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Merger price versus discounted cash flow: A study of Dell

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Originally published by Law360, July 26, 2016 © 2003-2016, Portfolio Media, Inc.

In arriving at the fair value of Dell Inc.’s equity subsequent to an appraisal proceeding brought in response to a management buyout, the Delaware Court of Chancery rejected the company’s contention that the final merger price was the best evidence of its fair value. The court determined that the fair value of the company’s stock when it was taken private was $17.62 per share. This value was significantly lower than the $28.61 per share calculated by petitioner’s expert, but still represented a 28 percent premium over the final merger price, and a 39 percent premium to the price calculated by the company’s expert.

The court did not find the merger price to be the best indication of Dell’s value, in part concluding that the leveraged buyout (LBO) pricing model understated the company’s fair value. The short-term focus of the market, and Dell’s depressed stock price, also created a significant valuation gap between the market’s perception and Dell’s operative reality. In addition, the lack of meaningful presigning competition undermined the reliability of the original and final merger prices as measures of Dell’s fair value.

The court weighed several key elements of the transaction and proposed adjustments to determine fair value, including offers during the go-shop, a discounted cash flow (DCF) analysis, the perpetuity growth rate, stock-based compensation and nonrecurring restructuring charges. The tax rate, weighted average cost of capital, cost of debt, capital structure, beta, equity risk premium and adjustments to cash were also key considerations during the valuation process.

Ultimately, the court weighed the DCF analysis’ fair value of $16.43 and the respondent’s expert’s fair value of per share of $18.81 equally to derive a fair value per share of $17.62. 

Read a recent article published by Law360 with RSM US LLP’s Boris Steffen for a detailed analysis of the elements that led to the court’s determination of Dell’s fair value.

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