The Global GT case (as reported in BVWire's June “Supply-side ERP More Reliable, Says Delaware Chancery Court”) shows that at least some courts have become more sophisticated in their understanding of cost of capital analyses.
There’s been lots of commentary on this issue (BVR’s digest is available at BVLaw)—but, as usual, Roger Grabowski (Duff & Phelps) summarizes the most critical conclusions clearly and thoughtfully in this morning’s ASA Business Valuation E-letter.
The award of approximately $33 million to the petitioners in Global GT LP and Global GT LTD v. Golden Telecom, Inc. was largely hinged on the rate used to discount the expected cash flows of Golden Telecom, Inc. back to present value. Citing “…substantial support in the professional and academic valuation literature”, the Court rejected the use of Ibbotson’s “historical” equity risk premium, and instead opted for a significantly lower "supply-side" equity risk premium. Had the equity risk premium used to construct the discount rate been higher, the resulting award would have been lower.
The Golden Telecom Inc. decision has important messages for those involved in litigated valuation disputes:
- The Courts are quite aware of the most recent valuation research, and the “cook book” methods traditionally used to determine the cost of capital (discount rates) are no longer simply accepted as doctrine; and
- Attorneys and their experts involved in litigated valuation disputes should certainly be more prepared than their opponents are, and should be at least as well-versed in the most recent valuation research as the Court is. To be conversant in the most recent professional and academic valuation literature is absolutely crucial. Those who cannot explain and defend the inputs used to develop their estimates of value will ultimately lose to those who can.