Opinion ID: 1488138
Heading Depth: 2
Heading Rank: 1

Heading: The Respondents' Expert Testimony

Text: The respondents' expert, Gartrell, employed two valuation methodologies: a comparable company analysis and a discounted cash flow (DCF) analysis. In his comparable company analysis, Gartrell focused on 14 rural and regional cellular companies. From that data set he derived revenue multiples of 3.5 for the rural companies and 3.3 for the regional companies, and he derived EBITDA multiples of 7.1 for the rural companies and 15.2 for the regional companies. To eliminate the minority discount embedded in those multiples, Gartrell added a control premium of 35%, which was the mean of his range of control premia (30% to 40%). Applying that 35% premium, Gartrell increased the median revenue multiples from 3.5 to 4.0 for rural cellular carriers, and from 3.3 to 4.0 for regional carriers; and he increased the median EBITDA multiples from 7.1 to 8.4 for rural cellular companies and from 15.2 to 18.9 for regional companies. Having generated revenue and EBITDA multiples, Gartrell proceeded to determine their strategic weights, in order to reflect[] the optimal mix of rural and regional business strategies for MCHC. Gartrell arrived at strategic weights of 79% for rural values and 21% for regional values, which resulted in an initial valuation for MCHC of $122.7 million. Gartrell determined that valuation was too high, based on MCHC's combinatorial deficiency, because (in Gartrell's view) cellular companies are significantly more valuable in specific combinations and Gartrell viewed MCHC as a stand-alone company. To account for MCHC's lack of combinatorial value, Gartrell applied two discounts to the value he had derived for MCHC. He applied the first discount  33%  to account for MCHC's low combinatorial value relative to similar cellular companies. The second discount  15%  accounted for MCHC's complete lack of combinatorial value as a stand-alone entity. Gartrell derived both discounts from the C-Block auction that had been conducted by the Federal Communications Commission (FCC) in 1996. [9] Gartrell used the C-Block auction as a model for valuing MCHC because (in his judgment) MCHC should be valued as an isolated, single license entity, like the start-up PCS bidders at that auction. Applying Gartrell's total 48% combinatorial discount resulted in a stand-alone value for MCHC of $63.3 million. To that amount Gartrell then added the outstanding inter-company receivable, arriving at a final valuation, based on his comparable company analysis, of $80.5 million. Gartrell also performed a DCF valuation of MCHC. Based on MCHC's financial performance for FY 2000 and its year-to-date performance as of June 30, 2001, Gartrell created his own forecasts of MCHC's future financials for a five-year period. He then adjusted those forecasts to subtract the bad debt expense that resulted from MCHC's installation of a new billing system. For his growth rate, Gartrell used the long-term GNP rate, which was 3.3%. Gartrell reasoned that the long-term GNP was the correct growth rate because MCHC had already saturated its market and therefore could not grow faster than the overall economy. Using those growth rates for his DCF analysis, Gartrell valued MCHC at $59.1 million, to which he added the $17.2 million inter-company receivable, to reach a final DCF valuation of $76.3 million. Thus, Gartrell's comparable company analysis and his DCF analysis resulted in a valuation of MCHC that ranged from $76.3 million to $80.5 millionvalues both lower than the unilaterally set price that had been paid to the minority shareholders in the MCHC merger. Having no reason to differentiate between those two values, Gartrell averaged them to arrive at his final valuation for MCHC of $7,840 per share. The Court of Chancery found that Gartrell's valuation approach was legally and factually flawed, and must be disregarded in its entirety, for three reasons. First, the Vice Chancellor found that Gartrell's overall theoretical framework was invalid as a matter of law, because Gartrell's stand alone approach valued MCHC as if it were not a going concern that had contractual relationships with other cellular providers. In fact, the Court found, MCHC had contractual relationships with Palmer and Palmer's larger preexisting networks, and those relationships represented value to which MCHC's minority stockholders were entitled. By valuing MCHC on a counterfactual stand alone basis, the Court concluded, Gartrell intended to deprive the minority stockholders of existing value as of June 30, 2001. [10] Second, the Vice Chancellor found that Gartrell's DCF analysis was fatally flawed and entitled to no weight because: (i) Gartrell used a generic growth rate (the long-term growth rate of GNP) as his growth rate for MCHC without any valid, credible explanation and despite his having had access to industry-specific growth rates; (ii) Gartrell used a constant growth rate, which would yield the same value for MCHC regardless of the time frame; [11] and (iii) Gartrell created the financial projections based entirely on his own judgment, without reference to other available sources of relevant information. For these reasons, the Vice Chancellor determined, Gartrell's DCF analysis was meaningless. [12] Third, the Court of Chancery found that Gartrell's comparable company analysis was invalid because of his methodology and his data. To begin with, Gartrell switched between the mean and the median at critical points. To compute his EBITDA multiples, Gartrell used figures that were the median of their data set, but for every other computation he used the mean. Had Gartrell used the mean numbers consistently throughout, the value of MCHC based on EBITDA would be over $163 million which, when added to the non-operating assets, would be $183 million  a figure much closer to the value reached by the petitioners' expert. [13] Moreover, when calculating the correct weighting for the EBITDA ratio between rural and regional carriers, Gartrell applied a much higher weight (79%) to the rural companies than to the regional companies (21%). That (in the Court's words) was simply not reality, because MCHC was an MSA and had the future potential of an MSA. [14] As the Vice Chancellor found, the conclusion would appear inescapable that Gartrell established a pre-determined valuation figure to which he applied the EBITDA multiples. [15] Lastly, Gartrell chose inputs (based on the C-Block auction) that were not relevant to a valuation of MCHC, because the C-Block auction suffered from obvious and glaring flaws which included outdated data, different technology, an emerging market and inexperienced bidders. The result, the Court found, was that the C-Block data [could] not be termed comparable in any reasonable sense of the word. [16] MCHC has not appealed the Court of Chancery's rejection, in its entirety, of the valuation of its expert, Gartrell.