Opinion ID: 1536001
Heading Depth: 1
Heading Rank: 11

Heading: Discounted Cash Flow Both Experts Opinions Rejected

Text: Both parties' experts also gave valuation opinions using the same discounted cash flow methodology. The qualifications of each parties' expert witness were accepted by the Court of Chancery. The propriety of using a discounted cash flow analysis in a statutory appraisal action was also acknowledged. The discounted cash flow methodology has been relied upon frequently by parties and the Court of Chancery in other statutory appraisal proceedings. Although Reilly and Clarke used the same discounted cash flow methodology, each applied different assumptions. The Court of Chancery determined, for example, that the difference between Clarke's 12% discount rate and Reilly's 18% discount rate [was] attributable primarily to their different estimates of MGB's cost of equity capital, and their different assumptions of the company specific risks confronting MGB at the time of the merger. [31] The Court of Chancery disagreed with certain of the other assumptions applied by both of the parties' experts. The Court of Chancery ultimately concluded that it could not rely on the DCF valuation opinion of either parties' expert. [32] The Respondents submit the only significant concern raised by the Court of Chancery with respect to Clarke's DCF analysis involved his use of a 12% discount rate, i.e., it incorporated a 1% small stock premium based on a 1996 study that may contain post-merger data. The Respondents contend that particular error could have been corrected through a mathematical adjustment, i.e., the addition of a 5.2% small stock factor based on a 1992 study (which Clarke had used in several other bank appraisals) results in a 15% discount rate. The Respondents have calculated that the substitution of the 15% discount rate for Clarke's 12% rate produces a fair value for MGB of $57 per share. The Respondents argue the Court of Chancery erred by rejecting their adjusted Clarke discounted cash flow valuation of $57 as a reliable indication of fair value. Having accepted the qualifications of both parties' experts and the propriety of using a discounted cash flow model in this statutory appraisal proceeding, the Court of Chancery was not required to adopt any one expert's methodology or calculations in toto. [33] Similarly, by recognizing the discounted cash flow model as one proper valuation technique, the Court of Chancery was not required to use that methodology to make its own independent valuation calculation by either adapting or blending the factual assumptions of the parties' experts. The ultimate selection of a valuation framework is within the Court of Chancery's discretion. [34]