Merger price more accurate than DCF-based valuations, says Delaware Chancery in 'Huff Fund

Huff Fund Investment Partnership v. CKx, Inc., 2013 Del. Ch. LEXIS 262 (Oct. 31, 2013)

Recently, the DE Chancery rejected valuations from two notable experts based on the discounted cash flow (DCF) analysis. "DCF, in theory, is not a difficult calculation to make—five-year projections combined with a terminal value are discounted to their present value to produce an overall enterprise value," Vice Chancellor Glasscock explained. But it only works when the projections are reliable. In this instance, they were not, the court found. The problems had to do with the unique nature of the target company, which owned the rights to "iconic" entertainment properties, and, specifically, with the unpredictable income stream from the company's main asset—rights to "American Idol." Uncertainty about future income rendered the experts' cash flow analyses "illusory," the court said. It concluded that the sales price in this case was a much more reliable indicator of value. 

Considering the Chancery's often-stated preference for the DCF analysis, what should one make of this decision? Does it suggest a change in valuation methodology or is it specific to the facts of the case? To find out how an experienced valuator sizes up the decision, read Jim Alerdingstake here.