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TIMELY NEWS, ANALYSIS, AND RESOURCES FOR DEFENSIBLE VALUATIONS
Vol. 24, No. 10, October 2018
BUSINESS VALUATION UPDATE
bvresources.com
Reprinted with permissions from Business Valuation Resources, LLC
By Gilbert E. Matthews, CFA
Sutter Securities Inc. (San Francisco, Calif., USA)
Delaware appraisal decisions in recent years have
effectively endorsed the concept that the price
paid in an arm’s-length transaction is “fair value”
when there has been a “robust” sales process.
A series of decisions since 2013, shown in the
exhibit, have arrived at appraisal values at or
close to the deal price in such situations. The two
2016 Court of Chancery decisions that arrived at
values above the deal price in arm’s-length trans-
actions (Dell1 and DFC Global
2) were reversed
and remanded.
In contrast, Vice Chancellor Travis Laster’s Febru-
ary 2018 Aruba Networks decision3 appraised the
company at 69.4% of the transaction price. Given
the substantial synergies that the buyer antici-
pated from the transaction, it was reasonable to
1 In re Appraisal of Dell Inc., 2016 Del. Ch. LEXIS 81
(May 31, 2016); rev’d, Dell Inc. v. Magnetar Global
Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017).
We include the Dell case as arm’s length; the Supreme
Court said, “[T]his was not a buyout led by a control-
ling stockholder. Michael Dell only had approximately
15% of the equity. He pledged his voting power
would go to any higher bidder, voting in proportion to
other shares.” [p. 30]
2 In re Appraisal of DFC Global Corp., 2016 Del. Ch.
LEXIS 103 (Del. Ch. July 8, 2016); modied, C.A. No.
10107-CB [unpublished] (Del. Ch. Sept. 14, 2016);
rev’d, DFC Global Corp. v. Muireld Value Partners,
L.P., 172 A.3d 346 (Del. 2017).
3 Verition Partners Master Fund Ltd. v. Aruba Networks,
Inc., 2018 Del Ch. LEXIS 52 (Del. Ch. Feb. 15, 2018)
(“Aruba I”); reargument denied, 2018 Del. Ch. LEXIS
160 (Del. Ch. May 21, 2018) (“Aruba II”).
conclude that fair value in this case was substan-
tially lower than the negotiated price. However,
it is troubling that the court based its appraisal
solely on the unaffected market price:
In this case, the best evidence of Aruba’s
fair value as a going concern, exclusive of
any value derived from the merger, is its
thirty-day average unaffected market price
of $17.13 per share. I recognize that no one
argued for this result. I also recognize that
the resulting award is lower than Aruba’s
proposed gure of $19.75 per share. That
gure relied on its expert’s discounted cash
ow analysis, which this decision has found
unpersuasive.4
The court based its valuation on the average
price during the 30 days prior to a Bloomberg
News article on Feb. 25, 2015, that disclosed the
pending transaction.
The vice chancellor explained that his decision
relied on the Supreme Court’s rulings in Dell
and DFC Global, noting that the Supreme Court
had discussed the efcient market theory5 and
stating, “The Delaware Supreme Court’s deci-
sions in Dell and DFC endorse using the market
price of a widely traded rm as evidence of fair
value.”6 However, neither decision had directed
the lower court to consider the preannouncement
4 Aruba I at *107. Although the decision considers
synergies (discussed later in this article), the valuation
is based solely on unaffected marker price.
5 Ibid. at *2, fn. 5; *47; *58; *59, fn. 307; *65; *98, fn. 466.
6 Aruba I at *1-*2 (citations omitted).
Aruba Networks: Should Appraisals Rely
on Unaffected Market Price?
2 Business Valuation Update October 2018 Business Valuation Resources
ARUBA NETWORKS: SHOULD APPRAISALS RELY ON UNAFFECTED MARKET PRICE?
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price on remand and, as the Aruba decision
points out, “The Delaware Supreme Court’s de-
cisions in Dell and DFC endorse using the deal
price in a third-party, arm’s-length transaction as
evidence of fair value.”7
Appraisal value in Delaware and in most other
states is “fair value,” generally described as the
value of the company as a going concern, exclud-
ing any appreciation arising from the transaction,
with no minority or marketability discount. In con-
trast, Ohio uses “fair cash value.”8 This unusual
appraisal statute and Ohio case law effectively
limit shareholders seeking appraisal to the prean-
nouncement value of their shares, i.e., unaffected
market value. A seminal article on appraisal criti-
cized this standard:
[T]he appraisal remedy [is] useless to mi-
nority shareholders of publicly traded
[Ohio] corporations…. No matter how low
the merger price, it will invariably exceed
the prevailing market price prior to the an-
nouncement of the merger; thus no sen-
sible shareholder would elect to dissent.9
The Aruba decision is similarly awed in relying
on preannouncement market prices.
Under Delaware law, the appraisal value should
be determined as of the closing date of the
transaction. The Aruba decision states that
“neither side proved that Aruba’s value had
changed materially by closing, so this decision
sticks with the unaffected market price and
the deal price less synergies.”10 Although the
market did not move materially between Febru-
ary 24 and the May 18 closing date (the S&P 500
was up a mere 0.6% based on both the closing
price and the 30-day average), the “unaffected
7 Aruba I at *2.
8 Ohio Rev. Code Ann. §1701.85(b).
9 Barry M. Wertheimer, “The Shareholders’ Appraisal
Remedy and How Courts Determine Fair Value,” 47
Duke L. J. 613, 656 (1998), fn. 207.
10 Aruba I at *53.
bvresources.com October 2018 Business Valuation Update 3
ARUBA NETWORKS: SHOULD APPRAISALS RELY ON UNAFFECTED MARKET PRICE?
Reprinted with permissions from Business Valuation Resources, LLC
market price” did not reect a material posi-
tive factor—higher-than-expected earnings—not
then known by the market. The Vice Chancellor
wrote:
Contrary to the market’s perception, Aruba
management knew internally that Aruba was
having an excellent quarter and would beat
its guidance. But, rather than correcting the
market’s perception, Aruba management
proposed to time the announcement of the
merger to coincide with the announcement
of Aruba’s February 2015 earnings…. In this
case, Aruba management believed that an
increase in the stock price would hurt their
chances of getting the deal approved. Pro-
viding both pieces of information simultane-
ously would blur the market’s reaction to
Aruba’s strong quarterly results and help
get the deal approved.11
11 Aruba I at *62-*63. [footnotes omitted]
He added:
Releasing information simultaneously or in
close proximity might make it difcult for
an expert to disentangle the price reac-
tion for purposes of an event study, but
the market still would have the informa-
tion and would respond…. Aruba’s stock
traded briey above the deal price, indi-
cating the market took into account both
the announcement of the deal and Aruba’s
strong results.
Nonetheless, the court concluded:
[T]he record does not provide a persuasive
reason to question the reliability of Aruba’s
trading price based on the decision by
Aruba management to bundle together two
pieces of information.12
12 Aruba I at *66. [footnote omitted]
Recent Court of Chancery Appraisal Decisions in Arm’s-Length Transactions
Premium
(Discount)
vs. Deal Price
Merion Capital, L.P. v. 3M Cogent, Inc., 2013 Del. Ch. LEXIS 172 (Del. Ch. July 8, 2013) 3.5%
Huff Investment Fund v. CKx, Inc., 2013 Del. Ch. LEXIS 262 (Del. Ch. Nov. 1, 2013); aff ’d, 2015 Del. LEXIS 77 (Del. Feb.
12, 2015) 0.0%
In Re Appraisal of Ancestry.com, Inc., 2015 Del. Ch. LEXIS 21 (Del. Ch. Jan. 30, 2015) 0.0%
Merlin Partners LP v. AutoInfo, Inc., 2015 Del. Ch. LEXIS 128 (Del. Ch. Apr. 30, 2015) 0.0%
Longpath Capital, LLC v. Ramtron Intl. Corp., 2015 Del. Ch. LEXIS 177 (Del. Ch. June 30, 2015) (1.0%)
Merion Capital LP v. BMC Software, Inc., 2015 Del. Ch. LEXIS 265 (Del. Ch. Oct. 21, 2015) 0.0%
Merion Capital LP v. Lender Processing Servicing, Inc., 2016 Del. Ch. LEXIS 189 (Del. Ch. Del. Ch. Dec. 16, 2016) 0.0%
In Re Appraisal of PetSmart, Inc., 2017 Del. Ch. LEXIS 89 (Del. Ch. May 26, 2017) 0.0%
In re Appraisal of AOL Inc. (“AOL I”), 2018 Del. Ch. LEXIS 63 (Del. Ch. Feb. 23, 2018); modied, 2018 WL 3913775 (Del. Ch.
Aug. 15, 2018) (3.4%)
Blueblade Capital Opportunities LLC v. Norcroft Cos., Inc. (“Norcroft”), 2018 WL 3602940 (Del. Ch. July 27, 2018) 2.6%
In re Appraisal of Solera Holdings, Inc. (“Solera”), 2018 Del. Ch. LEXIS 256, 2018 WL 3625644 (Del. Ch. July 30, 2018) (1.9%)
Note: Digests of these decisions and the courts’ opinions are available at BVLaw.
4 Business Valuation Update October 2018 Business Valuation Resources
ARUBA NETWORKS: SHOULD APPRAISALS RELY ON UNAFFECTED MARKET PRICE?
Reprinted with permissions from Business Valuation Resources, LLC
After the Bloomberg News report, Aruba’s
closing stock price rose from $18.38 to $22.24.
Two days later, after Aruba announced both the
transaction and the improved quarterly earnings,
its closing price rose from $22.61 to $24.81. The
vice chancellor did not adjust the “unaffected
market price” to reect the improved earnings,
explaining in his decision on reargument:
[T]he petitioners could have used the con-
junctive announcement as an opportunity
to engage with the respondent’s proffered
measure of the unaffected market price and
argue for a higher gure. Had they done so,
then in my view the respondent would have
had a strong argument that to the extent the
market price reacted to news of the deal,
the resulting valuation impact represented
an “element of value arising from the … ex-
pectation of the merger.”13
The petitioners “argued broadly that the market
price was unreliable and should be disregarded
because investors were undervaluing Aruba”14
and that the court’s selection of a 30-day period
reached an anomalous conclusion:
[H]ad the Court selected 1 day, the fair value
would have been $18.38; had it selected 90
days, it would have been $18.81; had it se-
lected 120 days, it would have been $19.51;
had it selected the opening price the day
HP rst approached Aruba about a deal, it
would have been $22.01.15
The court responded:
In response to the Reargument Motion, the
respondent has cited authorities indicating
that using a 30-day period is both “gener-
ally considered acceptable in the nancial
13 Aruba II at *14-*15 (quoting the Delaware appraisal
statute).
14 Aruba II at *15.
15 Aruba II at *8 (quoting Petitioners’ Reargument
Motion, ¶ 7).
community” and within a court’s discretion-
ary judgment.16
* * *
I have not delved into the valuation and aca-
demic literature on this point, but I suspect
many treatises and other articles could be
cited to support the general acceptance of
a 30-day average as a common metric for
calculating the unaffected trading price.17
The 30-day average is indeed a common metric.
Based on the author’s experience and research,
investment bankers’ fairness opinions have been
considering premiums over the 30-day unaffect-
ed market price (as well as premiums over the
latest unaffected closing price) for more than
ve decades. However, nancial professionals
have considered unaffected market price not as
a measure of the value of the target company,
but simply as the denominator for calculating the
premium being offered.
Prior to concluding that appraised value was
Aruba’s unaffected market price, the court had
determined that “[t]he two probative indications
of value in this case are the unaffected market
price of $17.13 and the deal-price-less-synergies
value of approximately $18.20 per share.”18 It
arrived at the $18.20 gure by deducting syner-
gies from the deal price of $2.651 billion and syn-
ergies estimated for the buyer by McKinsey and
“a March 2013 study by the Boston Consulting
Group which suggested that, on average, sellers
collect 31% of the capitalized value of synergies,
with the seller’s share varying widely from 6% to
51%”19:
Using the low-end synergy deduction of
$93 million implies a standalone value of
$2.558 billion, or $21.08 per share. Using
16 Aruba II at *10.
17 Aruba II at *10, fn. 42.
18 Aruba I at *5.
19 Aruba I at *86.
bvresources.com October 2018 Business Valuation Update 5
ARUBA NETWORKS: SHOULD APPRAISALS RELY ON UNAFFECTED MARKET PRICE?
Reprinted with permissions from Business Valuation Resources, LLC
the high-end synergy deduction of $793
million implies a standalone value of $1.858
billion, or $15.32 per share. The midpoint
is a standalone value of $2.208 billion or
$18.20 per share.20
Determining fair value by deducting an amount
for synergies from the deal price is an approach
that has been adopted in numerous Court of
Chancery decisions. Indeed, in one recent case,
the appraised value in a related party transaction
was only 42.6% of the transaction price.21 The
court’s $18.20 number, which is less than 75% of
the deal price and below the $19.75 valuation by
Aruba’s expert, is consistent with the Delaware
appraisal statute’s provision that “any element of
value arising from the accomplishment or expec-
tation of the merger” must be excluded.22
The concept of “unaffected” prices, as used by
investment bankers, encompasses market prices
prior to either public knowledge of a transaction
or public information that a company is seeking a
transaction. The fact that many companies’ shares
are deemed to be potential acquisition targets
may positively impact their prices; in these situ-
ations, it is possible that fair value could be less
than market price. Although fair value is usually
higher than “unaffected” price for the simple
reason that buyers are more likely to acquire un-
derpriced companies than overpriced compa-
nies, market price could also be greater than fair
value in periods of market exuberance for a par-
ticular sector, such as internet businesses in 1999.
Three subsequent decisions have cited Aruba.
In Solera, Chancellor Andre Bouchard rejected
respondent’s post-trial argument that unaffected
market price should be considered, and instead
20 Ibid.
21 ACP Master, Ltd. v. Sprint Corp., 2017 Del. Ch. LEXIS
125 (July 21, 2017). In this case, Sprint’s control
shareholder purchased a publicly traded company
51% owned by Sprint for $5.00 per share and the
court awarded dissenting shareholders only $2.13 per
share.
22 8 Del. Code Ann. § 262(h).
he adjusted for synergies23 and valued the shares
at 98.1% of the deal price. In Norcroft, Vice Chan-
cellor Joseph R. Slights III stated that he did not
consider market price because “Norcraft was fresh
off an initial public offering of its stock, was rela-
tively thinly traded … and was also thinly covered
by analysts.”24 Vice Chancellor Sam Glasscock III’s
decision in AOL, issued eight days after Aruba
I, did not consider the unaffected market price
because the respondents did not propose using
it.25 He utilized discounted cash ow to value AOL
at a discount to the deal price and wrote:
[O]ur Supreme Court’s recent decisions in
DFC and Dell, …, in distilled form, provide
… that no presumption in favor of transac-
tion price obtains. Where, however, trans-
action price represents an unhindered,
informed, and competitive market valua-
tion, the trial judge must give particular and
serious consideration to transaction price
as evidence of fair value. Where informa-
tion necessary for participants in the market
to make a bid is widely disseminated, and
where the terms of the transaction are not
structurally prohibitive or unduly limiting
to such market participation, the trial court
in its determination of fair value must take
into consideration the transaction price as
set by the market.26
Historically, some writers had posited that the
unaffected market price reflects an “inherent
minority discount” (IMD) so that fair value is nec-
essarily greater than market price. The concept
of an IMD was included in several appraisal
23 Solera at *34.
24 Norcroft at *2.
25 “[N]o evidence concerning the efciency of the
market for AOL stock is before me. Moreover, the
use of trading price to determine fair value requires
a number of assumptions that, to my mind, are best
made or rejected after being subject to a forensic and
adversarial presentation by interested parties. Thus, I
do not consider stock trading price further.” AOL I at
*25, fn. 118.
26 AOL I at *2.
6 Business Valuation Update October 2018 Business Valuation Resources
ARUBA NETWORKS: SHOULD APPRAISALS RELY ON UNAFFECTED MARKET PRICE?
Reprinted with permissions from Business Valuation Resources, LLC
decisions prior to 2002, but no later decisions
have applied it. Several academic articles have
questioned the concept of an IMD and served to
discredit it.27 In 2007, Vice Chancellor Stephen
Lamb acknowledged the criticisms and cited
the Hamermesh/Wachter and Booth articles.28
The older cases were cited in Solera in rejecting
the use of market price as a valuation standard
without reference to the academic articles or the
2007 decision.29
Appraisal necessarily depends on the nancial
condition and prospects of the company. Dela-
ware law species that appraised value should
be determined as of the effective date of the
transaction. Unaffected market price as of the
27 Lawrence A. Hamermesh and Michael L. Wachter,
“The Short and Puzzling Life of the ‘Implicit Minority
Discount’ in Delaware Appraisal Law,” 156 U.
Pa. L. Rev. 1 (2007); William J. Carney and Mark
Heimendinger, “Appraising the Nonexistent: The
Delaware Courts’ Struggle With Control Premiums,”
152 U. Pa. L. Rev. 845 (2003); Richard A. Booth,
“Minority Discounts and Control Premiums in
Appraisal Proceedings,” 57 Business Lawyer 127
(2001).
28 Highelds Capital, Ltd. v. AXA Financial, Inc., 2007 Del.
Ch. LEXIS 126 (June 27, 2007) at *67.
29 Solera at *33-*34.
announcement date is stale data at the closing
date. For public companies, it is common for a
transaction to close more than three months after
the announcement date, sometimes materially
later.
Moreover, the market price necessarily reects
only facts known to the market at a specic date.
The market rarely knows a company’s long-term
forecasts, which are the basic component of the
discounted cash flow approach the Delaware
courts currently favor. In the infrequent case
where the court determines that neither the
deal price nor the available financial analyses
are a reliable measure of value and that the ap-
praised value should not exceed an “unaffected
price,” it should examine the facts not known to
the market, as well as subsequent developments
in the company and in the market rather than
use market prices that are outdated and may not
reect all knowable information. ◆
Gilbert E. Matthews, CFA, is chairman of the
board and a senior managing director of Sutter
Securities Inc. (San Francisco). He has more than
50 years of experience in investment banking and
has spoken and written extensively on fairness
opinions, corporate valuations, and litigation re-
lating to valuations.
