The recent Delaware Chancery Court ruling in In re Appraisal of AOL Inc.  shows a recurring theme.
Nearly one week after Vice Chancellor J. Travis Laster decided that petitioners in the case of Aruba Networks, Inc. (“Aruba”) are entitled to receive a per share amount 31% below the price paid by Hewlett-Packard Company in its acquisition of Aruba,  Vice Chancellor Sam Glasscock III decided that petitioners in the appraisal case for AOL Inc. (“AOL” or the “Company”) held shares worth a fair value of $48.70, or roughly 3% below the deal consideration paid by Verizon Communications Inc. (“Verizon”).
While Glasscock and Laster incorporate frequent references to the Delaware Supreme Court’s recent decisions in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., et al. and DFC Global Corporation v. Muirfield Value Partners, L.P., et al. in their respective decisions, the concluded per share values were reached from very different paths.
In Aruba, Laster’s concluded value of $17.13 per share was ultimately based on the company’s 30-day average unaffected market price. In AOL, Glasscock’s concluded value ultimately relies on a discounted cash flow (DCF) analysis prepared by the court.
Before turning his attention to the DCF analysis, Glasscock indicated that the Verizon transaction had several conditions and characteristics that could render the deal price as being “Dell Compliant” and therefore evidence of fair value:
- AOL was widely known to be in play
- the Company talked to numerous potential purchasers in relation to the sale of part (or all) of AOL
- the no-shop period running post-agreement was not protected by a prohibitive break-up fee
- the actions of the AOL unaffiliated directors appear compliant with their fiduciary duties
However, Glasscock noted that “…the merger agreement was protected by a no-shop and matching right provisions. Moreover, the statements made by AOL’s CEO, who negotiated the deal, in my view signaled to potential market participants that the deal was ‘done,’ and that they need not bother making an offer.”
The petitioners’ expert performed a DCF analysis that resulted in a value of $68.98 per share, which is 54% above the opinion of the respondent’s expert ($44.85 per share). For reasons not detailed in his opinion, Glasscock noted that the petitioners “seem content to use the DCF model presented by the respondent’s expert as a starting point for [his] analysis.” Glasscock also suggested that the petitioners presented “limited arguments that certain assumptions or inputs in that valuation must be changed.”
Glasscock ultimately made two adjustments to the DCF valuation prepared by the respondent’s expert, including 1) modifying AOL’s projected financial results to include the impact from proposed new business deals with Microsoft Corporation (“Microsoft”) and 2) increasing the perpetuity growth rate assumed beyond the discrete forecast period.
For the projections, the court concluded that the two Microsoft deals were part of AOL’s “operative reality,” and neither was reflected in the financial projections prepared by AOL management in the Company’s regular course of business (the “Management Projections”). Glasscock relied on the petitioners’ analysis, which showed that the fair value of AOL stock increased by $2.57 per share for one of the Microsoft deals. Because the petitioners did not quantify the value contribution of the second Microsoft deal, Glasscock assumed it to be $0.
For the perpetuity growth rate, the court applied a rate of 3.5% in its valuation compared with 3.25% used by the respondent’s expert. Glasscock stated that “a perpetuity growth rate of 3.5% more accurately captures AOL’s prospects after the Management Projection period ends.” When the higher growth rate is used in the respondent expert’s DCF model, the fair value of AOL stock increased by $1.28 per share.
Glasscock’s fair value conclusion gave full weight to his DCF valuation, which started with $44.85 per share derived by the respondent’s expert, and added $2.57 per share for the Microsoft deal and $1.28 per share for the perpetuity growth rate adjustment. Glasscock concludes his opinion by noting the court’s final determination of $48.70 per share “does not deviate grossly from the deal price of $50,” and suggests that the difference might be that the “deal price may contain synergies that have been shared with the seller in the deal but that are not properly included in the fair value.”
 In re Appraisal of AOL Inc., 2018 BL 60894, Del. Ch., No. 11204-VCG, February 23, 2018.
 Verition Partners Master Fund Ltd. and Verition Multi-strategy Fund Ltd. v. Aruba Networks, Inc.