IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE APPRAISAL OF 

ANCESTRY.COM, INC.

)

)

Consolidated

Civil Action No. 8173-VCG

MEMORANDUM OPINION

Date Submitted: October 14, 2014

Date Decided: January 30, 2015

Kevin G. Abrams, J. Peter Shindel, Jr., and Matthew L. Miller, of ABRAMS & 

BAYLISS LLP, Wilmington, Delaware, Attorneys for Petitioner Merion Capital, 

L.P. 

Ronald A. Brown, Jr., Marcus E. Montejo, and Eric J. Juray, of PRICKETT, 

JONES & ELLIOTT, P.A., Wilmington, Delaware, Attorneys for Petitioners Merlin 

Partners LP and The Ancora Merger Arbitrage Fund, LP. 

Stephen C. Norman, Kevin R. Shannon, and James G. Stanco, of POTTER 

ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Stephen 

R. DiPrima, William Savitt, Adam M. Gogolak, and Steven Winter, of 

WACHTELL, LIPTON, ROSEN & KATZ, New York, New York, Attorneys for 

Respondent Ancestry.com, Inc.

GLASSCOCK, Vice Chancellor
1

I am tasked with determining the ―fair value‖ of shares of a publicly-traded 

company, in this case shares formerly held by the Petitioners, who were cashed out 

in the purchase of Ancestry, Inc. (―Ancestry‖ or the ―Company‖) by a private 

equity investor, Permira Advisors, LLC (―Permira‖). The sale was at a 40% 

premium to the market price untainted by the auction process, which process itself 

involved a market canvas and uncovered a motivated buyer. The price paid 

stockholders who tendered in the sale was $32. The Petitioners‘ valuation expert 

proved something of a moving target; he argued that the fair value of a share of 

Ancestry stock at the time of the merger was as high as $47, but at least $42.81. 

The Respondent‘s expert opined that fair value was $30.63, despite the fact that the 

buyer, a non-strategic investor with actual money at risk, was willing to pay more.

I have commented elsewhere on the difficulties, if not outright incongruities, 

of a law-trained judge determining fair value of a company in light of an auction 

sale, aided by experts offering wildly different opinions on value. I will not repeat 

those comments here. 1 It is worth noting, however, that this task is made 

particularly difficult for the bench judge, not simply because his training may not 

provide a background well-suited to the process, but also because of the way the 

statute is constructed. A judge in Chancery is the finder of fact, and is frequently 

 

1

See Huff Fund Inv. P'ship v. CKx, Inc., 2013 WL 5878807, at *1 (Del. Ch. Nov. 1, 2013),

adhered to, 2014 WL 2042797 (Del. Ch. May 19, 2014), judgment entered sub nom., Huff Fund 

Inv. P'ship v. CKX, Inc. (Del. Ch. June 17, 2014).
2

charged to make difficult factual determinations that may be without his area of 

expertise. The saving judicial crutch in such situations is the burden of proof. The 

party with the burden must explain why its version of the facts is the more 

plausible in a way comprehensible and convincing to the trier of fact; if not, it has 

failed to carry its burden, and the judge‘s duty is accordingly clear. A judge in a 

bench trial relies, therefore, on the burden of proof; he holds on to it like a 

shipwreck victim grasps a floating deck-chair or an ex-smoker hoards his last piece 

of nicotine gum. Section 262 is unusual in that it purports explicitly to allocate the 

burden of proof to the petitioner and the respondent, an allocation not meaningful 

in light of the fact that no default exists if the burden is not met; in reality, the 

―burden‖ falls on the judge to determine fair value, using ―all relevant factors.‖

2

 

Here, therefore, I must independently review those factors to determine ―fair 

value,‖ the price per share to which the Petitioners are entitled. The results of my 

analysis are set out below.

I. BACKGROUND FACTS

A. The Business of Ancestry

Ancestry is described as ―a pioneer and the leader in the online family 

research market,‖ having ―digitized, indexed, and added‖ to its websites ―more 

 

2

8 Del. C. § 262(h).
3

than 12 billion historical records . . . over the past 18 years.‖3 It ―is the world‘s 

largest online family history resource,‖4 and has over two million subscribers.5 

The Company also recently launched AncestryDNA, selling $99 DNA test kits, 

though the subscription services are still its most significant source of revenue.6

In November 2009, Ancestry became a publicly-traded company, trading at 

$13.50 per share.7 Several months later, in March 2010, the show Who Do You 

Think You Are?, for which Ancestry was the financial and research sponsor, began 

airing on Friday nights on NBC.8 This show featured celebrities learning more 

about their own family histories; Ancestry provided all of the research for these 

episodes.9 Additionally, ―Ancestry purchased product integration and advertising 

on the show, which generated substantial new interest in its services.‖10 

This show, which aired on NBC for three seasons, was a ―massive catalyst 

for growth.‖11 Between 2009 and 2011 in particular, Ancestry experienced an 

unprecedented acceleration of new subscribers—the ―North Star metric‖ for this 

 

3

JX 279 at 4.

4

Trial Tr. 7:19–20 (Sullivan). 

5

JX 279 at 4.

6

Trial Tr. 8:15–18 (Sullivan).

7

JX 260 at F–16.

8

See, e.g., Trial Tr. 113:5–6 (Hochhauser). 

9

See, e.g., id. at 111:24–112:8 (Hochhauser). 

10 Resp‘t‘s Opening Post-Tr. Br. at 21–22.

11 Trial Tr. 112:10, 113:12 (Hochhauser); but see id. at 112:21–113:2 (Hochhauser) (noting that 

Ancestry did not do any studies relating to the show and its specific effects on the business).
4

subscription business—leading to strong growth in revenue and EBIDTA.12 By 

early 2011, Ancestry stock was trading at over $40 per share.13 The show was 

ultimately cancelled in May 2012, the same day that it was nominated for an 

Emmy award.14

1. Key Metrics

As an internet-based, subscription-driven company, Ancestry‘s key business 

metrics include gross subscriber additions (―GSAs‖), churn, and subscriber 

acquisition cost (―SAC‖). GSAs ―measure the total number of new customers who 

purchase a subscription during any given period.‖15 Churn measures the number of 

cancelled subscriptions in a given period, represented as a percentage of the total 

subscriber base.

16

 Finally, SAC measures the ―efficiency of [Ancestry‘s] 

marketing and advertising programs in acquiring new subscribers‖ by calculating 

the average cost of each new subscriber.17 

Howard Hochhauser, Ancestry‘s CFO and COO, testified at trial that SAC is 

an important driver of EBITDA because marketing costs are Ancestry‘s largest 

variable costs.18 Churn is a proxy for the ―health of [the] existing business.‖19 

 

12 See, e.g., id. at 111:18–112:20 (Hochhauser).

13 See, e.g., JX 211 ¶ 34; JX 260 at 36 (noting that Ancestry repurchased some of Sullivan‘s 

shares for an average price of $41.67 per share).

14 See Trial Tr. 113:10–13 (Hochhauser).

15 Resp‘t‘s Opening Post-Tr. Br. at 26; see also Trial Tr. 109:6–10 (Hochhauser).

16 See Resp‘t‘s Opening Post-Tr. Br. at 27; JX 260 at 36; Trial Tr. 110:5–14 (Hochhauser).

17 JX 260 at 36; see also Resp‘t‘s Opening Post-Tr. Br. at 28; Trial Tr. 110:17–21 (Hochhauser).

18 See Trial Tr. 110:22–111:8 (Hochhauser).
5

Churn, together with GSAs, gives a picture of the subscriber base in a given 

period; as a subscription business, these two metrics make up the all-important

―hamster wheel of new people coming in and people existing at the same time.‖20

2. Competitive Forces

Ancestry faces several competitive forces, including a number of start-up 

companies21 and an increasing amount of free archived information more readily 

accessible by internet search engines.22 Additionally, the Church of Jesus Christ of 

Latter Day Saints operates a website that has resulted in a ―competitive dynamic‖ 

for Ancestry. 23 The website, FamilySearch.org, provides free online access to 

some of the Church‘s extensive resources—the Church has aggregated ―what's 

recognized as the world's largest collection of data and content that would be 

valuable for people researching their family history.‖24 This collection previously 

enticed interested individuals to travel to Salt Lake City, but the FamilySearch.org 

website has begun digitizing the collection and ―includes a lot of the same features 

and functionality‖ as Ancestry.com.25

 

19 Id. at 108:22–23 (Hochhauser).

20 Id. at 109:13–14 (Hochhauser).

21 See, e.g., id. at 8:24–9:5 (Sullivan); id. 118:5–11 (Hochhauser).

22 See, e.g., id. at 10:12–11:4 (Sullivan); id. 107:21–108:1 (Hochhauser).

23 Id. 10:4–11 (Sullivan). But see id. 53:12–54:5 (Sullivan) (noting that Ancestry has actually 

worked with the Church in some capacities, including digitizing certain of the Church‘s records).

24 See id. at 9:15–23 (Sullivan).

25 Id. at 9:20–10:3 (Sullivan).
6

B. The Sales Process 

By early 2012, Ancestry stock was trading in the low-$20s. Around that 

time, ―[i]nterest rates were at a record low,‖ and the Company was approached by 

a few private equity firms. 26 After receiving these unsolicited overtures, 

Ancestry‘s board began exploring strategic options for the Company. Ancestry‘s 

nine-member board included six independent directors, the Company‘s CEO, 

Timothy Sullivan, and two directors who were principals at Spectrum Equity 

(―Spectrum‖), which at that time owned approximately 30% of the Company.27

At an April 19, 2012 board meeting, Qatalyst Partners (―Qatalyst‖), a 

financial advisor, made a presentation to Ancestry‘s directors.

28

 In this ―state of 

the union‖29 presentation, Qatalyst raised as among its concerns that Ancestry ―was 

getting people that were less engaged in the hobby‖ and who would not maintain 

their subscriptions, though the Company‘s subscription base had been growing as a 

result of Who Do You Think You Are?.

30

 Qatalyst noted that Ancestry‘s 

subscription-based service raised questions regarding ―the size of Ancestry‘s 

 

26 Id. at 113:23–114:4 (Hochhauser); see also id. at 12:18–24 (Sullivan) (―This was a time where 

interest rates were historically low, and so the kind of company that Ancestry was, which is a 

subscription business, sort of more predictable than other kinds of businesses, really made, you 

know, Ancestry a potentially very attractive business for a private equity group to 

acquire . . . .‖). 

27 Id. at 12:2–7 (Sullivan).

28 See JX 22; JX 23. The board retained Qatalyst in May. See JX 33; JX 35.

29 Trial Tr. 114:24 (Hochhauser).

30 Id. at 116:23–117:3; see also JX 22; JX 23.
7

available market, [and] the degree to which Ancestry had already saturated that 

market.‖

31 As Jonathan Turner, a Qatalyst Partner, testified at deposition: 

There are only so many people who are interested and have the time 

to be able to devote a significant amount of their free time to 

genealogy and using the company‘s product and be willing to pay for 

it. And that was a—that was a concern because once the company hit 

. . . single-digit millions of subscribers, at this point the business was 

largely U.S. with a little bit of—a little bit of U.K. How many people 

left are there?32

The future of Who Do You Think You Are? was also uncertain, largely due to 

declining ratings;

33 as noted, the show was cancelled the month following this 

meeting, just as the auction process began. 

1. The Auction Process

Given the board‘s go-ahead, the auction process commenced in May 2012. 

Qatalyst reached out to a group of potential strategic buyers and financial sponsors 

including preeminent private equity firms and strategic partners that ―the company 

had had some contact with at various times in the past or that Qatalyst thought 

might be particularly interested in the business.‖

34

 In early June, news of the 

auction process was leaked, and on June 6, Bloomberg published an article 

detailing the previously confidential process.

35

 After the news of a potential sale of

 

31 Resp‘t‘s Opening Post-Tr. Br. at 22 (citing JX23 ACOM00000064–65; Turner Dep. (2014) 

27:10–30:1); see also Trial Tr. 115:23–116:2 (Hochhauser).

32 Turner Dep. (2014) 27:16–24.

33 Trial Tr. 117:7–15 (Hochhauser); see also JX 22; JX 23.

34 Trial Tr. 15:23–16:8 (Sullivan). 

35 See, e.g., id. at 16:10–17:4; JX 79 at ACOM00000376.
8

Ancestry became public, additional parties contacted the Company to express 

interest; Qatalyst ultimately held discussions with fourteen potential bidders, six 

potential strategic buyers and eight financial sponsors.

36

By June, nine potential bidders had signed non-disclosure agreements, 

thereafter receiving confidential information about the Company and meeting with 

management, including Ancestry‘s CEO and CFO.37 Ultimately, seven potential 

bidders submitted non-binding preliminary indications of interest, with bids falling 

in a range from $30-$31 to $35-$38.

38

 

Following these preliminary expressions, the Company invited the three 

highest bidders, including Permira, to engage in full diligence.39 According to 

Ancestry‘s CEO Timothy Sullivan, during this extensive diligence process, these 

bidders ―developed to varying degrees some real negativity about the company‘s 

prospects,‖ which ―significantly changed all of their views about value and . . . goforward strategies.‖40 Some of these bidders worked with their consultants to 

develop, based on data provided in diligence, detailed analyses of important 

 

36 JX 79 at ACOM00000376.

37 See id.; Trial Tr. 17:5–18:20 (Sullivan).

38 See JX 100 at ACOM00000395–97; Trial Tr. 18:21–20:4 (Sullivan) (describing an earlier 

stage in the process, by which time five bidders submitted preliminary indications of interest).

39 See, e.g., Trial Tr. Sullivan 20:15–21:20 (explaining that the Company decided to focus on the 

three highest bidders, after being advised by Qatalyst, for both logistical reasons and ―to create a 

competitive dynamic‖).

40 Id. at 23:17–22 (Sullivan); see also id. at 24:18–21 (Sullivan) (―[T]here was some sense that 

. . . Ancestry was a niche and it would have difficulty growing beyond this segment of serious 

genealogists.‖).
9

metrics such as ―renewal data and the engagement among different segments.‖41 

These cohort analyses ―broke down the different cohorts of people that joined a 

year ago or six months ago or three months ago, and sought to track the retention 

rates of similar groups of cohorts at different times.‖42 The Company had not 

previously conducted similar studies.43 The conclusions drawn from these studies 

were not favorable, showing declining trends across every cohort of monthly 

subscribers, at a time when these subscribers accounted for 60% of Ancestry‘s 

business.44 Hochhauser characterized this data as ―the two-by-four over the head[;]

 ̳Hey, guys, not sure you‘re aware of this, but this is pretty important.‘‖45

Qatalyst had set a deadline of early August for submission of final bids.

When no party submitted a bid by that deadline,

46 and despite the existence of a 

don‘t-ask-don‘t-waive provision, a fourth bidder, Hellman & Friedman (―H&F‖), 

was re-invited into the process.47 Although initially enthusiastic to engage in the 

 

41 Id. at 24:22–24 (Sullivan); see also id. at 25:2–7 (Sullivan) (―[G]enerally, there was some 

quite negative conclusions reached from some of that research with respect to, you know, 

degrading retention rates amongst certain cohorts and, you know, frankly, less engagement with 

the site among some segments of subscribers than they would have expected.‖).

42 Id. at 25:15–20 (Sullivan); see also id. at 139:12–140:6 (Hochhauser); JX 82.

43 See, e.g., Trial Tr. at 25:20–22 (Sullivan) (―[T]hat was actually a level and depth of retention 

analysis that the company had not done prior to that point.‖); id. at 140:8–14 (Hochhauser) 

(same, but noting also that this is now a standard analysis for the Company).

44 See id. at 142:6–8 (Hochhauser).

45 Id. at 142:2–4 (Hochhauser). Importantly, projections prepared in May for the sales process, 

which forecasted a decline in churn, were called into question by these new studies. See id. at 

143:8–20 (Hochhauser) (using more colorful language than I have here).

46 Id. at 25:23–26:8 (Sullivan).

47 See, e.g., id. at 28:9–18 (Sullivan); JX 112.
10

due diligence process, H&F became concerned after familiarizing itself with 

Ancestry‘s data and did not submit a bid.

48

 

At this point, the Company hired Goldman Sachs to ―make some 

recommendations for what the company could do as an ongoing stand-alone public 

company.‖49 As Sullivan noted at trial, ―[I]t was really the sort of Plan B option, 

as we referred to it internally.‖50

Meanwhile, the Company pursued the sales process. With two parties 

maintaining their interest in the Company, a partnership between these bidders was 

explored, but ultimately unsuccessful.51 On October 3, 2012, Permira submitted a 

bid of $31.52 Permira raised its bid to $31.25, and ultimately to $32, after further 

negotiation. 53 During these final price negotiations, Turner sent an email to 

Sullivan expressing, ―I told [Brian Ruder of Permira] that $32 was our line in the 

sand and we would not take anything less than that to the board.‖ 54 Sullivan 

responded, in part:

 

48 See, e.g., Trial Tr. at 31:3–16 (Sullivan) (―[T]hey found a lot of people who were subscribing 

to the product but that weren‘t even visiting and weren‘t engaging. And that really, really 

troubled them. . . . [T]here were some things about, again, the size of the addressable market, 

some of the competitive dynamics.‖). 

49 Id. at 32:5–7 (Sullivan).

50 Id. at 32:12–13 (Sullivan).

51 Id. at 32:23–33:20 (Sullivan) (explaining that one of these parties, upon engaging in further 

diligence, ―ended that process probably even a little more negative than the first time that they 

walked away‖).

52 JX 156.

53 Trial Tr. 34:14–19 (Sullivan).

54 See JX 162.
11

I would strongly urge that we communicate even more clearly to 

Brian tomorrow morning the following:

1. If we hit Monday morning with him at $31.99 or lower, we are 

done. There will be no additional counter offer. We are done 

and moving on [] with [the] press release[,] Q3 numbers[,] 

stock buy-back plans, etc[.] At least this is my personal view 

and one that I will share actively with the [board]. I will shave, 

put on a nice shirt, and throw myself energetically back into the 

job of being a public company CEO[,] with the extra vendetta 

of making the entire private equity industry look like idiots over 

the next couple of years.

2. If we hit Monday morning with him at $32.25, I will be an 

active advocate for this deal. I feel strongly that this is a price 

that is fair to shareholders.

3. If we hit Monday morning and we are between $32 and $32.24, 

I will largely defer to the independent members of the [board]. 

I might support the deal at this level, but I will not lead the 

charge to have it approved. This is a modest toughening of my 

previous position, but I am flabbergasted by his 

incrementalism, and I do not want this to drift into next 

week. . . .55

At trial, he explained that this language was meant to provide Turner with ―some 

words, a real stick . . . that he could use to advance his negotiations with Mr. 

Ruder.‖56 Sullivan further clarified that ―this was a calculated . . . effort‖ as the 

Company had ―determined that there was a reasonable chance [it] could get 

Permira to up their bid to [$]32,‖ so he was using this as ―a tactic to . . . draw a line 

in the sand and . . . lead Permira to believe that below [$]32, it wasn‘t going to 

 

55 Id.

56 Trial Tr. 36:11–15 (Sullivan).
12

happen.‖57 It was, in short, intended as ―a little bit of dramatic flourish.‖58 As 

noted, after active negotiation, Permira eventually offered $32.

On October 18, the board reviewed Permira‘s proposal, as well as a Qatalyst 

presentation on its fairness opinion.

59

 At this meeting, the board approved the 

merger with Permira. The $32 price represented a 41% premium on the unaffected 

trading price of Company stock.60 On October 21, Ancestry entered into a merger 

agreement with Permira affiliates Global Generations International, Inc. (―Global‖)

and its wholly owned subsidiary, Global Generations Merger Sub Inc. (―Merger 

Sub‖).

61

 

The merger was announced on October 22. During the two-month period 

between the announcement of the merger and the closing, no topping bid emerged, 

despite a fiduciary out clause in the merger agreement.

62

 On December 27, 2012, a

majority of Company stockholders approved the merger; in fact, 99% of voting

shares voted in favor of this transaction.63 On December 28 (the ―Merger Date‖), 

Ancestry merged with Merger Sub, with Ancestry as the surviving corporation. 

Ancestry is now a wholly owned subsidiary of Global. 

 

57 Id. at 36:16–24 (Sullivan). 

58 Id. at 37:23–24 (Sullivan); see also id. at 37:1–38:24 (Sullivan) (describing Sullivan‘s strategy 

and explaining another part of the email that is not quoted here).

59 See JX 182; JX 183.

60 Resp‘t‘s Opening Post-Tr. Br. at 1, 6.

61 See JX 187 at 1, 60; JX 268.

62 See JX 197 at 77–78; id. Annex A at 35–36 (Merger Agreement § 5.3(d)).

63 JX 274.
13

2. Management Projections

Ancestry did not prepare management projections in the ordinary course of 

business; the projections prepared in connection with the sales process were ―the 

first time that [Ancestry had] ever done long-term projections.‖64 In fact, ―[u]p 

until that point [May 2012,] [Ancestry] had frankly never done anything out past []

one year.‖65

Hochhauser worked with Curtis Tripoli, head of Ancestry‘s financial 

planning and analysis (―FP&A‖) group, and his team, as well as Sullivan, in 

preparing the Company‘s projections.66 The goal was to ―come up with a set of 

optimistic projections that we could stand in front of a room and walk through and 

present, but that we know are going to be very optimistic.‖67 The motivation to be 

optimistic derived in part from the belief that potential bidders were ―going to cut 

back or discount what we say, so we want to give ourselves some room or some 

cushion.‖68

 

64 Trial Tr. 119:13–14 (Hochhauser).

65 Id. at 119:18–19 (Hochhauser); see also id. at 47:17–19 (Sullivan). 

66 See, e.g., id. at 122:8–9 (Hochhauser) (noting that Sullivan would provide feedback); id. at 

47:1–8 (Sullivan) (―I was, you know, involved at a high level [with preparing these 

projections] . . . I‘m on the front end of the process, sort of agreeing to the philosophy of how we 

want to approach that, occasionally involved in setting some of the assumptions, but always 

involved in, you know, formally approving or giving my stamp of approval to the work of the 

finance group.‖).

67 Id. at 122:18–23 (Hochhauser).

68 Id. at 123:4–6 (Hochhauser).
14

a. The May Projections 

In early May, a set of projections was developed that addressed the key 

metrics of Ancestry‘s business—GSAs, churn, and SAC (the ―Initial May 

Projections‖). According to Sullivan ―the view was that these were forecasts that 

were going to be used by people that were going to . . . potentially bid to buy the 

company. And so we determined that we wanted those to certainly be optimistic, 

even aggressive.‖

69

Hochhauser presented these projections to the Company‘s directors at a May 

15 board meeting.70 Hochhauser noted in a May 14 email to the board enclosing 

materials for the meeting that he had adjusted the projections to account for NBC‘s 

recent cancellation of Who Do You Think You Are?.

71

 After reviewing these 

projections, ―the board‘s push-back was that you guys really need to turn—you 

know, be a touch more aggressive here and accelerate your growth.‖72

Hochhauser took the board‘s ―feedback [to] try to make [the projections]

more aggressive‖ and in fact ―made them slightly more aggressive.‖73 In these 

new projections (the ―May Sales Projections,‖ and collectively with the Initial May 

Projections, the ―May Projections‖), management ―turned the dials—GSA, SAC, 

 

69 Id. at 47:23–48:4 (Sullivan). 

70 JX 29 at ACOM00043393-400.

71 See id. at ACOM00043393; JX 28.

72 Trial Tr. 132:13–16 (Hochhauser).

73 Id. at 133:2–6 (Hochhauser); see also id. at 190:24–191:2 (Hochhauser) (―The board‘s 

feedback was to make them—you know, just to turn them a little more, to modestly increase the 

growth rates and revenue and EBITDA.‖).
15

churn—as much as [they] could while maintaining . . . credibility.‖74 Specifically, 

―to go much beyond what [management] did, you would have to assume some new 

business, creation of new business.‖75 These updated projections were presented to 

and approved by the board, and provided to interested parties during the sales

process. 

b. The October Projections

After receiving the May Sales Projections, some bidders commented that the 

assumptions were optimistic and aggressive.

76

 That fall, partly in response to 

bidder feedback, management developed a new set of projections (the ―October 

Projections‖). Qatalyst had also been ―pretty clear . . . that they likely couldn‘t

render a fairness opinion based upon those May numbers.‖77 As Hochhauser put it, 

―[i]f we‘re selling the company, the board would need to have the best set of 

numbers they could possibly have to make an important decision.‖78

To develop the October Projections, Hochhauser, working with Curtis, and 

others in Ancestry‘s FP&A group, along with Sullivan, underwent the ―[s]ame 

 

74 Id. at 133:21–24 (Hochhauser); see also Tripoli Dep. 35:1 (describing the May Sale 

Projections as ―aggressive yet believable‖); JX 43 at ACOM00174689; JX 37 at 

ACOM0000681115. 

75 Trial Tr. 133:24–134:2 (Hochhauser).

76 See, e.g., id. 144:13–18 (Hochhauser); Turner Dep. (2014) 135:20–24; see also JX 174 at 

ACOM00174922 (presenting this feedback to the board). As noted above, some bidders had 

conducted their own cohort studies that undermined certain assumptions in the May Sales 

Projections. See supra notes 41–45; Trial Tr. 148:5–11 (Hochhauser).

77 Trial Tr. 145:20–22 (Hochhauser); JX 273.

78 Trial Tr. 145:11–14 (Hochhauser).
16

process mechanically‖ as they had for the May Projections.79 In August, however,

the budget process had begun,

80

 and the Company ―had actualized or closed the 

months leading up through September.‖81 Accordingly, ―2012 was sort of a tighter 

set of numbers.‖82 

The updated numbers, in addition to the incorporation of bidder feedback, 

led to projections that were more conservative than the May Sales Projections 

previously approved by the board and provided to bidders.

83 As Hochhauser noted, 

in this set of projections, management—―shooting for the bull‘s eye of numbers‖—

was ―not trying to be optimistic or pessimistic. We‘re trying to be right down the 

middle.‖84 Sullivan relayed that the ―philosophy‖ behind these projections was 

―accuracy.‖85

On October 11, the October Projections were finalized. These Projections 

included two scenarios—Scenario A and Scenario B (the ―Scenarios‖)—which 

were not weighted; instead, they were meant to act as outer ―goalposts‖ of a range, 

with the goal being ―to just look between the two of them.‖86 At trial, management 

 

79 Id. at 146:1–5 (Hochhauser).

80 Id. at 146:21–147:2 (Hochhauser).

81 Id. at 146:5–8 (Hochhauser).

82 Id. at 146:8–9 (Hochhauser).

83 See, e.g., JX 170 (comparing the May Sales Projections to the October Projections‘ Scenario A 

and Scenario B).

84 Trial Tr. 146:10–13 (Hochhauser).

85 Id. at 49:13–15 (Sullivan).

86 Id. at 151:10–13 (Hochhauser).
17

opined that these were the best estimates of the Company‘s future performance.87 

Notably, however, at the time the Scenarios were being created, management was 

also contemplating equity rollovers into the new company.

3. Equity Rollover

Because Ancestry was engaging with a private equity bidder, Sullivan 

understood that there could be an expectation that he would rollover around 50% 

of his equity into the new company.88 In anticipation of this rollover, Sullivan 

conducted several calculations, which he also sent to Hochhauser and Turner in an 

email that ended: ―ANCESTRY.COM IS GOING TO BE HUGE!!!!!‖89 At trial, 

Sullivan described this exclamation as ―a bit of an ironic flourish,‖ noting that:

After months of really being beat down from prices that we thought 

we would be able to get at the beginning of the process to a low price, 

I was offering to use the fact that I was now prepared to roll over a big 

chunk of my equity to actually, you know, use that as an argument or 

a point of leverage to take to these buyers and show that, you know, 

look, the CEO is serious. The CEO thinks it‘s going to be huge. So I 

guess its tongue-in-cheek or ironic or something.90

Additionally, Sullivan ran his own calculations involving Company stock and its 

potential reaction to a transaction with a private equity buyer; he shared these 

calculations with Hochhauser in emails entitled ―incredible hack‖ and ―hack 

 

87 Id. at 49:20–23 (Sullivan); id. at 157:22–158:2 (Hochhauser).

88 Id. at 39:5–13 (Sullivan).

89 JX 134 at ACOM00008290.

90 Trial Tr. 40:21–41:7 (Sullivan).
18

version 2.‖91 At trial, Sullivan explained that he ―meant to convey something 

simple. It‘s a doodle. It‘s not . . . a formal analysis or projection of any kind. Just 

sort of a . . . really, really simple little hack of a model.‖92 

A third iteration of Sullivan‘s analyses contained two columns, one for 

―Take Private‖ and one for ―Stay Public.‖93 Though this third model has EBIDTA 

for 2016 under the ―Take Private‖ column, Sullivan disavowed that this was a 

projection of EBIDTA for 2016, reiterating:

[I]t‘s not a formal projection or, you know, forecast of any kind. It‘s 

just a simple exercise. I did this on my own, just to try to get a sense 

of, as I said earlier, the difference between how the P&L would work 

as a leveraged company versus as a, you know, continued stay-public 

company where, rather than pay debt service, we would continue to 

buy back shares. What I was really trying to do is understand the 

mechanics of staying public versus the mechanics of staying private, 

not in any way, you know, doing a genuine forecast.94

Notably, in light of Sullivan‘s attempt to minimize the importance of them, the 

―hacks‖ were much more optimistic than the October Projections.95 

Throughout negotiations, as Permira raised its offer, it required increased 

equity rollover from management and Spectrum, Ancestry‘s then-largest 

stockholder. Ultimately, at $32 per share, management agreed to rollover a total of 

 

91 Id. at 41:9–13, 41:19–42:2 (Sullivan); see also JX 126; JX 283. 

92 Trial Tr. 42:5–10.

93 JX 239.

94 Trial Tr. 43:6–23 (Sullivan).

95 See, e.g., id. at 369:14–21 (Wisialowski) (―[Sullivan‘s projections] were much more closely 

aligned with the original May projections, and they were drastically different from the Scenario 

A, in particular, and Scenario B as well, that were used for the basis of the opinion and what 

became Scenarios A and B.‖).
19

$82 million in equity,

96 which included 80% of Sullivan‘s stock;97 Spectrum rolled 

over $100 million, which represented approximately 25% of its Ancestry stock.98

C. The Appraisal Remedy 

Ancestry received written demands for appraisal dated December 6, 2012 

from Cede & Co., nominee for The Depository Trust Company (―DTC‖) and 

record holder of the 160,000 shares over which Petitioners Merlin Partners LP

(―Merlin‖) and The Ancora Merger Arbitrage Fund, LP (―Ancora‖ and, together 

with Merlin, the ―Merlin Petitioners‖) assert beneficial ownership. Ancestry 

received a written appraisal demand dated December 18, 2012 from Cede & Co. as 

record owner of the 1,255,000 shares for which Merion Capital, L.P. (―Merion‖)

asserts beneficial ownership.

99

D. Experts’ Valuations

The experts of both the Petitioners and Respondent relied exclusively on a

discounted cash flow (―DCF‖) analysis to value Ancestry as of the Merger Date, as 

opposed to comparable companies and comparable transactions analyses, 

recognizing that the latter would be irrelevant or unhelpful here, given Ancestry‘s 

 

96 JX 197 at 2.

97 Trial Tr. 96:15–17 (Sullivan). 

98 JX 197 at 2; see also Resp‘t‘s Pre-Trial Br. at 23.

99 In a Memorandum Opinion dated January 5, 2015, I denied Ancestry‘s Motion for Summary 

Judgment as to Merion‘s Petition. See In re Appraisal of Ancestry.com, Inc., 2015 WL 66825 

(Del. Ch. Jan. 5, 2015).
20

unique business and the concomitant difficulty of finding comparable companies 

or transactions.

100

The Petitioners‘ expert, William S. Wisialowski, initially opined that 

Ancestry was valued at $42.97; after making certain corrections to his analysis, he 

adjusted this valuation to $43.65,101 then to $43.05.102 At his deposition, however, 

Wisialowski testified that, ―[b]ased on the information that was given to [him],‖ he

would not provide a fairness opinion at a price below $47 per share.103 Finally, at 

trial, Wisialowski opined that the value of Ancestry was ―at least‖ $42.81 per 

share;

104 $42.81 is more than 30% higher than the merger price, resulting in a 

discrepancy of approximately $500 million between the two values.105

 

100 See Trial Tr. 254:4–10 (Wisialowski); id. at 368:10–16 (Wisialowski); id. at 551:20–552:3 

(Jarrell); JX 212 ¶¶ 146–47; JX 209 ¶¶ 216–17, 223–225. Jarrell also noted that the merger price 

―provides a strong indication of fair value.‖ JX 209 ¶ 105. The Petitioners object to the portions 

of his report opining on the sales process, which formed the basis for his opinion regarding the 

role of the merger price in the valuation. Ultimately, Jarrell stood upon his value of $30.61, 

derived from a DCF analysis, though still emphasizing that the $32 merger price was within his 

calculated range. See Trial Tr. 551:8–19 (Jarrell).

101 Id. at 381:8–22 (Wisialowski).

102 Id. at 383:23–384:2 (Wisialowski).

103 Wisialowski Dep. 75:20–23; see also id. at 74:11–22 (―My view is that the company would 

have been better off for its shareholders maintaining its public status. So I—you know, whether 

it was—whether it was [$]47, or—part of it is, is the intrinsic value, the DCF value, the cash 

flow value, it may not have been realizable at this point in time as a sell side transaction. And 

therefore, I would have shown [Ancestry] what their business was worth, and I would have 

counseled them that if they want to maximize and optimize value for their shareholders, selling 

the company now is not the way to do it.‖). 

104 Trial Tr. 391:2 (Wisialowski); id. at 391:22–23 (―I‘m comfortable that my value is at least 

[$]42.81.‖). Compare id. at 392:4–5 (―I believe [an increase] would be justifiable, but I‘m 

comfortable saying it‘s worth at least [$]42.81.‖), with Wisialowski Dep. 270:18–20 (―My

understanding of fairness is that what we‘re trying to do is we‘re trying to find the bull‘s-eye and 

we only get one shot.‖)

105 Resp‘t‘s Answering Post-Trial Br. at 2–3.
21

The Respondent‘s expert, Gregg A. Jarrell, arrived at a value of $30.63 per 

share.106 In arriving at $30.63, Jarrell testified that ―the $32 is within that range 

from a discounted cash flow analysis. And that provides a great deal of comfort to 

me that the discounted cash flow analysis has validity, is economically 

meaningful.‖ 107 Wisialowski‘s analysis, by comparison, resulted in a ―big 

discrepancy‖ between the value of the Company and the merger price. 108 As 

Jarrell testified:

[I]f that were me that was faced up with that big discrepancy, I would 

have to try to find out a way to reconcile those two numbers, or why 

would these smart, professional, profit-oriented professional private 

equity investors leave that much money on the table? Why wouldn‘t 

someone pay $33 for this company if, in fact, it were validly worth 

[$]42 to [$]47 as a stand-alone company? You know, that‘s a huge 

valuation gap and that‘s a lot of implied profit that‘s been left on the 

table. And that, to my mind, would create a lot of discomfort 

regarding my DCF valuation.109

1. Valuation Background

By way of brief background, and to provide context before recounting the 

experts‘ respective calculations and assumptions, 

[t]he basic premise underlying the DCF methodology is that the value 

of a company is equal to the value of its projected future cash flows, 

discounted at the opportunity cost of capital. Put simply, the DCF 

 

106 See, e.g., Trial Tr. 551:8–10 (Jarrell).

107 Id. at 559:12–17 (Jarrell).

108 Id. at 559:17–23 (Jarrell).

109 Id. at 559:24–560:11 (Jarrell).
22

method involves three basic components: (i) cash flow projections; 

(ii) a terminal value; and (iii) a discount rate.110

The method ―involves several discrete steps‖

111

: 

First, one estimates the values of future cash flows for a discrete 

period, based, where possible, on contemporaneous management 

projections. Then, the value of the entity attributable to cash flows 

expected after the end of the discrete period must be estimated to 

produce a so-called terminal value, preferably using a perpetual 

growth model. Finally, the value of the cash flows for the discrete 

period and the terminal value must be discounted back using the 

capital asset pricing model or ―CAPM.‖112

In this case, the experts disagreed on each of these components—the projections 

to use for future cash flows, the terminal value, and the discount rate—and the 

components that make up each of those, in addition to the role of stock-based 

compensation. I describe the discrepancies in the inputs of Wisialowski and 

Jarrell, and their respective rationales, below.113

 

110 In re Orchard Enterprises, Inc., 2012 WL 2923305, at *12 (Del. Ch. July 18, 2012), judgment 

entered sub nom. In re Appraisal of the Orchard Enterprises, Inc. (Del. Ch. July 26, 2012), 

judgment aff'd sub nom. Orchard Enterprises, Inc. v. Merlin Partners LP, 2013 WL 1282001 

(Del. Mar. 28, 2013); see also Merion Capital, L.P. v. 3M Cogent, Inc., 2013 WL 3793896, at 

*10 (Del. Ch. July 8, 2013), judgment entered sub nom. Merion Capital, L.P v. 3M Cogent, Inc.

(Del. Ch. July 23, 2013).

111 Andaloro v. PFPC Worldwide, Inc., 2005 WL 2045640, at *9 (Del. Ch. Aug. 19, 2005).

112 Id.

113 I include a detailed factual recitation here, because the inputs are necessary to any principled 

attempt to reconcile the experts‘ widely divergent DCF analyses. The casual reader may wish to 

skip ahead to the discussion section of this Memorandum Opinion; she may find reading the 

remainder of the facts section reminiscent of eating chicken gizzards: plenty of chewing but 

mighty little swallowing.
23

2. Projections

Wisialowski developed a set of ―blended‖ management projections, which 

weighted the Initial May Projections and October Scenario B equally. Wisialowski 

testified that his arrival at this weighting did not involve much precision.114 He did 

not attempt to determine the probability of either projection occurring; instead, he 

testified at trial that he ―was tempering—[he] was mixing the projections to say 

maybe they were half right on this growth rate and half right on this growth rate 

and put those together.‖115 He explained: ―What I try to do is come up with what I 

felt was a minimum defensible conservative valuation of the company.‖116

Jarrell, on the other hand, relied exclusively on the October Projections, 

weighting both October Scenarios equally. 117 He opined that the October 

Projections were more reliable because they incorporated bidder feedback, the 

 

114 Trial Tr. 470:16–19; Wisialowski Dep. 271:24–272:2; see also Wisialowski Dep. 273:20–

274:4 (―Q. But I think actually if you were trying to determine what is the best estimate of the 

likely outcome in the future, you would have come up with something different? A. I think 

where I stand—where I stand today, having learned more about the business, I might revisit the 

mix, especially now that I see what the drivers are in terms of—in terms of what the underlying 

assumptions were in getting them.‖).

115 Trial Tr. 470:12–15 (Wisialowski); see also id. 470:1–5, 20–23 (Wisialowski); id. at 471:9–

17 (Wisialowski) (―There were other ways to get to a similar judgment, which was trying to 

temper this—if people believe that these are aggressive, there are three ways that you can reduce 

them. You can actually just pick a number. You can blend them with something that‘s in 

existence, which is what I ultimately did, or I can just scale the set of numbers and run it at a 90 

percent or 80 percent or 70 percent realization. There‘s many ways to skin the cat.‖); id. at 

472:15–20 (―I think Scenario B, when blended with the management projections, gives a 

conservative growth rate in revenues and a highly defensible, if not excessively conservative, 

margin, certainly at the EBITDA level, which would be a good estimation of the business 

prospects of the company.‖).

116Id. at 472:24–473:2 (Wisialowski).

117 Id. at 573:12–17 (Jarrell); JX 209 ¶ 139.
24

realities of the auction process, and other information that management had learned 

since May; they were also closer to Wall Street estimates.118 

3. Terminal Value

Calculating terminal value involves four key components: perpetuity growth 

rate, the EBIT margin, the ―plowback‖ ratio, and the projected tax rate.119

As for perpetuity growth rate, Wisialowski adopted 3.0%, which he 

characterized as the most conservative assumption in his entire model.120 Jarrell 

agreed that this was ―on the low side,‖ and adopted a 4.5% growth rate.121 This 

difference did not garner much discussion at trial, comparatively speaking, as both 

choices could be seen as conservative for their respective sides. That is, had 

Wisialowski adopted a higher growth rate, his valuation could have been more 

favorable to the Petitioners; had Jarrell adopted a lower growth rate, his valuation 

could have been more favorable to the Respondent.

The remaining three components generated a more vigorous dispute.

First, Jarrell and Wisialowski disagreed as to whether it was necessary to 

normalize EBIT margins during the perpetuity period—Jarrell believed it 

necessary; Wisialowski did not. Normalization of EBIT margins is based on the 

 

118 See id. at. 571:8–573:5 (Jarrell).

119 See, e.g., Resp‘t‘s Opening Post-Trial Br. at 58; Trial Tr. 734:3–10 (Jarrell).

120 See Trial Tr. 271:7–14 (Wisialowski).

121 See id. at 733:15–22 (Jarrell).
25

idea that the EBIT projection for the last year of the projections period may not be 

appropriate to apply in perpetuity; as Jarrell explained at trial:

The perpetuity period, in theory, is a period where you‘re in long-run 

competitive equilibrium. In long-run competitive equilibrium, there's 

a tendency for margins to be lower than they are in the forecast period 

because competition in the long run is more fierce than it is in the 

short run. Any barriers to entry that Ancestry has in the short run, 

owing to whatever advantages that they‘ve generated, tend to erode in 

the long run rather than get better, and that reflects itself as 

competition for price, and the margin goes down.122 

Thus, rather than apply the projected margin for the final year of the projections 

period in perpetuity, Jarrell averaged the projected margins and used that figure, 

which had been ―normalized to a sustainable level,‖ in calculating terminal 

value.123 He averaged the projected EBIT margins for 2013 through 2016 (as 

projected in Scenarios A and B), resulting in a normalized EBIT margin of 26.1% 

for Scenario A and 27.3% for Scenario B, as compared to the historical actual 

EBIT margin of 18.2% for the years 2004–2012, and the actual EBIT margin of 

26.3% for the year 2012.124 

The Petitioners criticized Jarrell‘s approach on two grounds, first asserting 

that normalization ―was unnecessary given the pessimistic outlook already adopted 

by the Scenarios.‖ 125 Second, they contend, even if one were to normalize, 

 

122 Id. at 652:14–24 (Jarrell).

123 JX 209 ¶ 193 & n.239–41.

124 Id. ¶ 194 & Table 12.

125 Merion Capital L.P.‘s Post-Trial Br. at 72.
26

―normalized profit margins should reflect the midpoint of the company‘s business 

cycle,‖ because ―[a]s the company reaches a steady state, the cost structure evolves 

and becomes stable.‖ 126 Because Ancestry had been growing, ―the average 

margins used by Jarrell would not reflect a mid-point of its business cycle,‖ and

―Jarrell conducted no analysis to determine whether his EBIT margin assumption 

during the perpetuity period was the midpoint of Ancestry‘s business cycle.‖127 

While criticizing Jarrell‘s approach, the Petitioners offered little in the way 

of substantive support of Wisialowski‘s approach, other than to characterize it as 

―appropriate[],‖ ―given Ancestry‘s consistent trend of increasing margins.‖ 128 

Wisialowski used 38.8% in his terminal period calculation, which is his EBITDA

margin projection for 2016, and is higher than any margin Ancestry ever 

achieved.

129

 Wisialowski arrived at 38.8% by blending the projected EBITDA 

margins from the last projected year of each of the Initial May Projections and 

October‘s Scenario B. 130 Jarrell noted that, had Wisialowski normalized his 

EBITDA margins, his figure would have been 37.3%. 131 The effect of this 

discrepancy is to drive the terminal value, and thus the DCF, of the respective 

 

126 Id. (emphasis added).

127 Id. (emphasis added).

128 Id. at 71.

129 Resp‘t‘s Opening Post-Trial Br. at 91.

130 Trial Tr. 476:13–477:17 (Wisialowski); see also id. at 654:19–655:15 (Jarrell).

131 Id. at 655:10–15 (Jarrell).
27

experts further apart; i.e., the Petitioners‘ expert‘s valuation comes out higher, and 

the Respondent‘s expert‘s valuation comes out lower.132

Second, the experts arrived at different plowback ratios, which is the

percentage of net operating profit after tax that is reinvested in capital 

expenditures. The idea is that ―[i]n order to adequately support a perpetual growth 

rate in excess of expected inflation (i.e., positive real growth), a firm will need to 

reinvest in capital expenditures at a sustainable rate that is above that of projected 

depreciation.‖133 Jarrell‘s plowback ratio was 12% of his terminal period cash 

flows, which he arrived at by considering plowback for Scenarios A and B (12.1% 

and 11.5%, respectively), and the historical plowback, which was 11.9%.

134

 In 

light of his 4.5% perpetuity growth rate, with 2% expected inflation, this 12% 

plowback ratio implied a return on investment of 22.8% going forward—―a very 

pro increases-value assumption.‖

135 By comparison, Wisialowski used a 4.8% 

plowback ratio and criticized Jarrell‘s higher figure.136 Jarrell noted, however, that

because of Wisialowski‘s 3% perpetuity growth rate, again assuming 2% expected 

inflation, Wisialowski‘s projected return on investment comes out to 22.6%;

137 in 

other words, the assumptions used by each expert result, essentially, in a wash. 

 

132 See, e.g., id. at 656:3–14 (Jarrell).

133 JX 209 ¶ 203.

134 Trial Tr. at 658:2–9 (Jarrell).

135 Id. at 661:20–21 (Jarrell).

136 See JX 221 ¶¶ 149–51.

137 See Trial Tr. at 662:15–24 (Jarrell)
28

Finally, as to projected tax rate, Jarrell used 38%, while Wisialowski used 

35%. ―This difference has a material effect on the valuation—if Jarrell had used a 

35% tax rate, it would raise his valuation by $0.97; if Wisialowski used a 38% tax 

rate, [] it would lower his valuation by $1.17.‖138 Jarrell‘s marginal tax rate figure 

is based on historical actual effective tax rates, which the Petitioners criticized as 

improper and not representative of the Company‘s future.139 Jarrell defended his 

figure by suggesting that, although an average tax rate may be lower than a 

marginal rate, one cannot rely, in perpetuity, on whatever variables resulted in a 

lower tax rate in a given year.

140 He found it more reasonable to remain consistent 

with the Company‘s long-term historical average tax rate.141 Wisialowski arrived 

at 35% by using 34%—a figure presented by PricewaterhouseCoopers in a 

presentation to Permira as to the likely tax rate ―for the foreseeable future,‖ but not 

explicitly a tax rate in perpetuity—and adding 1%, to ―[be] conservative.‖142

4. Discount Rate 

Wisialowski calculated a discount rate of 10.96%,143 while Jarrell calculated 

11.71%.144 This resulted in a $4.27 per share difference in their valuations.

145

 The 

 

138 Merion Capital L.P.‘s Post-Trial Br. at 69.

139 Id.

140 See Trial Tr. 664:3–665:8 (Jarrell).

141 Id. at 666:3–6 (Jarrell).

142 Id. at 524:4–525:6 (Wisialowski).

143 JX 212 ¶ 136. 

144 JX 209 ¶ 172.

145 See, e.g., Trial Tr. 351:20–22 (Wisialowski).
29

discrepancy turns largely on the experts‘ respective ―beta‖—that is, discount for 

risk based on the stock‘s movement as compared to the market—calculations; 

Wisialowski calculated beta of 1.107,146 later updated to 1.095,

147 while Jarrell 

calculated 1.30.148 

Key inputs in beta calculations include the market proxy, the observation 

period, and the sample period.149 The experts used different inputs on all accounts, 

at least in their initial reports; they ultimately agreed on the most appropriate 

sample period, while remaining in disagreement over the market proxy and 

observation period.

150

 

First, the experts used different market proxies in their regression analyses. 

Wisialowski ―selected the beta resulting from the regression of ACOM [Ancestry 

stock] against the NASDAQ Composite for all data since its IPO on a weekly 

basis.‖151 Wisialowski opted to use NASDAQ as the market proxy because he 

believed it to contain a number of companies similar to Ancestry. He then applied 

this beta to an S&P 500-based equity risk premium, though his report identified 

that a NASDAQ-derived beta should be multiplied by a NASDAQ equity risk 

 

146 JX 212 ¶ 113. 

147 JX 221 ¶ 178. 

148 See, e.g., Trial Tr. 351:17–19 (Wisialowski). 

149 See, e.g., id. at 352:7–12 (Wisialowski). 

150 See id. at 352:7–354:4 (Wisialowski).

151 JX 212 ¶ 128 (emphasis omitted).
30

premium.152 Jarrell used the S&P 500 as his market proxy for the regression 

analysis.153 In post-trial briefing, the Petitioners asserted that they ―[do] not take 

issue with regressing Ancestry‘s weekly beta against the S&P 500 if a weekly 

observation period is used, which results in a beta of 1.137.‖154

Second, Wisialowski and Jarrell used different observation periods, which 

can be daily, weekly, or monthly. Wisialowski used a weekly observation period, 

while Jarrell used a monthly period. Wisialowski characterized this as the ―biggest 

difference‖ in their respective calculations. 155 Wisialowski testified that many 

valuations use monthly data, but that, for Ancestry, this resulted in only 30 data 

points, whereas using 36 to 60 is recommended; thus, he used weekly data to 

generate more points.156 Jarrell testified that daily or weekly trading prices can 

include statistical ―noise‖ that affects the accuracy of the beta calculation, but 

noted that, ―all else equal, the more observations, the better in terms of statistical 

precision.‖ 157 He used a monthly period, which he described as ―sort of the 

 

152 See JX 212 ¶ 136. At trial, he stated that this was a typo and that he intended to, and did, use 

a market equity risk premium. But he used a figure from Ibbotson‘s Yearbook, which was based 

on the S&P 500. See Trial Tr. 486:2–5 (Wisialowski); JX 219 ¶¶ 46–50.

153 See JX 209 ¶ 179 & n.217.

154 Merion Capital L.P.‘s Post-Trial Br. at 66; see also Joinder of Pet‘rs Merlin Partners LP and 

AAMAF, LP in Post-Trial Br. 

155 Trial Tr. 351:6–10 (Wisialowski).

156 Id. at 353:2–23 (Wisialowski).

157 Id. at 636:4–637:3 (Jarrell).
31

standard of the services,‖ 158 having found ―noise‖ when he conducted further 

calculations.159

Third, while Wisialowski observed the period from the IPO through the date 

of the merger in his initial report, Jarrell excluded the period in which the auction 

process had become public. In his rebuttal report and at trial, Wisialowski 

conceded that Jarrell‘s approach was sound.160 However, Wisialowski testified 

that when he adjusted the time period to use Jarrell‘s approach, his beta decreased, 

thus driving a further gap between the experts‘ calculations.161

5. Stock-Based Compensation

Wisialowski, in his initial DCF analysis, did not take into account 

Ancestry‘s practice of providing stock-based compensation (―SBC‖) to its 

employees.162 Jarrell, by contrast, contends that a failure to account for SBC 

expenses within a DCF model may result in overvaluation.163 Scenarios A and B 

 

158 See id. at 637:4–12 (Jarrell).

159 Id. at 638:6–16 (Jarrell).

160 JX 221 ¶ 175; Trial Tr. 481:3–13 (Wisialowski).

161 Trial Tr. 352:19–23 (Wisialowski).

162 See JX 221 ¶ 138. 

163 JX 209 ¶ 163. He cites multiple authorities for this point, but also notes that this Court 

previously held that a respondent had failed to demonstrate that SBC should be treated as a cash 

expense. See id. ¶¶ 165–67 (citing Merion Capital, L.P. v. 3M Cogent, Inc., 2013 WL 3793896 

Del. Ch. July 8, 2013), judgment entered sub nom. Merion Capital, L.P v. 3M Cogent, Inc. (Del. 

Ch. July 23, 2013)). Merion contends that Jarrell‘s SBC calculation is too speculative and that it 

is not otherwise an appropriate adjustment to a DCF model because it is ―not an established 

approach in the valuation community or under Delaware law.‖ See Merion Capital L.P.‘s PostTrial Br. at 50–51.
32

of the October Projections did not include projections for SBC, however; he 

instead used a figure—3.2% of revenues—taken from the May Projections.

164

In his rebuttal report, Wisialowski ―built a model to estimate the number of 

options granted each year and the future stock price of Ancestry in order to 

measure the cash flow required to eliminate any dilution from future option grants 

and their exercise.‖165 For his model, he maintained his 50/50 weighting of the 

May Projections with Scenario B, but, as noted, because the October Projections 

did not include SBC projections, Wisialowski chose 1%, which he said was based 

on ―total personnel expense and SBC of 23.5% for Scenario B, which is slightly 

higher than the combined figure for the [May Projections].‖ 166 Ultimately, he 

calculated a difference in share value of approximately $0.50. 167 Wisialowski 

explained that he decided

not to include any impact for SBC in my DCF analysis because 

adding the future stock trading price adds yet another level of 

assumptions which are difficult to prove. That being said, I strongly 

believe that my estimates are conservative and Jarrell‘s are just plain 

wrong. I continue to believe that non-inclusion of SBC expense in 

FCF for purposes of a DCF-based valuation is the proper treatment 

and the treatment recognized by this Court.168

 

164 Trial Tr. 723:1–8. Compare JX 29 (Initial May Projections), and JX 43 (May Sales 

Projections), with JX 170 (October Projections). But see Trial Tr. 723:20–724:3 (Jarrell) (noting 

also that ―[n]othing below the EBITDA line was in the October projections‖; they were missing 

other figures that had been included in the May Projections, including depreciation, capital 

expenditures, and tax rates). 

165 JX 221 ¶ 130. 

166 Id. ¶ 131; see also Wisialowski Dep. Tr. 449:1–7.

167 JX 221 ¶ 134.

168 Id. ¶ 138.
33

II. PROCEDURAL HISTORY

Following the announcement of the merger, several plaintiffs filed actions in 

this Court, alleging, among other things, that the merger price was inadequate and 

the sales process was flawed. In November, these actions were consolidated, and 

on December 17, 2012, then-Chancellor Strine heard oral argument on the 

plaintiffs‘ motion for a preliminary injunction. He denied this motion from the 

bench.169 In March 2013, these plaintiffs then filed an amended complaint, which 

the defendants moved to dismiss. Oral argument was held on September 27, 2013, 

with then-Chancellor Strine granting the defendants‘ motion following 

argument.170

On January 3, 2013, Merion filed a Verified Petition for Appraisal pursuant 

to 8 Del. C. § 262. Also on January 3, the Merlin Petitioners filed a Petition for 

Appraisal of Stock. On June 24, these actions were consolidated. Collectively, the 

Petitioners owned 1,415,000 shares of common stock as of the Merger Date. 

On May 9, 2014, shortly before trial, Ancestry filed a Motion for Summary

Judgment, arguing that Merion lacked standing because it could not demonstrate 

that its shares were not voted in favor of the merger. I postponed consideration of 

 

169 See In re Ancestry.com Inc. S’holder Litig., C.A. 7988-CS (Del. Ch. Dec. 17, 2012) 

(TRANSCRIPT).

170 See In re Ancestry.com Inc. S’holder Litig., C.A. 7988-CS (Del. Ch. Sept. 27, 2013) 

(TRANSCRIPT).
34

that Motion until after full briefing and oral argument, which was completed in 

October. I denied the Motion in a Memorandum Opinion dated January 5, 2015.171

III. APPRAISAL ANALYSIS

A. The Appraisal Standard 

Characterized as, at one time, a liquidity option and, more recently, as a 

check on opportunism, the appraisal statute allows dissenting stockholders to 

receive judicially-determined fair value of their stock.172 After determining that 

appraisal petitioners have standing, as I have done here,173

the Court shall determine the fair value of the shares exclusive of any 

element of value arising from the accomplishment or expectation of 

the merger or consolidation, together with interest, if any, to be paid 

upon the amount determined to be the fair value. In determining such 

fair value, the Court shall take into account all relevant factors.174

“Appraisal is, by design, a flexible process.”175 Section 262 ―vests the Chancellor 

and Vice Chancellors with significant discretion to consider  ̳all relevant factors‘ 

and determine the going concern value of the underlying company.‖ 176 Our 

Supreme Court has declined to ―graft common law gloss on the statute,‖ in light of 

the General Assembly‘s determination that this Court‘s consideration of ―all 

 

171 See In re Appraisal of Ancestry.com, Inc., 2015 WL 66825 (Del. Ch. Jan. 5, 2015).

172 See id. at *3–4 (providing a brief history of the appraisal statute in Delaware).

173 As noted, Ancestry argued that Merion lacked standing, and moved for Summary Judgment 

as to Merion‘s Petition. I denied that Motion, finding that Merion has met the statutory 

prerequisites of Section 262. See id. Ancestry does not challenge the Merlin Petitioners‘ 

standing.

174 8 Del. C. § 262(h).

175 Global GT LP v. Golden Telecom, Inc., 11 A.3d 214, 218 (Del. 2010).

176 Id. at 217–18 (quoting 8 Del. C. § 262(h)).
35

relevant factors‖ is fair, albeit imperfect.177 Thus, and in the absence of ―inflexible 

rules governing appraisal,‖178 ―it is within the Court of Chancery's discretion to 

select one of the parties' valuation models as its general framework, or fashion its 

own, to determine fair value in the appraisal proceeding.‖179

Although the Supreme Court ―has defined  ̳fair value‘ as the value to a 

stockholder of the firm as a going concern, as opposed to the firm's value in the 

context of an acquisition or other transaction,‖

180 this Court has relied on the 

merger price as an indicia of fair value, ―so long as the process leading to the 

transaction is a reliable indicator of value and merger-specific value is 

excluded.‖181 In fact, this Court has held, where 

the transaction giving rise to the appraisal resulted from an arm‘slength process between two independent parties, and [] no structural 

impediments existed that might materially distort ―the crucible of 

objective market reality,‖ a reviewing court should give substantial 

evidentiary weight to the merger price as an indicator of fair value.182

B. Ancestry’s Fair Value

In an appraisal action, as pointed out above, ―[b]oth parties bear the burden 

of establishing fair value by a preponderance of the evidence,‖ which effectively 

 

177 Id. at 217.

178 Id.

179 Cede & Co. v. Technicolor, Inc., 684 A.2d 289, 299 (Del. 1996).

180 Golden Telecom, 11 A.3d at 217.

181 Huff Fund Inv. P’ship v. CKx, Inc., 2013 WL 5878807, at *9 (Del. Ch. Nov. 1, 2013) (internal 

quotation marks omitted); see also Highfields Capital, Ltd. v. AXA Fin., Inc., 939 A.2d 34, 42 

(Del. Ch. 2007).

182 Highfields Capital, 939 A.2d at 42.
36

means that neither party has the burden, and the burden instead falls on this 

Court.183 Upon consideration of the sales process, the experts‘ opinions, and my 

own DCF analysis, conducted in light of certain concerns with both experts‘ 

analyses, I find that Ancestry‘s value as of the Merger Date is $32. To explain that 

conclusion, I turn first to the evidence of valuation reflected in the market price.

1. The Sales Process

The sales process was reasonable, wide-ranging and produced a motivated 

buyer. It has been approved of, as free from the taint of breaches of fiduciary duty,

by this Court. In a bench ruling denying motion for a preliminary injunction, thenChancellor Strine noted that: ―The process looked like they segmented the market 

carefully, logical people were [brought] in, a competent banker who appears at 

every turn to have done sensible things, ran it.‖184 The Court characterized that 

process as one ―that had a lot of vibrancy and integrity‖: 

I think they tried to kick the tires. I think that even when I look at the 

communications by Mr. Sullivan, I think they were trying to get these 

buyers to pay as full a price as possible. They were trying to create a 

competitive dynamic. Given that and given the ability of stockholders 

 

183 Huff Fund, 2013 WL 5878807, at *9; see also Highfields Capital, 939 A.2d at 42–43 (―[I]f 

neither party adduces evidence sufficient to satisfy this burden, the court must then use its own 

independent judgment to determine fair value.‖); In re Orchard Enterprises, Inc., 2012 WL 

2923305, at *5 (Del. Ch. July 18, 2012) (―[T]he court may not adopt an  ̳either-or‘ approach to 

valuation and must use its own independent judgment to determine the fair value of the shares.‖) 

judgment entered sub nom. In re Appraisal of the Orchard Enterprises, Inc. (Del. Ch. July 26, 

2012) and aff'd sub nom. Orchard Enterprises, Inc. v. Merlin Partners LP, No. 470, 2012, 2013 

WL 1282001 (Del. Mar. 28, 2013).

184 In re Ancestry.com Inc. S’holder Litig., C.A. 7988-CS, at 210:22–211:1 (Del. Ch. Dec. 17, 

2012) (TRANSCRIPT).
37

to vote for themselves, I‘m disinclined to take it out of their hands. . . . 

I think given the market test that was done here, I‘m poorly positioned 

to take that risk for [the stockholders], and I‘m not prepared to do 

so.

185

In dismissing the amended complaint pursuant to Court of Chancery Rule 

12(b)(6), the Court concluded that ―the plaintiffs have not pled facts that raise an 

inference that any of the director defendants, much less a majority of them, 

suffered from disabling conflicts that would give rise to a breach of the duty of 

loyalty.‖186 In considering the process as a whole, which the Court characterized

as ―logical‖ and as ―an open door to a range of people,‖ 187 and, specifically 

addressing Spectrum‘s and management‘s equity rollovers, the Court concluded, 

―[P]ut simply, there‘s no non-conclusory factual allegations in the complaint from 

which I can conceivably infer that Spectrum, Sullivan, or Hochhauser, or any of 

the Ancestry directors, had any conflict of interest.‖188

Of course, a conclusion that a sale was conducted by directors who complied 

with their duties of loyalty is not dispositive of the question of whether that sale 

generated fair value.

189

 But the process here, described in full earlier in this

 

185 Id. at 232:5–233:4.

186 In re Ancestry.com Inc. S’holder Litig., C.A. 7988-CS, at 73:14–18 (Del. Ch. Sept. 27, 2013) 

(TRANSCRIPT).

187 Id. at 80:7–9.

188 Id. at 95:4–8.

189 I note that Ancestry had a charter provision exculpating directors for breaches of the duty of 

care; the actions of the board, therefore, were not even reviewed in the fiduciary duty action for 

gross negligence in the conduct of the sale. Nothing in the record before me, however, leads me 

to the conclusion that the sales process was fundamentally flawed.
38

Memorandum Opinion, appears to me to represent an auction of the Company that 

is unlikely to have left significant stockholder value unaccounted for.

190

 On the 

other hand, as is typical in a non-strategic acquisition, I find no synergies that are 

likely to have pushed the purchase price above fair value. The Defendant‘s expert, 

although arguing that fair value is somewhat below the sales price, concedes as 

much.191

It is within that context of the auction process, which generated a sale price 

of $32 per share, that I turn first to a significant issue in Ancestry‘s valuation—its 

projections—before turning to the evidence of value by way of the experts‘

opinions.

 

190 The Petitioners and Wisialowski argue that the merger price was ultimately the product of a 

financing issue, rather than a valuation issue. See, e.g., JX 212 ¶¶ 54–55; Merion Capital L.P.‘s 

Post-Trial Br. at 82. In support, they point to an email between Sullivan and Turner during the 

negotiation process, in which Sullivan colorfully describes his stance on the ongoing 

negotiations, and also stated, ―[W]e have taken [Permira] at [its] word for several months that 

[its] inability to do a deal at $33 was primarily a source of funds question . . . rather than a 

valuation question.‖ JX 162. As Sullivan explained at trial, that email also shows that, in order 

to ―call [Permira‘s] bluff‖ that it would not pay more than it had previously offered, supposedly 

because it could not obtain financing, management and Spectrum would roll over a larger portion 

of their equity, thus driving up the price Permira was willing to pay. See Trial Tr. 38:9–24 

(Sullivan). I found Sullivan‘s testimony on the context of this email credible, and I do not think 

his statement about financing should be afforded the weight the Petitioners suggest, particularly 

when taken in light of the broader context of the auction that produced no buyer willing to pay 

more.

191 Jarrell opined, ―Since Permira is a financial acquirer and not a strategic partner, the $32

merger price presumably does not contain any significant synergies that might result from 

combining the operations of Ancestry with any complementary operating business.‖ JX 209 ¶ 

107. He went on further to discuss certain ―public-to-private cost savings,‖ which he estimated 

to be $0.11 per share, but did not deduct them from the merger price since he was unable to 

determine whether the savings were included in it. 
39

2. Company Projections 

Both sets of projections that formed the basis of discounted cash flow 

analyses and provided the underpinnings of the experts‘ respective valuations are 

imperfect. Ancestry‘s management made no business projections in the regular 

course of business; its first set of long-term projections, the Initial May 

Projections, were made aggressive to bolster a potential sale of the company and 

revised after encouragement by the board to be even more aggressive, resulting in 

the May Sales Projections.192 Notably, one particular assumption underlying these 

projections—that churn would decrease over time—was directly called into 

question by potential bidders during their due diligence processes.193

The October Scenarios are also questionable. They were made in light of an 

understanding that the May Projections could not support a fairness opinion for the 

proposed transaction and at a time when management was contemplating large 

rollovers of their own positions in Ancestry stock. I note that at the same time 

management was creating the October Scenarios, the CEO was doing private 

projection ―hacks,‖ anticipating joyfully a possible growth rate for his rollover 

interest substantially greater than those management projections. Nonetheless, I

find the Scenarios more reliable than the May Projections. Testimony indicated 

that the October Scenarios were management‘s best estimates as of the time of the 

 

192 See, e.g., Trial Tr. 133:2–6 (Hochhauser).

193 See id. at 143:8–144:18 (Hochhauser).
40

merger. They included hard numbers, rather than projections, for several 

additional months of data compared to the May Projections. The Scenarios also 

took into account feedback from the Company‘s financial advisor, relayed from 

bidders, that the May Projections were too optimistic. 

It is within this context that I turn to the experts‘ analyses. The Petitioners‘

expert, Wisialowski, contended that the May Sales Projections were so 

unsupportably rosy that potential investors lost confidence in management; thus, he 

focused instead on the Initial May Projections. The Initial May Projections were 

not approved by the board and were not presented to bidders. Notably, the Initial 

May Projections that the Wisialowski champions were only marginally more 

conservative than the May Sales Projections he rejects.194 Notwithstanding his 

support for the Initial May Projections, I conclude that Wisialowski believed that a 

DCF based on the Initial May Projections alone (which, again, he contended to be 

the more conservative of the May Projections) would itself be unsupportably 

 

194 Wisialowski found the May Sales Projections sufficiently divorced from reality that he opined 

that, in his view, they may have so alienated potential bidders that they resulted in decreased 

competition and an artificially low sales price, a proposition I find dubious, but interesting in 

light of his acceptance of the similar Initial May Projections. See Trial Tr. 260:13–24 

(Wisialowski); JX 221 ¶ 197 (―[T]he lack of credibility caused by the fact that the [May Sales] 

Projections could not be described as a 50/50 case, but instead were described by Qatalyst as 

 ̳stretchy‘ further reduced the likelihood of realizing a full price.‖). It seems to me implausible 

that private equity investors‘ sensibilities are so tender that, upon diligence revealing that 

management was engaged in puffing in its forecasts, the investors would walk away, leaving tens 

or hundreds of million dollars on the table in a fit of pique.
41

high.

195 Ultimately, he used a blended projection from the Initial May Projections

and the better case October Scenario, which Scenario he contended was tainted and 

unsupportably low,

196 yet still incorporated into his valuation. It is unclear how 

―blending‖ two unsupportable sets of projections gives a number on which this 

Court can rely.197

The Respondent‘s expert, Jarrell, relied solely on the October Projections, 

because management represented them as the best prediction as of the date of the 

merger. Again, I note that those projections were (1) not developed in the ordinary 

course of business, (2) done in light of the information that the banker would be 

unable to provide a fairness opinion based on management‘s May Projections, and 

(3) done at a time when management knew that it would be rolling over its own 

equity in the company rather than being cashed out. Therefore, a DCF based on 

these projections leaves room for doubt. That said, this Court has recognized that 

management is, as a general proposition, in the best position to know the business 

and, therefore, prepare projections; ―in a number of cases Delaware Courts have 

relied on projections that were prepared by management outside of the ordinary 

course of business and with the possibility of litigation.‖198 As described below, 

 

195 See Trial Tr. 428:18–429:24 (Wisialowski).

196 See, e.g., id. at 439:9–440:12 (Wisialowski).

197 See, e.g., id. at 470:1–19 (Wisialowski).

198 See, e.g., Merion Capital, L.P. v. 3M Cogent, Inc., 2013 WL 3793896, at *11 (Del. Ch. July 

8, 2013), judgment entered sub nom. Merion Capital, L.P v. 3M Cogent, Inc. (Del. Ch. July 23, 

2013). But see id. (noting that it has also declined to afford that deference where ―management 
42

therefore, and despite the factors that make the October Projections problematic, I 

find that an equal weighting of the Scenarios is a better platform on which to base 

a DCF analysis than a blend of the Initial May Projections and the best case 

October Scenario, as employed by Wisialowski.

3. DCF Analysis

While I will not burden this Memorandum Opinion by reciting the 

qualifications of the competing experts here, I note that both are respected in their 

field, and well qualified to offer valuation opinions. That said, I find each 

respective approach less than fully persuasive. It is clear to me that the Petitioners‘

expert tailored his DCF analysis by blending together what he described as the

―unbelievable‖ best case October Scenario199 with the Initial May Projections

simply in order to come up with a number that was ―defensible‖200—that is, higher 

than the merger price, but not astronomically so as would have been the case if he 

used the more ―reliable‖ projection alone. The Respondent‘s expert candidly

suggested that, if he had reached a valuation that departed from the merger price by 

as much as the Petitioners‘ expert, he ―would have to tried to find out a way to 

reconcile those two numbers,‖ in other words, he would have tailored his analysis 

 

had never prepared projections beyond the current fiscal year, the possibility of litigation, such as 

an appraisal proceeding, was likely, and the projections were made outside of the ordinary course 

of business‖).

199 See Trial Tr. 442:8–10 (Wisialowski) (―Q. Okay. So it was your view that the entire scenarios 

were a sham? A. I don't believe them.‖).

200 See, e.g., id. at 446:3–11 (Wisialowski).
43

to fit the merger price.201 Neither of these approaches gives great confidence in the 

DCF analysis of either expert, since both appear to be result-oriented riffs on the 

market price.202 Ultimately, I am faced with an appraisal action where an open 

auction process has set a market price, where both parties‘ experts agree that there 

are no comparable companies to use for purposes of valuation, and where 

management did not create projections in the normal course of business, thus 

giving reason to question management projections, which were done in light of the 

transaction and in the context of obtaining a fairness opinion. As Wisialowski

repeatedly testified, he saw it as his job to ―torture the numbers until they 

confess[ed].‖

203 I note that (beyond any moral concerns) it is well-known that the 

problem with relying on torture is the possibility of false confession.

204

 

Accordingly, my own analysis of the value of Ancestry follows.

While the concept of a DCF valuation—that value is derived from the sum 

of future revenue discounted to present value—is quite simple, the calculation 

 

201 See id. at 459:24–560:11 (Jarrell). My comments should not be read as a criticism of Jarrell, 

who I found to be a candid and sincere witness; they are instead in recognition of the limitations

of a post-hoc DCF analysis, in general. If an analysis, relied upon to assess whether a sales price 

represents fair value, in turn uses that very sales price as a check on its own plausibility, and if it 

must be revised if it fails that check, then the process itself approaches tautology.

202 See Joseph v. Shell Oil Co., 482 A.2d 335, 341 (Del. Ch. 1984) (―Reasonable [minds] can 

differ as to opinions as to value. Indeed, the Court is well aware that expert appraisers usually 

express different opinions as to value even when they use the same data for arriving at their 

opinion. And it is not unusual that an expert appraiser will express a higher value if he has been 

hired by the plaintiff than if he has been hired by the defendant.‖).

203 Trial Tr. 226:5-6 (Wisialowski); id. at 229:1–2 (Wisialowski); id. at 445:5–6 (Wisialowski).

204 See, e.g., John McCain, Bin Laden’s Death and the Debate over Torture, Wash. Post, May 

11, 2011, http://www.washingtonpost.com/opinions/bin-ladens-death-and-the-debate-overtorture/2011/05/11/AFd1mdsG_story.html.
44

itself is complex. The following discussion is laden with formulas through which 

the discount rate and terminal value are arrived at. I freely admit that the formulas 

did not spring form the mind of this judge, softened as it has been by a liberal arts 

education. Footnotes indicate the derivation of each, principally taken from the 

reports of the experts. I also found Vice Chancellor Parsons‘ lucid explanation of 

calculations of value via discounted cash flow in Merion Capital, L.P. v. 3M 

Cogent, Inc.205 helpful. Although I will address, with specificity, the experts‘ 

contentions and my findings with respect thereto, I find that, as a general matter, 

Jarrell was more credible and his analysis is more likely to result in a fair value of 

Ancestry. I diverge with him on two significant points: first, his beta calculation, 

and specifically, his use of a monthly observation period; and second, his use of a 

4.5% growth rate coupled with a 12% plowback ratio. I will discuss my findings 

as they specifically relate to the evidence offered by the two experts, but I am 

largely adopting the methodology advanced by Jarrell. Employing that 

methodology, my valuation of Ancestry as of the Merger Date, based solely on a 

DCF analysis, is $31.79.

As an initial matter, the parties dispute whether a two-stage or three-stage 

discounted cash flow method is most appropriate. This issue turns largely on the 

projections upon which I rely, and, as discussed below, I rely on the October 

 

205 2013 WL 3793896 (Del. Ch. July 8, 2013), judgment entered sub nom. Merion Capital, L.P v. 

3M Cogent, Inc. (Del. Ch. July 23, 2013).
45

Projections in my analysis. Accordingly, I agree here with Jarrell that a three-stage 

model is unnecessary.

206

a. Projections 

Driving the bulk of the substantial valuation differential between the 

analyses performed by Jarrell and Wisialowski is the key input: management 

projections. Jarrell relies on the October Scenarios, despite evidence suggesting 

that they were produced in light of the need to justify the sales price. Wisialowski, 

on the other hand, created his own projections, by blending the Initial May 

Forecast with the best case October Scenario, presumably because relying solely 

on the Initial May Forecast—which Wisialowski touts as the most reliable—would 

produce a valuation so high as to be likely rejected out-of-hand. The evidence 

suggests that the May projections were created to drive a high sales price; like the 

October Scenarios, they were not created in the ordinary course of business.

This Court has expressed skepticism in past cases as to managementprepared projections when those projections are not made in the ordinary course, 

and are instead made in contemplation of the sale of the company.

207

 But

management is uniquely situated in its knowledge of the Company, and while 

management projections are imperfect, hindsight-driven post hoc ―projections‖ are 

 

206 See, e.g., JX 212 ¶¶ 89–91 & n.45. In using the October Projections there is not the same 

substantial ―step down‖ in growth rate from the projection period to the perpetuity growth rate 

about which Wisialowski was concerned in using his blended projections. See JX 219 ¶¶ 78–84.

207 See supra note 198 and accompanying text.
46

more so; notably, both experts here rely on (different) management projections. 

Thus, and for the reasons set out above, I find it most appropriate here to rely upon 

the October Scenarios, as Jarrell did. These projections represented management‘s 

best view of the Company,

208 and as discussed above, I do not find the May 

Projections to be reliable. Therefore, I will rely exclusively on the October 

Projections, weighing Scenarios A and B at 50% each because management 

declined to present either Scenario as more likely.

b. Terminal Value

The experts disagreed as to the appropriate perpetuity growth rate, but Jarrell 

pointed out that, in light of their respective plowback ratios, the differences were 

not particularly significant. That is, with Jarrell‘s perpetuity growth rate and 

plowback ratio, the rate of return on investment would be 22.8%, while 

Wisialowski‘s figures would generate a 22.6% return on investment. Ultimately, 

in light of this Court‘s prior methodology, where it has assumed zero plowback, 

and Jarrell‘s forthright statement that Wisialowski‘s lower plowback rate was 

reasonable in relation to his lower growth rate, I am adopting Wisialowski‘s 

figures, a 3% growth rate and 4.8% plowback, here.209 

 

208 I rely on the Scenarios for my DCF analysis for the reasons I have described, despite their 

preparation in light of the fact that the May Projections might not have supported a fairness 

opinion, and not withstanding their deviation from the CES‘s own ―hacks;‖ in other words, the 

October Scenarios are the best of the imperfect projections here.

209 See Trial Tr. 663:21–664:2 (Jarrell).
47

The more significant of their disputes concerns the normalization of EBIT 

margins. Jarrell found it important to normalize, while Wisialowski did not; the 

Petitioners argue that normalization was not necessary given the pessimistic view 

of the Scenarios Jarrell used. Because I find the October Projections to be 

management‘s best view of the Company going forward, not necessarily a 

pessimistic one, normalization is appropriate.210 I find Jarrell‘s averaging of the 

2013 through 2016 EBIT margin projections, which figure was then used as his 

future projection, appropriate. This results in a normalized EBIT margin of 26.1% 

for Scenario A and 27.3% for Scenario B.

Finally, the experts disagreed over the appropriate tax rate. Although I 

sympathize with the Petitioners‘ contention that few (if any) companies pay their 

marginal tax rates in perpetuity, it strikes me as overly speculative to apply the 

current tax rate in perpetuity. I agree with this Court‘s approach in Henke v. 

Trilithic Inc. to use the marginal tax rate ―[b]ecause of the transitory nature of tax 

deductions and credits.‖211

Because I find weighted average cost of capital (―WACC‖) to be 10.71%, as 

discussed below, and I am otherwise adopting Jarrell‘s methodology here, 

including his calculation of NOPAT that includes a working capital adjustment, 

 

210 And although the Petitioners criticize Jarrell‘s calculation for failing to determine whether his 

projected normalized margins represent the midpoint of the Company‘s business, I find that 

criticism unhelpful here, in light of the lack of a proposed alternative methodology. 

211 2005 WL 2899677, at *9 (Del. Ch. Oct. 28, 2005).
48

also discussed below,

212 the terminal value is calculated using the perpetuity 

growth model as follows213:

Terminal Value 

 NOPAT2017 1 – Plowback Rate 

(WACC Growth Rate)

Thus, the Terminal Value for Scenario A is $1,538.51 million; for Scenario 

B it is $1,692.86 million. As discounted to the present value as of the Merger 

Date, the Terminal Value is $1,077.57 million for Scenario A and $1,185.68

million for Scenario B.

214

c. Discount Rate

I cannot adopt either expert‘s discount rate in full. In calculating beta, 

Wisialowski used NASDAQ as the market proxy; I find that the S&P 500 is a more 

suitable market proxy in light of its broader sampling of the market. Wisialowski 

also initially used an inappropriate measurement period, running through the 

Merger Date, which failed to account for increases in stock price once the auction 

process became public. I find that Jarrell, on the other hand, should have used 

weekly data, rather than monthly, to generate a larger sample size, notwithstanding 

his assertion that daily inputs involved statistical ―noise.‖ Jarrell‘s monthly data 

 

212 See infra text accompanying notes 229, 230. 

213 See JX 209 ¶¶ 192–211.

214 To discount to present value, I divided the terminal value calculated above by 1.1071 

(1+WACC), raised to the 3.5 power representing the time between the calculated terminal value 

and the Merger Date.
49

generated 30 data points, to which he attributes a 99% confidence level.

215

 

However, the valuation literature suggests using at least 36 data points, with some 

sources suggesting at least 60, 216 and Jarrell did not adequately explain why, 

specifically, a weekly input would be inappropriate here. 217

Using a weekly observation period, S&P 500 as the market proxy, and an 

observation period from the Company‘s IPO through June 5, 2012, just before 

news of the auction broke, I find beta to be 1.137.218

The parties agreed that the appropriate risk-free rate is 2.47%, but disagreed 

as to the equity risk premium. While both agreed that a supply-side equity risk 

premium from the Ibbotson Yearbook is appropriate, they disagree as to which 

years of data to use. Wisialowski relied upon the 2013 Yearbook, which included 

data from 1926 through 2012, to derive an ERP of 6.11%. Jarrell used the 2012 

Yearbook, containing data from 1926 through 2011, to derive an ERP of 6.14%. 

 

215 JX 209 ¶ 179 & n.220.

216 See, e.g., Trial Tr. 353:12–23 (Wisialowski).

217 I note that Jarrell took the extra step of calculating a daily sum beta to compare his monthly 

beta to a daily beta, and found, after that analysis, ―noise‖ in the daily beta calculation. But it is 

not clear why he did not consider (or, if he did, why he did not include in his report) the effect of 

weekly data. See JX 209 ¶ 179. In his rebuttal, Jarrell identified ―three significant flaws‖ from 

which Wisialowski‘s beta suffered; none of them involved Wisialowski‘s use of weekly data. 

See JX 219 ¶ 36.

218 The Petitioners have helpfully conceded that they are not opposed to my use of 1.137 as beta. 

See Merion Capital L.P.‘s Post-Trial Br. at 66; Joinder of Pet‘rs Merlin Partners LP and 

AAMAF, LP in Post-Trial Br. 
50

This same disagreement as to the proper edition of Ibbotson‘s underlies the 

experts‘ disagreement as to the appropriate equity-size premium. Wisialowski, 

relying on the 2013 Yearbook, reached a premium of 1.73%, while Jarrell, relying 

on the 2012 Yearbook, reached a 1.75% premium. At trial, Jarrell testified that he 

used the 2012 edition because the Merger Date was December 28, 2012, and it is 

his practice to use the data that would have been available to investors as of the 

merger date; the 2013 Yearbook itself would not be available until after the merger 

closed. He candidly stated, however, that this was ―not a big deal‖ and that he 

understood why Wisialowski would use the newer book.219 The Petitioners argued 

in post-trial briefing that the 2013 Yearbook was more appropriate because it 

included ―data from 2012 that—with the exception of a single trading day—was 

known or knowable on December 28, 2012.‖ 220 Ultimately, I agree with 

Wisialowski‘s approach to use actual data available in the 2013 edition, especially 

since the Merger Date was so close to the end of the year and the 2013 edition 

would not have contained any information not available as of the Merger Date, 

aside from one day of trading information.

Jarrell assumed 5% debt in Ancestry‘s capital structure; Wisialowski did not 

include any. The Petitioners contend that had Wisialowski included 5% debt, his 

valuation would have increased by $0.38, and thus, they do not object to my use of 

 

219 Trial Tr. 629:5–19 (Jarrell).

220 Merion Capital L.P.‘s Post-Trial Br. at 67.
51

Jarrell‘s capital structure assumption.221 Under Jarrell‘s assumptions, the cost of 

debt is 3.81%.222 He also applied a 38% tax rate, which, as discussed above, I find 

to be appropriate.

Both experts calculated the discount rate using the WACC methodology, 

which I therefore adopt. WACC is calculated as follows223:

WACC = [KD x WD x (1 - t) ] + (KE x WE )

Where :

KD = Cost of debt capital = 3.81%

WD = Average weight of debt in capital structure = 5%

t = Effective tax rate for the company = 38%

KE = Cost of equity capital = 11.15%, as calculated below

WE = Average weight of equity capital in capital structure = 95%

To calculate the cost of equity capital, both experts used the Capital Asset Pricing 

Model (―CAPM‖), which is calculated as follows:

KE = RF + (β x RERP ) + RESP

Where:

RF = Risk-free rate = 2.47%

β = Beta = 1.137

RERP = Equity risk premium = 6.11%

RESP = Equity size premium = 1.73%

KE = 11.15%

 

221 Id. at 60.

222 JX 209 Ex. 17.

223 These formulas were helpfully laid out in Merion Capital LP v. 3M Cogent, Inc., 2013 WL 

3793896, at *14 (Del. Ch. July 8, 2013), judgment entered sub nom. Merion Capital, L.P v. 3M 

Cogent, Inc. (Del. Ch. July 23, 2013).
52

Thus, WACC = [.0381 x .05 x (1-.38)] + (.1115 x .95) = .1071, or 10.71%

d. Stock-Based Compensation

As an internet-based company, Ancestry is not alone in its practice of

compensating employees heavily with stock. The effect of that practice is 

significant in a valuation of such a company. Jarrell included SBC in his valuation 

by deducting the non-cash stock expense from EBIT, treating it as tax deductible to 

approximate the anticipated deductions when options are exercised, and not adding 

this expense back.224 Jarrell used the projected SBC as a percentage of revenue 

item from the May Sales Projections and the 2012 full-year forecasted results from 

mid-December 2012, both of which amounted to 3.2%, and applied this to 

Scenarios A and B, and into perpetuity.225 

The Petitioners point out that this approach has not yet been endorsed by this 

Court. In fact, in Merion Capital, L.P. v. 3M Cogent, Inc., Vice Chancellor 

Parsons rejected that respondent‘s contention that SBC should be treated as a cash 

expense, having found it to have failed to show that SBC would ―have any effect 

on the actual cash flows of the Company.‖226 Nevertheless, the Court agreed that 

―it makes sense to adjust earnings to take into account the dilutive effect of 

 

224 Id. at ¶ 164 & n.195.

225 Id. at ¶ 159.

226 2013 WL 3793896, at *13.
53

SBC.‖227 To that end, Wisialowski‘s rebuttal report attempted to consider the 

dilutive effect of SBC using a self-created model, but ultimately declined to 

―include any impact for SBC in [his] DCF analyses.‖228

What is clear to me is that, once it reaches a material level, SBC must in 

some manner be accounted for in order to reach a reasonable calculation of fair 

value. The real dispute is how to do so, whether by measuring its dilutive effect or 

by accounting for it in expenses. Here, the Petitioners dispute Jarrell‘s approach, 

but do not offer a reliable alternative for my consideration. I find Jarrell‘s 

approach to be reasonable, and I am adopting it here.

e. Other Issues Bearing on Enterprise Value

On several other points, the experts diverged, to varying degrees, some of 

which are alluded to in my analysis above. First, Wisialowski excluded deferred 

revenues as part of free cash flows, which would have otherwise increased his 

value by $2.89 per share. Jarrell advocated for including them in free cash flows 

as a necessary working capital item needed ―to adjust accounting data to cash flow 

data.‖229 The Petitioners contend Wisialowski ―took the objective and correct 

route of excluding deferred revenues, which had the impact of lowering his per-

 

227 Id.

228 JX 221 ¶ 138.

229 Jarrell Dep. at 345:4–23; see also Trial Tr. 272:5–9 (Wisialowski); JX 216 ¶ 154.
54

share valuation.‖230 I presume, from this statement, that the Petitioners do not 

object to my adherence to Jarrell‘s approach on this matter.

Second, as to excess cash added to the DCF value, Jarrell‘s figure was $32.9 

million, using the Company‘s cash position minus its debt on December 31, 2012. 

Wisialowski‘s used $14 million, calculated based on a 2013 Permira report, 

indicating $44 million cash at closing, from which he subtracted his estimated four 

weeks‘ operating expenses of $30 million. In post-trial briefing, the Petitioners

submitted that they ―[have] no objection to the Court‘s use of Jarrell‘s excess cash 

assumption.‖231

Finally, while Wisialowski did not initially estimate the value of the 

Company‘s net operating losses, the experts ultimately agreed that the present 

value of NOL tax shields is $4.4 million.232 ―Merion does not object to including 

the value of Ancestry‘s NOLs in the Court‘s determination of the fair value of 

Ancestry‘s stock as of the Valuation Date.‖233

These three topics, while not generating as much dispute as other 

components of the valuation analysis, are nevertheless important to the valuation

because of their bearing on enterprise value. I ultimately find, based on my review 

 

230 Merion Capital L.P.‘s Post-Trial Br. at 58–59.

231 Id. at 59; see also Joinder of Pet‘rs Merlin Partners LP and AAMAF, LP in Post-Trial Br. 

232 See JX 209 ¶ 153; JX 216 ¶ 157.

233 Merion Capital L.P.‘s Post-Trial Br. at 57; see also Joinder of Pet‘rs Merlin Partners LP and 

AAMAF, LP in Post-Trial Br. 
55

of the experts‘ reports and trial testimony, Jarrell‘s approach on these topics to be 

the most reasonable, and I adopt his methodologies.

f. My Valuation Results

Ancestry‘s calculated equity value is the sum of its enterprise value plus net 

cash. Its enterprise value is the sum of the present value of free cash flows during 

the projection period, the present value of the NOL tax benefit, and the present 

value of the terminal value based on constant growth.234

Using a DCF analysis, for Scenario A, I calculated $30.33 as the price per 

share. For Scenario B, I calculated $33.24 as the price per share. Weighted 

equally, the value derived from discounted cash flow is $31.79.

235

 The actual 

market price as determined by the sale is $32. These are the two competing 

 

234 See, e.g., JX 209 ¶ 214.

235 In the interest of transparency, my calculations are as follows:

Enterprise Value = DCF + PV of NOL tax benefit + PV of Terminal Value. See, e.g., JX 209 ¶ 

214. The DCF is based on the October Projections, discounted to the mid-year. The parties 

agree upon my use of $4.4 million for the PV of NOL tax benefit. See supra note 233. Thus, 

with numbers expressed in millions of dollars:

Enterprise ValueA = 355.31 + 4.4 + 1077.57 = 1437.28

Enterprise ValueB = 393.51 + 4.4 + 1185.68 = 1583.59 

Equity Value = Enterprise Value + Net Cash. See, e.g., JX 209 ¶ 214. The parties agree on my 

use of $32.9 million for net cash. See supra note 231. Thus, with numbers expressed in millions 

of dollars:

Equity ValueA = 1437.28 + 32.9 = 1470.18

Equity ValueB = 1583.59 + 32.9 = 1616.49

The per-share price is determined by adding the Equity Values, above, to the cumulative exercise 

proceeds of options outstanding, then dividing that sum by the number of fully diluted shares. 

See JX 209 Ex. 19. Thus:

Price per share [Scenario A] = 1470.18 million 56.1 million

50,317,969

 $30.33

Price per share [Scenario B] = 1616.49 million 56.1 million

50,317,969

= $ 33.24.
56

valuations that the statutory ―all relevant factors‖ directive charges me to take into 

account. The question becomes, should I rely on the DCF to reach fair value, 

using what appears to be a relatively untainted market-derived valuation as a 

check, or should my analysis be the reverse? Because the inputs here, the October 

Scenarios (as well as the alternative May Projections) are problematic for the 

reasons addressed at length above, and because the sales process here was 

robust,236 I find fair value in these circumstances best represented by the market 

price. The DCF valuation I have described is close to the market, and gives me 

comfort that no undetected factor skewed the sales process. I note that my DCF 

value—while higher than Jarrell‘s—is still below that paid by the actual acquirer

without apparent synergies; it would be hubristic indeed to advance my estimate of 

value over that of an entity for which investment represents a real—not merely an 

academic—risk, by insisting that such entity paid too much.

V. CONCLUSION

For the foregoing reasons, I find that the merger price of $32 is the best 

indicator of Ancestry‘s fair value as of the Merger Date. The Petitioners are 

entitled to interest at the legal rate. The parties should confer and submit an 

appropriate form of order consistent with this Opinion.

 

236 See In re Ancestry.com Inc. S’holder Litig., C.A. 7988-CS (Del. Ch. Dec. 17, 2012) 

(TRANSCRIPT).