MRI v. Kessler.”
The case digest, which appears in the July edition of Business Valuation Update, includes an extensive discussion of the parties’ and the court’s selection of the risk premia. The full court opinion will be available soon at BVLaw. The case is Laidler v. Hesco Bastion Environmental, Inc., 2014 Del. Ch. LEXIS 75 (May 12, 2014).
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