COURT OF CHANCERY OF THE S AM G LASSCOCK III

V ICE C HANCELLOR STATE OF DELAWARE C OURT OF C HANCERY C OURTHOUSE 34 T HE C IRCLE G EORGETOWN , D ELAWARE 19947 Date Submitted: July 30, 2018 Date Decided: August 15, 2018 Stuart M. Grant, Esquire Mary S. Thomas, Esquire Laina M. Herbert, Esquire Grant & Eisenhofer P.A. 123 Justison Street Wilmington, DE 19801 Kevin R. Shannon, Esquire Berton W. Ashman, Jr., Esquire Christopher N. Kelly, Esquire Potter Anderson & Corroon LLP 1313 N. Market Street Hercules Plaza, 6th Floor Wilmington, DE 19899

Re: In re Appraisal of AOL Inc. , Civil Action No. 11204-VCG

Dear Counsel: On February 23, 2018, I issued a Memorandum Opinion in this app raisal

action in which I determined that the fair value of one share o f AOL stock was $48.70 as of the merger date. 1 In that Opinion, I noted that our Supreme Court has

directed the trial courts to consider a transaction that result s in fair market value as persuasive to a finding of statutory fair value. 2 Nonetheless, I concluded that circumstances in the sale of AOL precluded reliance upon the me rger price as

indicative of fair value. 3 As urged by the parties, I det ermined the value of an AOL share through a DCF analysis, but expressed concern about certa in figures upon

1 In re AOL Inc. , 2018 WL 1037450, at *21 (Del. Ch. Feb. 23, 2018) (the “Memora ndum Opinion” or the “Mem. Op.”). 2 Id. at *8. 3 Id. at *9.2 which I relied to calculate the v alue of unconsummated deals th at I found to be part of the operative reality of AOL. 4 Both parties moved for reargumen t pursuant to Court of Chance ry Rule 59(f). Reargument, in my experience, is rarely efficient or pr oductive. It has become de rigueur in appraisal actions, however, and especially so with respect to appraisals relying upon financial determinations of value developed from t he reports of partisan experts. No DCF analy sis, used to calculate the “exact” value of a corporation, can be sufficiently rigorous that it will not permit a good-faith a rgument that the value should be otherwise. This, I think, substantiates the wisdom o f reliance on deal price, where appropriate; it als o may explain the current popul arity of motions for reargument. Reargument, however , is properly reserved for occa sions where the outcome of a court’s reasoning is affected by mistakes of fact or law. Where a motion seeks simply to urge the court to amend application of i ts discretion, reargument is not appropriate. This Court must resist the desi re to achieve the “right” number in a financial an alysis—a temptation particularl y strong in this, an area not directly within its expertise—by revisiting such discr etionary decisions in a way that encourages run-on litiga tion. Unlike revenge, justice is a dish that is best served warm, and the power of statutory interest further adds t o the exigency. Nonetheless, this is that rare c ase where reargument must be gr anted.

4 Id. at *17–18.3 In my Memorandum Opinion, I found that two pending transactions —the “Display Deal” and the “Search Deal”—were part of the operative reality of AOL at

the time of the transaction. 5 The Petitioners at trial largely withdrew any reliance on their financial expert, and I pr incipally relied, therefore, on the analysis of the Respondent’s expert, Dr. Fischel. 6 Fischel did not account for the value of the Display or Search Deals in his D CF, however, and I therefore am ended his analysis

to include the accretive value of the Deals, as I calculated th em. 7 The parties, on reargument, urge me to reconsider my calculation of the value o f the Display Deal and the Search Deal, as well as the Perpetuity Growth Rate (the “PGR”) applied in my DCF. 8 I find that the Display Deal value that I used in the overall v aluation of AOL was based on an incorrect assumption of fact. Once corrected, I find that the accretive value of $2.57 per AOL share, which I attributed to t he Display Deal in the Memorandum Opinion, must be revised. I find that the other mat ters raised on reargument do not require amendment to my Memorandum Opinion, h owever. Accordingly, I revise the fair v alue of a share of AOL stock on the merger date from $48.70 to $47.08. My reasoning follows.

5 Id. at *17. 6 Id. at *21. 7 Id. at *17–18. 8 Interested readers, if any, s hould consult my Memorandum Opini on for a recitation of the facts and issues resolved in this appraisal; I will not repeat them h ere.4 I. ANALYSIS Reargument under Court of Chancery Rule 59(f) is governed by a “flexible” standard and may be granted wher e the court “overlooked a decis ion or principle of law that would have a controlling effect or the [c]ourt has mis apprehended the law

or the facts so that the outcome of the decision would be affec ted.” 9

A. The Microsoft Display Deal I find that the value of $2.57 per AOL share for the Display De al must be revised. In the Memorandum Opinion, I determined that the Disp lay Deal was “at least partially accretive” to AOL’s value. 10 I determined the value accretive to my DCF to be $2.57 per share, an amount which I nonetheless found “potentially overstat[ed] fair value” base d on the evidence of record. 11 The Display Deal involved “a ten -year commercial partnership fo r AOL to run the sales of display, mobile, and video ads on Microsoft pr operties in the United States and eight international markets.” 12 Having found the Display Deal part of the operative reality of AOL and par tially accretive, but nonethele ss not a part of the Fischel DCF which I largely a dopted, I was required to account for it in my valuation. I did so by relying on the Petitioners’ representat ion that “Verizon’s [the

9 Doft & Co. v. Travelocity.com Inc. , 2004 WL 1366994, at *1 (Del. Ch. June 10, 2004) (internal quotation marks omitted). 10 Mem. Op. at *18. 11 Id. 12 Id. at *15.5 buyer’s] integrated view of Millennial Media calculated its DCF value at up to $600 million or $4.14 per share” 13 and that “the Millennial and Display Deal[s combined] contribute an additional $6.71 pe r share using Fischel’s DCF mo del.” 14 The Millennial Deal was another pote ntial AOL deal that I found was not part of AOL’s operative reality. 15 I arrived at a value for the Display Deal by using the representations above. 16 I attempted to unbundle the value of the Display Deal by subtracting $4.14 (the Millennial Deal value) from $6.71, the a ggregate value of the

two deals to AOL as I understood the Petitioners to have repres ented. 17 In fact, as both parties now agr ee, my calculation was erroneou s. The “$4.14 per share” referred to Millennium shares while the “$6.71 pe r share” referred to AOL

shares. 18 The $2.57 figure I arrived at w as meaningless, therefore, and I withdraw

it. In connection with this motion for reargument, both experts agr ee that I should value the Display Deal through amendment to the whole-company D CF analysis of AOL, although they differ on whether the present value of the D isplay Deal should simply be added to the DCF analysis (Respondent) or whether pro jected revenue from the Deal should be run through the DCF analysis as part of cash flow

13 Pet’rs’ Post-Trial Answering B r. 46 (citing JX2432 at VZ-00242 77) 14 Id. at 47 (emphasis omitted); id. Ex. 2 (Cornell Revise d Rebuttal Report). 15 Mem. Op. at *17. 16 Id. at *15 n.175. 17 Id. at *15. 18 July 30, 2018 Reargument Tr. (DRAFT) 30:22–31:9.6 (Petitioners). 19 Each party begins with the Fis chel DCF model. The Petitioner s also rely on an additional affidavit by Professor Cornell, their exp ert witness, to value the Display Deal at $5.78 per share, or approximately $500 million. 20 Cornell reaches this number by adding four years of Display Deal revenue, based on AOL internal projections, to Fischel’s DCF model and applying a 3.5% PGR. 21 Cornell’s analysis results in a per-share value of $51.98. 22 This half-a-billion-dollar valuation for the Display Deal, 23 in light of the trial testimony and contemporaneous evidence o f the value placed by AOL on the Deal, is fantastic. 24 I note that the “unlevered free cash flows” that AOL projects for the Display Deal are set to consis tently decline beginning in 2019, but that these outyear projections are not r eflected in the Cornell DCF analysis. 25 Applying a positive and generous PGR to the early cash flows

19 Aff. of Prof. Bradford Cornell in Supp. of Pet’rs’ Mot. for Re argument (“Cornell Aff.”) ¶¶ 3, 5– 6; Aff. of Daniel R. Fischel in Supp. of the Respt’s’ Mot. for Reconsideration (“Fischel Aff.”) ¶ 6 n.9 (explaining why a whole-comp any DCF analysis reduces reli ance on “subjective judgments”). 20 Cornell Aff. ¶¶ 7–8. 21 JX2331 at tab “DCF”; Cornell Aff. ¶ 7; Cornell Aff. Ex. 2 at t ab “Projections” (including a total enterprise value of $4.442 billion). 22 Cornell Aff. Ex. 2 at tab “Exhibit 2.” 23 See Agranoff v. Miller , 791 A.2d 880, 896 (Del. Ch. 2001) (“[T]he use of math should not obscure the necessarily more subj ective exercise in judgment th at a valuation exercise requires.”). 24 See, e.g., Mem. Op. at *17; JX1844 (May 15, 2015 email from CFO Dykstra) ( “The financials need to get locked down soon. W e also need to lo ok at this on a cash flow basis. Is this ever going to be cash flow positive?”); JX1825 (May 19, 2015 email from AO L finance employee) (“We are scrubbing the revenue numbers hard but according to the latest we don’t make any money really.”); Trial Tr. 374:22–24 (AOL CFO of Platforms Bellomo) (“I thought that was an incredibly risky strategy just not only to pull off but the impact that it might have on morale and execution and operations.”); Trial Tr. 375:13–17 (AOL CFO of Platforms Bellom o) (“Q. [] And was there a consensus or view about the wisdom of the Microsoft deal in the platforms group before it got approved? A. The senior manageme nt team at platforms was largel y against the deal.”). 25 Cornell Aff. Ex. 2 at tab “Exhibit 2.”7 almost certainly overstates value. 26 The record also indicates that AOL understood contemporaneously that the Display Deal “contained a number of risks,” 27 and Cornell’s employment of the whole-company WACC again almost cer tainly inflates

value. 28 The record cannot support a valuation of the Display Deal tha t represents, at one point, 18.6% of the free cash flow of AOL. 29 If I were to employ the Cornell methodology at this stage of the litigation, therefore, I would need to reopen the matter for expert reeva luation of the assumptions underlying th e whole-company DCF analysis. For all these r easons, I decline to adopt the Co rnell valuation. On reargument, Fischel, for reasons just referenced, declines t o include the Display Deal in a whole-company analysis without revisiting the PGR, WACC, and other assumptions made under the previous analysis without the Display Deal. 30 Rather than include the Display Deal revenues in calculating th e terminal value and total enterprise value, Fischel adds the present value of the D isplay Deal free cash flow to the total enterprise v alue of $3.928 billion, for an im plied equity value of $3.984 billion. 31 Fischel calculates this Displa y Deal present value from the center

26 JX2331 at tab “DCF.” 27 See, e.g. , supra note 21 (all citations). 28 Fischel Aff. ¶ 15 n.21 (“Given t he potentially speculative nat ure of projections for future acquisitions and strategic partnerships, it is not surprising t hat they would be discounted at a higher rate than the company as a whole.”). 29 Id. ¶ 9 (“Under Prof. Cornell’s a ssumptions, in 2018 the Display D eal would account for $42.4 million of AOL’s total $228 million in free cash flow, or appro ximately 18.6% of the company’s free cash flows.”). 30 Id. ¶ 7. 31 Id. Ex. G.8 of a sensitivity matrix located in a set of AOL internal projec tions for the Display

Deal. 32 Through this method, Fischel avoids applying the whole-compan y PGR and other assumptions to the Display Deal, and arrives at a total p er-share value of $46.78. 33 Fischel argues that including the Display Deal revenues in th e underlying DCF assumptions would upset the balance of variables upon which those assumptions are based; in other words, that a whole-company ana lysis including Display Deal cash flows should not apply without revisiting tho se variables. 34 In the Memorandum Opinion, I found that the Display Deal was ac cretive to AOL, and the evidence, while not supporting the Cornell valuati on, suggests the value is greater than zero. I note that the Display Deal was pr ojected to incur declining free cash flow starting in 2019 and carried a signifi cant amount of risk. As stated above, running the cash flows from this deal through the whole-company DCF analysis would require revisiting, with expert support, the ass umptions underlying the DCF. Therefore, I find that Fischel’s method on reargument —adding the present

32 Id. ; JX2331 at tab “DCF.” I explain the details of this sensitivi ty matrix below. 33 Fischel Aff. Ex. G. 34 Id. ¶¶ 6–7 (“Prof. Cornell’s correcti ons are inconsistent with my D CF modelling methodology because they rely on subjective judgments that my model specifi cally rejects, in addition to being inconsistent with observable real world market evidence. For e xample, my DCF model analyzes AOL as a whole company because it allows me to observe market a nd financial data for AOL that are only available for the whole company. . . . [P]rof. Cornell ‘simply add[s]’ the Display Deal projections from 2015 to 2018 to the AOL Management Projections . He applies a 3.5% terminal growth rate after 2018 to the combined projections and discount s these projections at the same weighted average cost of capital (‘WACC’) I used in my DCF mode l, which is 9.5%.”) (internal citations and quotations omitted).9 value of the Display Deal, rathe r than running the revenue numb ers through the DCF model assumptions—is the better method here. Like the parties, I rely on AOL’s internal projections for the Display Deal in adjusting my valua tion. 35 I note that the AOL projections include a sensitivity analysis employing a disc ount rate ranging from 11% to 19%, substantially greater than the whole-company W ACC of 9.5%, and deal lengths of five, seve n, and nine-and-a-half years, ref lecting the reality that the Display Deal could terminate at the discretion of either pa rty, but in any event after ten years. 36 Assuming a nine-and-a-half-year term and a mid-point 15.0% discount rate, the Display Deal adds $85.1 million in present v alue. 37 This amount matches the $85.1 million present value chosen by AOL managemen t. 38 Given the risks described, I find that val uation appropriate here. Using Fischel’s updated DCF model, and including $85.1 million for the Display Deal, 39 yields an implied equity

35 JX2331 at tab “DCF”; see Doft & Co. v. Travelocity.com Inc. , 2004 WL 1152338, at *5 (Del. Ch. May 20, 2004) (“Delaware law clearly prefers valuations bas ed on contemporaneously prepared management projections because management ordinarily h as the best first-hand knowledge of a company's operations.”). 36 Id. The Display Deal allowed either party to terminate the deal a fter five or seven years. Id; JX2008 at 31 (establishing a ten-year term in § 13.1 of the Dis play Deal advertising sales and services agreement). 37 JX2331 at tab “DCF,” cell F36. 38 Id. at cells E30, F36. 39 I note that I use different potions of the management matrix t han did Fischel, because I find it better comports with management’s best assumptions; my stand-al one valuation for the Display Deal is significantly higher th an Fischel’s, therefore.10 value of $4.01 billion. 40 Keeping all other inputs to my DCF stable, that implies a fair value of $47.08 per share. 41

B. The Microsoft Search Deal I decline to revisit my finding that the Search Deal adds no no n-speculative value to AOL. In the Memorandum Opinion, I found that the Sear ch Deal was, “at least minimally, additive” to the management projections, but t hat “[t]he record is lacking in a principled way to account for the Search Deal.” 42 Thus, I concluded that fair value “is best expressed by omitting any speculation as to the value to AOL of the pending Search Deal.” 43 Unlike with respect to the Display Deal, the Search Deal valuation (of $0) was not based on an error of fact. The Petitioners stated in their Post-Trial Opening Brief that “ AOL did not produce detailed forecasts for th e Search Deal” and, instead of suggesting a value, urged me to “select a number slightly higher than the mid-point share price to

account for the Search Deal’s benefits.” 44 On reargument, the Petitioners rely on a valuation method they did not r aise before; the Petitioners pul led “the metadata supporting [a] graph” from an A OL presentation to Verizon about the Search Deal,

40 Fischel Aff. Ex. G. 41 As with my DCF valuation in the Memorandum Opinion, I apply th e deal price as a rough check on the reasonableness of this valuation based on financial anal ysis. To my mind, a per-share valuation of $47.08 is reasonably close to that implied by deal price. 42 Mem. Op. at *18. 43 Id. 44 Pet’rs’ Post-Trial Opening Br. 56; JX1906 at VZ-0056420 at sli de 6 (showing a June 10, 2015 Presentation by AOL to Veriz on, including a graph showing Searc h Deal projections).11 arguing that my failure to base my valuation on these implied n umbers was

erroneous. 45 I disagree. The record is simp ly too sparse to attribute non-s peculative value to the Search Deal. Neither expert attributed any value to the Search Deal in their DCF analyses. 46 The Petitioners did not argue that I should use the implied c ryptic cash flows in valuing the Search Deal until their Motion for Re argument, 47 resulting in a near-silent record and raising real issues of fairness and waiver. 48 Extracted metadata from a graph, presented at the reargument stage, is no t a sufficient basis for me to revisit my valuation of the accretive value of the Se arch Deal. Reargument on this issue is, accordingly, denied.

C. The Perpetuity Growth Rate I determined that the appropriate PGR was 3.5%. Fischel, on wh ose report I largely relied, originally applied a rate of 3.25%. 49 In the Memorandum Opinion, I found that “a [PGR] of 3.5% more accurately captures AOL’s pros pects” after the

45 Pet’rs’ Mot. for Reargument ¶¶ 11–15 (“The Court attributed no value to the Microsoft Search deal, even though the Court determ ined that Microsoft Search wa s part of AOL’s operative reality at the time of the Merger . . . a nd that it was ‘additive to th e LTP.’”). 46 JX2277 ¶ 86 (Cornell Revised Op ening Report); Trial Tr. 232:18 –19 (Cornell); JX2255 ¶ 41 n.90 (Fischel Report). 47 Pet’rs’ Mot. for Reargument ¶¶ 13–15. 48 Oliver v. Boston Univ. , 2006 WL 4782232, at *1 (Del. Ch. Dec. 8, 2006) (“New argument s that have not previously been raised cannot be considered for reargu ment.” (internal citations and quotations omitted)). I note that the Respondent argues in pos t-trial briefing, and again on reargument, that the Petitioners w aived attributing any value t o the Search Deal by failing to account for it in their exper t’s report. July 30, 2018 Reargum ent Tr. (DRAFT) 52:13–53:19. 49 JX2255 (Fischel Report) ¶ 54 n.104.12 Management Projections end, becau se a PGR of 3.25% would “not a ccurately capture the trajectories of the t wo divisions of AOL that were in hypergrowth at the end of the Management Projection period.” 50 The Respondent on reargument again urges me to adopt a PGR of 3.25%. 51 That Motion is denied; I explained my rationale in my Memorandum Opinion. I may have gotten it wrong , but that is a matter for appeal, not reargument. 52 As stated above, there is a tension between any judge’s natural desire to create a “perfect” valuation and the need for litigants’ economy and f inality. I rely on my rationale in the Memorandum Opin ion and deny the Respondent’s M otion for Reargument on this matter.

II. CONCLUSION I find that my assignment of value to the Display Deal of $2.57 per AOL share, additive to the DCF analysis, was based on an error of fact. T o that extent, both parties’ Motions are granted. C onsequently, I revise the fair value of an AOL share on the merger date from $48.70 to $47.08. The remaining portio ns of the Motions

50 Mem. Op. at *19. 51 I note that the Respondent uses the risk-free-rate as an ancho r but does not argue for its adoption here. Resp’t’s Mot. for Reconsid eration ¶¶ 17–18 (“Nor did the Court’s analysis take account of the Supreme Cour t’s ruling in DFC , where the Chief Justice observe d that the risk-free rate (her e, 2.92%) might be the appropriate ‘ceiling’ for a perpetual growt h rate” but the “Respondent does not ask the Court to reduce Fisc hel’s 3.25% perpetual growth ra te to the risk-free rate”). 52 If I had followed the Cornell model and applied the company-wi de assumptions to the Display Deal projections, there would be a much stronger case to revisi t the PGR, among other inputs.13 are denied. The parties should submit an appropriate form of o rder in accordance with this Letter Opinion.

Sincerely,

/s/ Sam Glasscock III

Sam Glasscock III