This case summary was prepared by Harrison Krupnick.
Within one week, the Delaware Chancery Court rendered two appraisal opinions, arriving at divergent results. In Petsmart, the Court strayed from the discounted cash flow ("DCF") analysis (the “gold standard” of valuation methods) and instead held that, under those specific circumstances, the deal price was the best determination of fair value. In SWS, the Court stated that the sale of SWS was undertaken in conditions that made the price derived unreliable as evidence of fair value and relied on a DCF analysis to determine fair value.
In Petsmart, the Court noted that although DCF analysis is the gold standard of valuation tools, DCF analysis is generally calculated using the Management Projections. When management’s projections are unreliable, the valuation rendered by the DCF analysis will be meaningless, or as the Court noted, “garbage in, garbage out.” Accordingly, in finding the merger price to be the best evidence of fair value, the Court determined the merger price was the result of a “proper transactional process” comprised of a “robust pre-signing auction in which adequately informed bidders were given every incentive to make their best offer in the midst of a well-functioning market.”
In SWS, the Court acknowledged the Petsmart decision but stated that the sale of SWS was undertaken in conditions that made the price derived unreliable as evidence of fair value. The Court notes that there were certain structural limitations unique to SWS that made the application of the merger price unreliable as indicia of fair value. Most notably, pursuant to the Credit Agreement, the acquirer exercised partial veto power over competing offers. Such a partial veto power undermines the standard noted in Petsmart whereby “adequately informed bidders were given every incentive to make their best offer in the midst of a well-functioning market.” Accordingly, the Court found it inappropriate to rely on the merger price as fair value.