Delaware Court Of Chancery Uses DCF Analysis To Arrive At Fair Value Below Deal Price, Even Though Deal Process Was Not “Dell Compliant”
On February 23, 2018, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery ruled, based on his own discounted cash flow (“DCF”) analysis, that the fair value of AOL Inc. (“AOL”) was below the deal price paid by Verizon Communications Inc. (“Verizon”) to acquire it. In re: Appraisal of AOL Inc., C.A. 11204-VCG. The Court reached this conclusion after finding that the deal process was not “Dell Compliant”—a newly coined phrase—because various deal protections and statements by AOL’s CEO may have discouraged other potential buyers who would have paid more to acquire AOL. Accordingly, the Court afforded no weight to the deal price in its valuation of AOL but rather used that price as a “check” on his DCF analysis.
AOL and Verizon began negotiations in January 2015, which led to the announcement of a deal at $50 per share on May 12, 2015. Although AOL was widely known to be in play during this time and entertained discussions with several other potential buyers in parallel with Verizon, the Court concluded that the merger agreement’s no-shop and matching right provisions, paired with comments by AOL’s CEO in a televised interview the day after the deal with Verizon was announced (explaining why AOL had not run an auction process and expressing commitment to doing the Verizon deal), communicated to other potential buyers that the deal was “done.” Those factors suggested to Vice Chancellor Glasscock that the deal price should not be afforded substantial weight (as it was in Dell) because AOL’s actions did not create a competitive environment in which the deal price would reflect the efficiency of the market and thus the transaction was not “Dell Compliant.”
The Court instead determined fair value using a DCF analysis. Petitioners claimed that AOL’s fair value was 28% greater than the deal price, but the Court determined that the fair value was actually lower, $48.70 per share. In reaching this conclusion, Vice Chancellor Glasscock began by adopting the long-term plan projections used by management (and AOL’s expert) and refining AOL’s expert DCF analysis in two respects: first, by adding to the long-term plan value a pending acquisition that the Court deemed moderately accretive to the company (because it was highly likely to close and to add value), and second, by adjusting slightly upward the perpetuity growth rate based upon the Court’s view that AOL’s proposed rate did not adequately account for those segments of the company in a “hypergrowth” phase. Even though the Court’s calculations yielded a lower value than the deal price, Vice Chancellor Glasscock explained that this discrepancy may have be the result of certain “synergies” that were shared with the seller in the deal and which should not be included in a pre-deal fair value analysis.
This application of Dell differs significantly from Vice Chancellor Laster’s application of Dell in the recent Aruba Networks’ appraisal decision. Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Ch. Jan. 26, 2018). In Aruba, Vice Chancellor Laster opined that Dell compelled the trial court to ignore evidence of a less-than-robust deal process and undervaluation, as opposed to Vice Chancellor Glasscock’s emphasis in the present case on the importance of an open deal process. These divergent interpretations of Dell invite further comment on the matter from the Delaware Supreme Court.