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concluding that if the parties could prove an asset was nonoperating then its value would be added to the total enterprise value of the company being appraised
Summary of this case from Henke v. Trilithic IncorporatedOpinion
Civil Action No. 8474
Date Submitted: March 13, 2002
Date Decided: September 10, 2002
Kevin G. Abrams, Thomas A. Beck, and Russell C. Silberglied, of RICHARDS, LAYTON FINGER, Wilmington, Delaware, Attorneys for Petitioner.
Steven J. Rothschild and Lorin M. Hochman of SKADDEN, ARPS, SLATE, MEAGHER FLOM LLP, Wilmington, Delaware, and Joseph M. Asher, of SKADDEN, ARPS, SLATE, MEAGHER FLOM LLP, of New York, New York, Attorneys for Respondent.
MEMORANDUM OPINION
This is an appraisal action in which the Court is asked to determine the fair value of 2,000 shares of a publishing company. After two appeals to the Supreme Court and following the second remand, this Court enlisted the assistance of a neutral expert with respect to certain outstanding issues. Exceptions have been filed to the expert's final report, and this is the Court's opinion regarding those exceptions.
I. INTRODUCTION
On January 8, 1986, SAP Holding Company, Inc. was merged with and into Straight Arrow Publishers, Inc. ("SAP"). In the merger, SAP common stock was either converted into the right to receive $100 or cancelled. Petitioner Laurel Gonsalves declined to accept the merger consideration for her 2,000 shares of SAP common stock and brought this action pursuant to 8 Del. C. § 262 seeking a determination from this Court of the fair value of her cancelled shares.
Gonsalves v. Straight Arrow Publishers, Inc., 793 A.2d 312 (Del. Ch. 1998) (the "Remand Opinion"). SAP's main operating asset is Rolling Stone magazine. A more extensive factual and procedural history of this litigation is set forth in the Remand Opinion.
After trial, former-Chancellor Allen found the fair value of SAP on the merger date to be $131.60 per share and awarded pre-judgment simple interest at the legal rate. Gonsalves appealed the valuation of SAP and SAP cross-appealed the amount of the interest award. The Delaware Supreme Court reversed and remanded the matter for a new valuation hearing, concluding that Chancellor Allen's decision to fix a value for SAP by accepting the methodology and resulting valuation of one party's expert to the exclusion of the other party's expert was "error as a matter of law." With regard to SAP's cross-appeal of the interest award, the Supreme Court noted the lack of reasoning set forth to support the interest awarded in the First Opinion and stated that it "assume[d] that the Court of Chancery [would] supply reasons for any award of interest" in its remand decision.
Gonsalves v. Straight Arrow Publishers, Inc., 1996 WL 696936 (Del. Ch.) (the "First Opinion").
Gonsalves v. Straight Arrow Publishers, Inc., 701 A.2d 357, 358 (Del. 1997) ( "Gonsalves I"). Chancellor Allen told the parties that he was inclined to accept one side's valuation "hook, line, and sinker." The Supreme Court found that Chancellor Allen's either-or approach was at odds with § 262's requirement that the court make an independent determination of the value of an appraisal petitioner's shares. See id at 362.
Id. at 363.
On remand, this Court considered the trial record and the parties' post-trial and appellate briefs and issued an opinion setting forth valuation guidelines that, when applied to the earnings capitalization formula substantially agreed upon by the parties' experts, resulted in a value of $173.50 per SAP share. The Remand Opinion concluded that pre-judgment interest was to be compounded monthly. Once again, Gonsalves appealed the valuation and SAP cross-appealed the interest award. By Order dated January 5, 1999, the Supreme Court reversed in part and affirmed in part the Remand Opinion.
Remand Opinion, 793 A.2d 312 (Del.Ch. 1998).
See Gonsalves v. Straight Arrow Publishers, Inc., Del. Ch., C.A. No. 8474, Chandler, C. (Apr. 20, 1998) (ORDER).
Remand Opinion at 328.
Gonsalves v. Straight Arrow Publishers, Inc., 725 A.2d 442 (Table), 1999 WL 87280 (Del. 1999) (ORDER) ( "Gonsalves II").
The Supreme Court affirmed the determinations of the Remand Opinion with regard to "(i) the weighted five year earnings base; and (ii) the treatment of SAP's repositioning plan and discontinuation of unprofitable businesses as affecting the value of the enterprise on the date of the Merger." The Court held that those "rulings are to be viewed as `law of the case.' All other valuation rulings are remanded for redetermination and findings independent of the findings invalidated in Gonsalves I." The Supreme Court specifically noted four issues that this Court was to redetermine on remand: (1) the appropriate capitalization rate; (2) the treatment of deferred subscription income; (3) the treatment of excess cash; and (4) an explanation for the form of interest awarded (the "Open Issues").
Id. at **5.
Id.
Id. at **3-4. Gonsalves contends that the Supreme Court's February 25, 1999 Order, Gonsalves v. Straight Arrow Publishers, Inc., Del. Supr., No. 232, 1998, (Feb. 25, 1999) (ORDER) (the "February Order"), expanded the scope of remand to include the issues determined to be law of the case in Gonsalves II. As support for this contention. Gonsalves points to language in the February Order that "the Court of Chancery, on remand, is free to reexamine any previous independently determined element of value to the extent that such reexamination may assist the court in the determination of overall value." The February Order denied petitioner's motion for reargument of Gonsalves II. I find it implausible that this language, contained in a three-sentence order denying reargument of Gonsalves II, was intended to overturn the Supreme Court's explicit ruling in Gonsalves II with regard to the issues it determined to be law of the case. As such, I will not address Gonsalves' exceptions to the Final Report directed at the appropriateness of the five year weighted average earnings or the treatment of SAP's repositioning plan and discontinuation of unprofitable businesses as affecting the value of the enterprise on the date of the merger. I do believe, however, that this language, and the language of Gonsalves II remanding all valuation rulings other than those determined by the Supreme Court to be law of the case, indicate that I am not to limit my consideration to the four Open Issues explicitly mentioned in Gonsalves II.
In this current valuation proceeding, the parties agreed to the appointment of Professor Donald J. Puglisi as a neutral expert (the "Expert") to assist the Court in its determinations with regard to the remaining valuation issues — particularly the Open Issues identified by the Supreme Court in its January 5, 1999 Order and reiterated in this Court's March 30, 1999 letter to counsel. The Expert's evaluation was to focus on the Open Issues. He was to have access to the entire trial and appellate record in this case and the ability to pose specific questions to the parties' counsel. Pursuant to this Court's Order, the Expert issued his draft report on May 30, 2001. The parties submitted exceptions to the draft report on August 17, 2001. On September 24, 2001, the Expert issued his final report (the "Final Report"), which valued SAP common stock on the merger date at $287.86 per share and recommended interest compounded monthly from the merger date. The parties agreed to the admission of the Final Report into evidence and waived their right to depose the Expert or to call him as a witness before the Court. The parties each submitted exceptions to the Expert's report. I have carefully examined the entire record in this case including, but not limited to, the competing valuation reports submitted by the parties' experts, the Expert's report, and the parties' exceptions to the Expert's report. This is my determination, based on the record presently before me, of the fair value of Gonsalves' shares of SAP on the merger date and the appropriate form of pre-judgment interest.
On May 11, 1999, this Court issued an Order, which was amended on April 23, 2001 following the Supreme Court's decision in Cede Co. v. Technicolor, Inc., 758 A.2d 485 (Del. 2000), appointing Dr. Donald J. Puglisi as a neutral expert. See Gonsalves v. Straight Arrow Publishers, Inc., Del. Ch., C.A. No. 8474, Chandler, C. (Apr. 23, 2001) (ORDER). The ability to appoint neutral experts in appraisal cases was restored to the Court of Chancery by the General Assembly as of July 23, 2001. See 10 Del. C. § 372.
See January 7, 2002 Letter from Russell C. Silberglied to Court.
SAP's valuation expert was Martin Whitman. SAP also retained The Publishing Media Group ("PMG") to analyze and critique the work of Gonsalves' valuation expert. The PMG report was prepared by Daniel McNamee. Gonsalves' valuation expert was James Kobak.
II. ANALYSIS
A. The Valuation Framework
I agree with the valuation framework set forth in the Expert's report as an appropriate one by which to determine the fair value of SAP on the merger date. As the Expert points out, this framework is essentially an expansion of the framework set forth in this Court's April 20, 1998 Order valuing SAP pursuant to the Remand Opinion. Although, the Supreme Court found that certain inputs into that framework were not properly determined, the framework itself was not held to be improper. Therefore, the fair value of Gonsalves' SAP stock will be determined as follows:
(1) Calculate SAP's Enterprise Value. [EVSAP]
(a) Specify a financial performance measure for SAP. [pSAP]
(b) Determine an Enterprise Value/financial performance measure ratio (capitalization rate) based on examination of similar ratios for SAP's comparable companies. [EVc/pc]
(c) Multiply SAP's performance measure by the capitalization rate of comparable companies. [EVSAP = EVc/pc • pSAP]
(2) Adjust Enterprise Value to determine SAP's Value of Common Stock.
(a) Subtract SAP's interest bearing debt.
(b) Add SAP's cash and cash equivalents.
(c) Add the value of non-operating assets.
(d) Subtract the value of contingent liabilities.
(e) Add or subtract any other necessary adjustments.
(3) Make additional adjustments to SAP's Value of Common Stock as necessary to determine SAP's Fair Value of Common Stock.
(a) Adjust as necessary for impaired marketability of SAP stock.
No adjustment for impaired marketability will be applied and none was suggested by the Expert. This line item is included only for the sake of consistency with the valuation framework as set forth in the Final Report.
(b) Adjust as necessary for minority ownership interest discount.
(4) Establish the total number of shares of SAP common stock.
(5) Divide SAP's Fair Value of Common Stock by the total number of shares to calculate SAP common stock's Fair Value Per Share.
(6) Establish the number of shares held by Gonsalves.
(7) Multiply SAP common stock's Fair Value Per Share by the number of shares held by Gonsalves to arrive at the aggregate fair value of Gonsalves' shares of SAP Common Stock.
To determine certain inputs into the valuation formula, the parties' experts used a capitalized earnings model employing a comparable company's analysis. This was described in the Remand Opinion as a
model, which may be used to predict the market capitalization that a private company would enjoy were it publicly traded, [and] requires two basic inputs: a measure of the company's earnings and a capitalization rate. Measures of earnings frequently employed include the company's earnings before interest and taxes ("EBIT") or the company's earnings before interest, taxes, depreciation and amortization ("EBITDA"). The capitalization rate is obtained through a comparison with similar publicly traded companies whose market capitalization and earnings measures are publicly disclosed. By applying the implied capitalization rate of the public companies to the earnings measure of the comparable private company, an estimate of the private company's capitalization may be obtained.
The legitimacy of this formula depends on the validity of at least four key decisions: [1] the choice of an appropriate earnings measure ( e.g., EBIT, EBITDA); 2) the selection of the historical time period on which the measure is based; 3) the determination of which adjustments, if any, should be made to the earnings measure to reflect items such as non-recurring expenses; and 4) the determination of an appropriate capitalization rate.
Remand Opinion. 793 A.2d 312, 319 (Del.Ch. 1998) (footnotes omitted).
The Supreme Court affirmed the weighted five-year EBIT arrived at in the Remand Opinion and that determination is the law of the case. As discussed below, the Expert demonstrated that no adjustment to that earnings measure is necessary in this case. The determination of a proper capitalization rate is the next step in determining SAP's fair value on the merger date.
Gonsalves II, 1999 WL 87280, at **5.
As applied in this Court's April 20, 1998 Order, SAP's five-year weighted EBIT at the time of the merger was $1,699,475. Because no adjustment to that earnings measure is necessary, that figure will be incorporated into my present fair value calculation.
B. The Appropriate Capitalization Rate
A capitalization rate is a figure determined by examining the known ratios of enterprise values to earnings bases of public companies reasonably similar to the respondent company being appraised. The average of the comparable company ratios is calculated. Any adjustments to that average necessary to compensate for dissimilarities between the comparable companies and the respondent company are then made with the resulting figure being the appropriate capitalization rate. That capitalization rate is multiplied by the known earnings base of the respondent company to determine its unknown enterprise value as an operating entity. The Expert concluded that the capitalization rate that should be multiplied by SAP's weighted average five-year historical earnings base is 11.00. In arriving at this figure, the Expert began by examining the competing comparable companies selected by the parties' experts and then determining which group of companies was more properly comparable to SAP for valuation purposes. Gonsalves' expert, Kobak, based his valuation of SAP common stock on the value of SAP's primary operating asset, Rolling Stone magazine, plus additional value for what Kobak viewed as SAP's non-operating assets. SAP's expert, Whitman, based his valuation on SAP as the operating entity rather than limiting his focus to Rolling Stone as the operating entity.
Determining the unknown enterprise value of the respondent company using this method is merely solving a four-variable algebraic equation with three known variables and one unknown variable, here SAP's enterprise value. As a simplified example, suppose comparable Company A's enterprise value (Aev) is 10 and its earnings base (Aeb) is 5. Company B's enterprise value (Bev) is unknown and its earnings base (Bev) is 3. When the known values are plugged into the formula Aev/Aeb = Bev/Beb (10/5 = Bev/3), Company B's enterprise value (Bev) is calculated to be 6.
In this case the earnings bases for the comparable companies and SAP are multi-year averages of EBIT. Both the Expert and Whitman calculated the enterprise values of the comparable companies as the sum of the market value of common stock plus the value of preferred stock plus the value of interest-bearing debt plus the value of minority interests in other entities less cash and cash equivalents. For simplicity, the Expert reduced the previous sentence to: Enterprise Value = Value of Common Stock + Interest Bearing Debt — Cash (including cash equivalents). See Final Report at 17 43; see also Whitman Valuation at 18.
The Expert viewed Kobak's methodology as flawed. As the Expert correctly pointed out, Gonsalves owned stock in SAP, not Rolling Stone magazine. Also, SAP had additional operating activities beyond Rolling Stone not accounted for by Kobak. Use of this flawed methodology resulted in Kobak failing to "identif[y] a sample of comparable companies whose valuations and financial attributes can be used in the process of determining the fair value of the common stock of SAP on the [Merger] Date."
Final Report at 14.
Whitman valued SAP as a whole and did not focus only on the value of Rolling Stone to determine SAP's value. Like SAP, the comparable companies Whitman examined could all be considered publishing companies. The Expert believed that any non-publishing activities of Whitman's comparable companies were subject to similar economic forces that affect revenues of publishing companies. As a result, the Expert determined "the comparable companies included in the Whitman analysis represent a reasonable grouping for purposes of getting insight into a relevant earnings capitalization rate in this Action." Although the Expert concluded that Whitman's report contained acceptable comparable companies from which to derive a capitalization rate, he did not agree with Whitman's determination of that rate.
Id. at 16.
Whitman used a simple average of comparable company EBIT to calculate his proposed capitalization rate. The Expert stated that he believed a weighted EBIT average should be used to determine the earnings capitalization rates for the comparable companies. Through a comparison of capitalization rates derived from weighted, versus arithmetic, EBIT averages of the comparable companies, however, the Expert demonstrated that it does not "make any significant difference to the determination of the value of SAP if the EBIT average for the comparable companies is a simple arithmetic average or a weighted average." Based on the prior five-year earnings of the comparable companies in this case, therefore, use of either type of EBIT average for those comparable companies is acceptable here.
See Final Report at 40-41 Ex. 1. As noted above, a weighted average was applied to SAP's earnings and a simple arithmetic average was applied to the earnings of Whitman's comparable companies. In the Remand Opinion. I had recognized the seemingly inconsistent appearance of applying a capitalization rate based on an arithmetic average of the comparable companies' earnings and a weighted average of SAP's earnings but explained that this was not problematic in this case. See Remand Opinion. 793 A.2d 312, 323 (Del.Ch. 1998). The Expert's conclusions, albeit in a different manner, support my earlier determination on that point.
The Expert also noted that Whitman's report failed to give SAP sufficient credit for its higher rate of growth in both advertising revenue and total revenue relative to the comparable companies. According to the Expert, that failure led Whitman to suggest too small a capitalization rate. Taking SAP's greater growth into account led the Expert to conclude that the appropriate capitalization rate to be applied to SAP's weighted earnings measure is 11.0. Each party objects to the Expert's determination. SAP contends that the Expert's rate is too high and Gonsalves argues it is too low.
SAP attacks the Expert's capitalization rate as arbitrary and unsupported by analysis or explanation. I disagree. The Expert considered all of the factors put forth by Whitman as well as the fact of SAP's higher rate of growth in advertising revenues and total revenues for which Whitman gave insufficient weight. Because of the added weight given SAP's growth rate, the Expert's capitalization rate is higher than the 9.5 suggested by Whitman. The Expert did, however, give weight to several of the factors Whitman noted as reasons the capitalization rate should be less than the median enterprise value to earnings base ratio of the individual comparable companies. The weight given those factors led the Expert to suggest a capitalization rate approximately 10% less than that median. I believe the Expert set forth a reasonable explanation for his conclusion that 11.0 is the appropriate capitalization rate and did not make that selection arbitrarily.
In its exceptions to the Final Report, SAP includes a large block-quote from Whitman's report listing Whitman's considerations when comparing SAP to the comparable companies. This list contains nine factors that would make SAP less valuable relative to the comparable companies. Those factors are: (1) SAP's small relative size; (2) SAP's lack of diversification instead of relying on a single print publication; (3) SAP's lower margins; (4) SAP's volatile profitability; (5) the "non-trophy" status of Rolling Stone; (6) SAP's low capital reinvestment program; (7) SAP's speculative use of cash proceeds; (8) SAP's non-dividend paying policy contrasted with the dividend paying nature of the publicly-traded comparable companies; and (9) SAP's contingent liabilities. Significantly, however, the factors Whitman reports considering do not include SAP's greater growth rate — a factor that would increase SAP's value relative to the comparable companies.
Gonsalves contends that the Expert's capitalization rate is too low. She asserts that the capitalization rate should be at least the mean of Whitman's comparable companies and, in reality, should be greater because SAP was a growth company in 1985. Gonsalves argues that the Expert improperly lowered the capitalization rate from the comparable company mean as a result of giving undue weight to the value-decreasing factors listed in Whitman's report and, also, by not giving enough weight to the SAP's greater growth in 1985 relative to the comparable companies. I am not convinced by Gonsalves' arguments on this point. The Expert concluded, and I agree, that the comparable companies listed in the Whitman report are an appropriate group from which SAP's value can be extrapolated. Part of that extrapolation includes making adjustments to the capitalization rate based on differences in business risk and growth prospects between SAP and the comparable companies. That is just what the Expert has done. The Expert opined that the capitalization rate should be less than the mean of the comparable companies based on some, but not all, of the factors set forth by Whitman. That downward adjustment was reasonable based on the valuation characteristics of SAP that were negative relative to the comparable companies. The Expert's suggested capitalization rate of 11.0 is 16% higher than the 9.5% proposed by Whitman. That higher rate is explicitly due to SAP's higher revenue growth relative to the comparable companies. That Gonsalves believes the neutral Expert did not give enough weight to this positive characteristic is understandable but, in my opinion, the Expert's explanation for his suggested capitalization rate is reasonable and convincing. I conclude, therefore, that the appropriate capitalization rate to be applied in this case is 11.0.
C. Treatment of Deferred Subscription Income
SAP's enterprise value is determined by multiplying its weighted five-year EBIT by the capitalization rate. Before this calculation is made, however, it is first necessary to determine whether any adjustment to SAP's reported EBIT must be made. Specifically, whether an adjustment is necessary to account for SAP's deferred subscription income ("DSI"). DSI arises when a magazine's subscribers purchase multi-year subscriptions. DSI represents income that is currently received but will be earned in future time periods through the delivery of magazines. Although DSI represents a temporary source of funds, the obligation of the company to print and deliver magazines at a future time means that, depending on future costs of production, advertising revenue, or other factors, it is uncertain whether those funds will ultimately result in a net profit.
Kobak contends that EBIT must be adjusted to reflect DSI on a cash basis, thereby increasing the fair value of SAP. Kobak's proposed method involves adding to, or subtracting from, a given year's EBIT the change in DSI from the preceding year to the current year in which EBIT is being measured. Predictably, SAP opposes adjusting EBIT to reflect DSI on a cash basis, with Whitman and McNamee offering alternative reasons why there should be no such adjustment.
Whitman argues that "the adjustment of subscription income to reflect cash basis accounting is essentially `double counting' since the same accounting methodology and recognition of income would have been the case among all the comparable companies from which the multiple was derived." Whitman report at 43. McNamee contends that DSI should not be added to income because "[i]t's not the standard, orthodox practice, at least in the past two decades. It runs counter to regulatory guidelines, which encourage deferral. It's not just spare cash sitting around. In fact, the publisher will need the cash in the near future to fulfill the subscriptions. Trends would not encourage a publisher to assume growth in perpetuity." PMG report at 57. Because I base my determination on the DSI issue on the sound reasoning of the Expert, I do not specifically address the merits of the rationales of Whitman or McNamee on this point.
The Expert disagrees with Kobak's proposed adjustment. First he notes that Kobak's justifications for his position are somewhat contradictory. At one point, Kobak seems to, once again, base his proposed adjustment on the inappropriate idea that SAP should be valued with reference to the sale of its primary asset, Rolling Stone magazine, independent of the entire company's value as a going concern. In his report, Kobak states, "[f]or valuation purposes, . . . the cash basis [for DSI] is more appropriate because when magazines are sold, the multiples are applied to earnings with subscription income and expenses on the cash basis." At another point in his report, however, he contends that the DSI "is put on the cash rather than deferred (accrual) basis . . . because on a going concern basis the publisher has the cash to use and will never have to repay the subscribers." Kobak contradicted that statement, with regard to the use of DSI funds, when he acknowledged at trial that in the event that a magazine publisher goes out of business, "[t]heoretically, it would have to pay cash, should pay cash [to the subscribers whose subscriptions are not being fulfilled]." More importantly, however, the Expert noted that DSI cash is only a temporary source of funds. Whether or not the publisher would ever face the situation where it had to repay subscribers, DSI funds are not funds "[w]hich [the company] can use in any way [it] wants" as Kobak asserted at trial. Those funds create an obligation on the part of the publisher to fill a subscription the costs of which are not incurred (or precisely knowable) at the time of DSI receipt.
Kobak report at 17 (emphasis added); see also Trial Tr. at 32 (testifying that puffing subscription income on a cash basis "is the normal way . . . when magazines are bought or sold, that publishers do it").
Kobak report at 3 (emphasis added).
Trial Tr. at 38. Kobak contended that this "theoretical" obligation to repay unfilled subscriptions would not actually occur because when magazines go out of business they can sell unfilled subscriptions to other magazines. But, those subscribers would have to agree to having their subscriptions switched, see id., so it is not accurate to say subscribers would never have to be repaid.
Trial Tr. at 26.
As Chancellor Allen noted when Kobak was testifying on this point, "[y]ou also have high confidence that you are going to produce that magazine at a cost less than the income [from DSI]. But you can't be certain . . . what that level is yet. And indeed, if some horrible event occurs, paper prices go through the roof, you might produce that magazine at a higher cost than the subscription price." Trial Tr. at 29.
Instead of directly addressing the Expert's analysis of this issue, Gonsalves merely takes exception to the rejection of the DSI adjustment by referencing the reasons set forth in her 1996 post-trial brief. I have carefully examined the arguments presented in that brief and remain unconvinced that a DSI adjustment should be made. For instance, Gonsalves attempts to discount the possibility of unprofitable subscriptions by explaining that SAP has three unified revenue streams — subscriptions, single copy sales, and advertising. Therefore, Gonsalves argues, the cost of producing magazines ( i.e., the obligation created by DSI) is not paid for solely out of subscription income. Although that may be true, the obligation to fill subscriptions continues to exist. Not only are the associated production costs unknown when DSI funds are received, but income provided by each of the other revenue streams is uncertain as well. Because of the uncertainty of future revenue from subscription, single copy sales, and advertising, as well as the costs of filling subscriptions paid for with DSI, I believe it is inappropriate to make an adjustment to SAP's reported EBIT for DSI. SAP's enterprise value on the date of the merger, therefore, is the product of the capitalization rate (11.0) and SAP's weighted average EBIT ($1,699,475), or $18,694,225. Before calculating the value of SAP common stock from its enterprise value, I must first determine how to treat SAP's cash and cash equivalents.
D. Treatment of "Excess" Cash
As of December 31, 1995, SAP had $5,066,000 in cash and cash equivalents. At trial the parties disagreed about how much, if any, of this amount should be allocated to working capital and how much was excess cash that should be added to SAP's enterprise value. Whitman contended that SAP's sixty-day working capital requirement of approximately $5.3 million exceeded the amount of cash and cash equivalents and, therefore, there was no excess cash to be added to SAP's enterprise value. Kobak contended that SAP required only thirty days of working capital. Based on Kobak's calculations, this thirty-day requirement equaled approximately $3.065 million, leaving approximately $2 million in excess cash that must be added to SAP's enterprise value before the value of SAP's common stock can be determined.
The Expert noted a methodological inconsistency in the approach taken by the parties' experts with respect to the treatment of SAP's cash. As explained in note 19, above, both the Expert and Whitman used the same formula to calculate the enterprise values of the comparable companies: Enterprise Value = Value of Common Stock + Interest Bearing Debt — Cash. The ratio of those enterprise values to the comparable companies' earnings bases were then used to determine the capitalization rate, which, when multiplied by SAP's earnings base resulted in an enterprise value of $18,694,225 for SAP. The "Cash" term included in the calculations of the comparable companies' enterprise value did not discriminate between necessary-for-operations cash and excess cash. According to the Expert, when determining the value of SAP common stock by rearranging the terms in the above formula (Value of Common Stock = Enterprise Value — Interest Bearing Debt + Cash) it would be inconsistent to treat SAP's "Cash" term differently, by now adding in only "excess" cash. Therefore, to accurately determine the value of SAP common stock, the Expert believes that the entire $5 million must be included as the "Cash" term in the formula.
The "cash" term in this formula and the following discussion includes cash and cash equivalents.
SAP argues that the position of the Expert is contrary to established Delaware law purportedly holding that cash needed for a company's working capital requirements should not be added into the company's enterprise value to determine the fair value of that company's stock. SAP maintains its position that all of SAP's cash at the time of the merger was less than its sixty-day working capital requirement, leaving no excess cash to be added to SAP's enterprise value. In the alternative, SAP argues that, at most, any adjustment to enterprise value should be limited to the approximately $2 million in excess cash as opined by Kobak.
I disagree with SAP's characterization of "established Delaware law" as requiring that only excess cash be added to enterprise value in an appraisal valuation. SAP cited only two cases for this proposition and both are readily distinguishable. In Hintman v. Weber the Court did refuse to make an adjustment for cash that could not be shown as being in excess of working capital requirements. First, there is no indication in Hintman that the Court believed there is a blanket prohibition against considering a company's cash for valuation purposes absent a finding of the amount of such funds that exceed working capital needs. The Court there made its determination based on a consideration of that issue in light of the particular facts of that case. The facts of that case are not mirrored here. This is most importantly true with regard to the valuation methodologies employed by the Hintman experts. Those experts conducted discounted cash flow analyses to value the respondent company. That case did not present the situation, as here, where a comparable companies valuation was conducted that relied on a defined "enterprise value" for the comparable companies to determine an identically defined enterprise value for SAP. Consistency requires the same treatment of the elements making up the enterprise value of the comparable companies as make up the elements of SAP's enterprise value. I conclude, therefore, that an accurate determination of the value of SAP common stock requires that the full $5,066,000 be included in the calculation. Inserting the appropriate values into the enterprise value formula gives a tentative value for SAP common stock on the date of the merger as: $18,694,225 (Enterprise Value) — $1,295,663 (Interest Bearing Debt) + $5,066,000 (Cash) = $22,464,562 (tentative Value of SAP Common Stock). I call this a "tentative" value as additional adjustments might be necessary to arrive at the actual value of SAP common stock.
1998 WL 83052 (Del.Ch.).
SAP's citation to Bomarko v. International Telecharge, Inc., 794 A.2d 1161 (Del.Ch. 1999), also fails to support SAP's proposition. There the plaintiff brought both an appraisal and a fiduciary duty case with the Court only deciding the fiduciary duty case. That Court even noted "the more exact process followed in an appraisal action" as compared to the degree of certainty required in making a damages calculation in a fiduciary duty case. Id. at 1184. Given that the valuation in Bomarko was made in the context of a breach of loyalty case, I would be hard pressed to accept the treatment of excess working capital there as a bright line rule for appraisal actions.
I decline the Expert's suggestion that an adjustment to the value of SAP's interest bearing debt should be made to account for the fact that a portion of that debt was secured by monies in an escrow account. There is no evidence as to whether or not any of the interest bearing debt of the comparable companies was similarly secured. The absence of any evidence suggesting that this issue was considered with regard to how the interest bearing debt of the comparable companies was treated when calculating their enterprise values, I believe, makes it improper to make such an adjustment in the calculation of SAP's enterprise value. This approach is consistent with my determination that it is appropriate to treat SAP's cash the same way as the comparable companies' cash when calculating SAP's enterprise value.
E. Additional Adjustments
The first possible additional adjustment identified by the Expert is to subtract the value of SAP's contingent liabilities from the tentative value of SAP common stock. Whitman noted contingent SAP liabilities and purportedly accounted for them in his suggested capitalization rate. The Expert concluded that it was inappropriate to consider contingent liabilities in determining a capitalization rate but, if such liabilities exist, they should be factored in at this point — when the value of the common stock of the respondent corporation is being determined. In this case, however, the Expert concluded, and I agree, that the occurrence of the liabilities Whitman views as contingent are too uncertain to warrant adjustment.
The Expert also considered whether there should be an adjustment to reflect the value of a piece of land purchased by SAP in 1985 for $1,127,000. Whether this adjustment will be made depends on a determination of whether the land was a non-operating asset held for investment or an operating asset. If the land was a non-operating investment asset, the value of that asset should be added to my tentative value of SAP common stock. If the land could reasonably be viewed as an operating asset, no adjustment would be appropriate. Unfortunately, the record is not developed to the extent necessary for me to resolve this question. Therefore, I will permit the parties to develop new evidence and present briefs on this limited question to the Expert for his independent analysis and report to the Court for resolution of this issue. If it is ultimately determined that the land is a nonoperating asset held for investment, $1,127,000 will be added to the tentative value of SAP common stock. If the land may be fairly characterized as an operating asset, no additional adjustment will be made and the tentative value of SAP common stock will be deemed to be the value of SAP common stock. At that point, only one question must be decided before a final calculation of the fair value of Gonsalves' SAP shares can be determined. That is whether it is appropriate to adjust the value of SAP common stock to account for any minority ownership discount inherent in the determined value of SAP common stock that resulted from the use of a comparable companies valuation methodology.
F. Minority Ownership Discount
A minority ownership discount may arise in a comparable company's valuation because the market prices of the comparable companies' shares represent prices paid for minority interest positions. In an appraisal action, however, the petitioner is to be awarded the fair value of the stockholder's proportionate interest in the company on a going concern basis. It is sometimes appropriate, therefore, to adjust the determined value of the common stock of the respondent company to avoid penalizing the petitioner for being in a minority ownership position. The Expert believed that such an adjustment should be made in this case but felt constrained by both what he viewed as this Court's admonition to address only the Open Issues and the limited usefulness of SAP's trial exhibits addressed to this issue. Once again, I believe that a more thorough examination of this issue is required before I can make a final determination of what, if any, adjustment should be made to eliminate a possible minority ownership discount here. To this end, the parties may submit supplemental briefing on this issue to the Expert for his independent analysis and report to the Court. If an adjustment to the value of SAP common stock is necessary to eliminate any inherent minority ownership discount, the adjustment will be made to the share price as calculated after resolving the land asset question. The result of any such adjustment will establish the fair value of SAP common stock. This value will then be divided by the total number of outstanding SAP shares at the time of the merger, 85,428, to find the fair value per share of SAP common stock. The fair value per share of SAP common stock will then be multiplied by the number of shares (2000) owned by Gonsalves. That calculation will yield the fair value of Gonsalves' SAP stock at the time of the merger. G. Pre-judgment Interest
It is with great reluctance that I conclude the record before me makes it necessary to request that the parties again present evidence and supporting briefs to the Expert who must in turn make an independent evaluation of that evidence, go through the process of creating draft and final reports with exceptions thereto, and culminating in a final determination of the issues by this Court. I note that a tentative value of Gonsalves' SAP shares may be determined using the conclusions I am able to reach at this point. That value is based on the tentative $22,464,562 value of SAP common stock divided by the total number of SAP common shares, 85,428. This gives a value of $262.96 per share of SAP common. The value of Gonsalves' 2,000 shares of SAP stock based on this per-share value would be $525,920. The only further issues to be addressed are the characterization of the land asset and whether a minority ownership discount adjustment is appropriate and, if so, what that adjustment should be. I note that if my ultimate determination on these issues is that no further adjustments are appropriate, the value of Gonsalves' SAP shares will be determined as described above. I am sensitive to the fact that this action has been pending for many years and that the parties (and the Court) are anxious for its final resolution. With that in mind, I offer, rather than require, the parties the opportunity to submit briefing on these issues to the Expert who will then present his conclusions to the Court for my decision. If the parties do not think the potential benefit of the additional time and expense required by that process is warranted, I will issue an order reflecting the valuation as described above.
1. The Form of Interest
Finally, I must determine the rate and form of interest that is appropriate in this action. In Gonsalves II, the Supreme Court acknowledged "that the Court of Chancery has broad discretion under the appraisal statute to award either simple or compound interest" and that the exercise of that discretion is entitled to deference absent an "abuse of discretion." The Supreme Court went on to state, however, that although "the statute provides discretion to choose on a case-by-case basis, [it] requires explanation for the choice." The Supreme Court remanded the issue of the interest award because it believed that "the Court of Chancery provided no explanation for its selection of compound interest in a case where a predecessor judge had awarded simple interest." Although I think I provided a detailed explanation for the interest award in the Remand Opinion, I will endeavor yet again to set forth my reasoning in a simple and straightforward manner.
Gonsalves II at **4.
Id. at **3.
Id. at **4.
Id. The Supreme Court also stated that, "[o]f equal concern is SAP's argument that it is being penalized for succeeding on its cross-appeal of Chancellor Allen's award of simple interest by now having to pay a significantly greater amount in the form of compound interest." Id. SAP argues that its cross appeal only challenged the rate, not the form, of the interest award and that it is unfair for this Court to change the form of interest awarded. As explained below, both the rate and form of interest are components of any ultimate interest award and the Court must address each in fashioning appropriate relief.
See Remand Opinion, 793 A.2d 312, 326-328 (Del.Ch. 1998).
Section 262(h) states that in valuing the shares of stockholders entitled to an appraisal:
the Court shall appraise the shares, determining their fair value . . . together with a fair rate of interest, if any, to be paid upon the amount determined to be fair value. . . . In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding.
8 Del. C. § 262 (h) (emphasis added); see also Rapid-American Corp. v. Harris, 603 A.2d 796, 809 (Del. 1992) (noting that, although "not exhaustive, some of [the relevant factors to be considered in determining a fair rate of interest] can include the considerations enumerated in 8 Del. C. § 262 (h)").
Section 262(i) provides "[t]he Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct." Sections 262(h) and 262(i) demonstrate that an interest award necessarily has two components — a rate of interest and a form of interest. The Court must determine both parts in fashioning an interest award that is fair to the dissenting stockholder as well as to the surviving corporation.
8 Del. C. § 262 (i) (emphasis added).
When determining what interest award is appropriate, however, the Court is mindful that in an appraisal action such an award is neither intended to be punitive nor to "increase the statutory recovery of the principal award." As I noted in the earlier Remand Opinion, there are two purposes served by an interest award in an appraisal action. First,
See Rapid-American Corp., 603 A.2d at 808 (stating that the Supreme Court had made clear that "the purpose of an appraisal action is not to punish the respondent corporation").
Francis I. duPont Co. v. Universal City Studios, Inc., 343 A.2d 629, 634 (Del.Ch. 1975).
[i]t is intended to compensate a petitioner for the loss of use of the fair value of her shares during the pendency of an appraisal process and[, second,] to cause the surviving corporation to give up the benefit it obtained from the use of the fair value of petitioner's shares during that same period.
Remand Opinion at 326; see also Chang's Holdings, S.A. v. Universal Chems. Coatings, 1994 WL 681091, at *1 (Del.Ch.) (describing the first purpose as an attempt "to place the dissenting stockholder in the position she would have been in had the corporation promptly paid her the value of her shares" and the second purpose as "forc[ing] the surviving corporation to disgorge the benefit it received from having use of the plaintiff's funds").
In essence, an interest award is the Court's attempt to put both parties in the position most closely approximating their respective positions had the fair value of the dissenting shareholder's stock been paid on the date of the merger. Both the rate and form of interest awarded interact to achieve this goal.
With regard to the rate of interest, "[e]ach party bears the burden of proving an appropriate rate under the circumstances." The more detailed evidence presented, the more likely the Court will be able to determine a fair rate of interest for the particular parties. In the absence of sufficient evidence, the less individually tailored legal rate may be awarded. Similarly, with regard to the form of interest, a well-developed record makes it more likely that compound interest would be appropriate because such evidence allows the Court to make a more precise determination of what interest award — both as to rate and form — is appropriate for the parties before it.
Grimes v. Vitalink Communications Corp., 1997 WL 538676, at *1 (Del.Ch.).
See Remand Opinion at 327 (noting that the legal rate "serves as a useful default rate when the parties have inadequately developed the record on the issue"); Grimes, 1997 WL 538676, at *9 (same); see, e.g., Remand Opinion at 328 (explaining that where neither party had provided sufficient evidence on the issue of SAP's cost of borrowing, the Court had to "rely on the legal rate to provide an estimate of SAP's cost of debt").
In this case, the Court is not faced with an inadequately developed record warranting an award of interest at the legal rate as a fall back, or default, position. I noted at the time of the Remand Opinion that "[w]here, as here, the record is sufficiently developed, the legal interest rate . . . simply is not relevant." The record was sufficiently developed for me to determine a fair rate of interest, and that compounding was appropriate, four years ago when the Remand Opinion was issued. The current record is even more developed than it was at that time and includes the parties' original expert opinions. In addition, the record now includes the report of a neutral expert along with the parties' responsive briefing to the Expert's report that focus on this issue and the other three Open Issues. The additional evidence provided by the Expert, and the parties' responses to that evidence, has allowed me to determine more precisely what interest award is appropriate here.
Remand Opinion at 327.
In Gonsalves II, the Supreme Court also indicated its concern that the award of compound interest in the Remand Opinion was the result of a perceived "developing standard practice" of awarding compound interest in appraisal cases. I addressed this concern in Onti, Inc. v. Integra Bank. In that case, I reviewed Delaware precedent with regard to the form of interest awarded and gave a detailed explanation for my conclusion that the award of compound interest would generally be the form of interest most likely to fulfill the purposes of the appraisal statute. Included in that explanation was my opinion that "[i]t is simply not credible in today's financial markets that a person sophisticated enough to perfect his or her appraisal rights would be unsophisticated enough to make an investment at simple interest." Therefore, a shareholder generally would not be fairly compensated for the loss of use of the fair value of her shares during the pendency of the appraisal process with an award of simple interest.
Gonsalves II at **4.
751 A.2d 904 (Del.Ch. 1999).
See Onti, 751 A.2d at 926-929.
Id. at 926.
Furthermore, because the impact of compounding becomes more significant over time, the detriment suffered by a shareholder — who must wait for years before the value of her shares is determined — is magnified if she is ultimately awarded only simple interest. That detriment may be warranted if the petitioner is responsible for the delay. Here, however, I previously considered and rejected SAP's arguments alleging improper delay by Gonsalves. See Remand Opinion at 328. Although those arguments were aimed at limiting the time period subject to the interest award, were I to have found them persuasive they would have been relevant to an argument that I should award simple, and not compound, interest. There was no convincing evidence to find delay resulting from Gonsalves' intentional or strategic maneuvering at the time of the Remand Opinion. Likewise, the delay in resolution of this litigation due to the reversal of the Remand Opinion and subsequent preparation of the Expert's Final Report has not been caused by the actions of Gonsalves. If, as here, responsibility for the delay is not due to intentional delay or strategic maneuvering on the part of the petitioner, she should not be penalized by awarding her simple interest.
"As for the defendant company in an appraisal action, it is even harder to imagine a corporation today that would seek simple interest on the funds it holds. . . . Nor is it conceivable that [the defendant company's] lenders were providing . . . capital at simple rates of interest." An award of simple interest, therefore, would not force the defendant company to disgorge the full benefit it received from having use of the plaintiff's funds. In light of these financial realities, I noted in Onti that "[t]he rule or practice of awarding simple interest, in this day and age, has nothing to commend it — except that it has always been done that way in the past." Consequently, where an interest award is warranted in an appraisal action, compound interest would generally be necessary to satisfy the purposes of that award.
Onti, 751 A.2d 926-27 (footnote omitted).
Id. at 929. The Delaware Supreme Court agrees with this proposition, and has explicitly found that compound interest is within this Court's discretion. See Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., et al., No. 372, 2001 (Del. Aug. 29, 2002); Smith v. Nu-West Indus., 781 A.2d 695 (Del. 2001).
This general proposition is applicable to the specific parties before me. There is nothing in the record that would lead me to believe that the lengthy duration of this litigation was the result of any intentional delay on the part of Gonsalves. SAP has had the use of Gonsalves' funds during the pendency of this litigation — funds on which SAP would have to have paid compound interest if it had gone to the market to borrow those funds. The fact that Gonsalves would have earned, and SAP would have to have paid, compound interest on those funds is not altered by any "perception" that the Court of Chancery was more likely to award a particular form of interest during different periods in the past. I conclude, therefore, that the evidence before me confirms that compound interest is the most appropriate form of interest award for these parties. Having made this conclusion as to the form of interest awarded, I will now set forth my determinations of a fair rate of interest along with the proper compounding period.
2. The Rate of Interest
The Expert suggested that the appropriate interest rate is an average of SAP's cost of borrowing and Gonsalves' opportunity cost. The Expert determined SAP's cost of borrowing to be the prime rate of interest less .25% or its APR equivalent with monthly compounding since the merger date. In the alternative, if I determine that information on the prime rate impermissibly causes the record to be expanded, the Expert suggests use of the legal rate of interest, compounded monthly but reflecting changes in the Federal Reserve discount rate over time since the merger date. The Expert provided two estimates of Gonsalves' opportunity cost, one based on an objective prudent investor model with the portfolio allocations suggested by Whitman and compounded monthly, the other based on a more subjective analysis of Gonsalves' probable personal opportunity cost.
The Expert suggested that SAP's cost of borrowing be calculated based on either the prime rate less .25% or the legal rate of interest, either compounded monthly. Neither SAP nor Gonsalves challenge the Expert's recommendation as to SAP's cost of borrowing. I therefore determine that SAP's cost of borrowing is the prime rate less .25% compounded monthly. The parties are not in agreement as to the Expert's estimation of Gonsalves' opportunity costs, however. Each party objects to at least part of the Expert's conclusions on this element.
The Expert broke down his consideration of Gonsalves' opportunity costs into two parts. First, a determination of what investment alternative represents Gonsalves' lost opportunity. Second, what compounding frequency should be applied to the rate of return from that investment alternative. The Expert provided two methods to determine Gonsalves' opportunity costs. The first was a comparison of the alternative prudent investor models provided by the parties' experts. The Expert concluded that Whitman's model was more appropriate. The second was "to estimate the risk of Gonsalves' SAP stock and formulate a reasonable relationship of that risk to the return on some common stock benchmark, e.g., the SP 500, one can then proceed to estimate what Gonsalves opportunity cost has been since the merger date."
Final Report at 69.
SAP endorses the use of the report of its expert, Whitman, as the proper model for determining Gonsalves' opportunity cost. SAP argues that there is no basis for the Expert's alternative method of determining Gonsalves' opportunity cost based on using the SP 500 as a benchmark. The Expert suggested this alternative method as providing a more accurate representation of Gonsalves' opportunity cost than using a hypothetical prudent investor model. This position is based on the Expert's premise that Gonsalves was a financially rational investor who willingly invested in SAP and accepted the risk inherent in that stock as part of an overall investment strategy. Because a rational investor holds her portfolio risk relatively stable over time, the Expert contends, in order to maintain stable portfolio risk, the investor would have to invest proceeds from the sale of one part of her portfolio in securities with similar risk. Like the hypothetically rational investor, it would be reasonable to assume that Gonsalves would use the proceeds from her SAP stock to purchase securities having a similar risk as her SAP stock. Therefore, if the risk of the SAP stock could be calculated and a reasonable relationship of SAP's risk could be related to the return on some common stock benchmark, for example the SP 500, a more precise measure of Gonsalves' actual opportunity cost could be calculated. SAP contends that the use of the SP 500 as a component of determining opportunity cost has been previously rejected by this Court. Furthermore, SAP argues, the record does not support the Expert's premise that Gonsalves would invest the proceeds received for her SAP stock in other common stock of similar risk. SAP argues that Gonsalves did not purchase her SAP stock as part of a total investment plan but, rather, because of her personal and professional relationships with SAP's founder, Jann Wenner, and his wife, Jane.
Gonsalves argues in favor of the Expert's alternative measure of her opportunity cost based on the SP 500, and against the prudent investor standard. If the Court determines that a prudent investor standard is to be used, Gonsalves urges the Court to adopt Kobak's prudent investor model. Gonsalves maintains that Whitman's model is excessively conservative and that the Expert acknowledges that Kobak's model is equally as prudent as Whitman's.
I conclude that Gonsalves' opportunity cost should be measured against the prudent investor rate as set forth in Whitman's report. Although I believe that the Expert's methodology is sound, I reject the use of the Expert's alternative approach. In my opinion, the record evidence does not support the premise that Gonsalves' SAP shares were purchased and held as part of an investment strategy resulting in a portfolio of fixed risk thereby lending itself to the Expert's alternative approach. More importantly, however, that approach is geared towards Gonsalves' subjective opportunity cost. Although the Court may look at the actual cost of borrowing by the respondent company, the Court determines the petitioner's opportunity cost based on an objective standard. That is also why Gonsalves is incorrect in her assertion that the Expert's report indicates that Kobak and Whitman each suggested equally appropriate prudent investor models to estimate Gonsalves' opportunity cost in this appraisal action. The Expert did say that:
See, e.g., Grimes v. Vitalink Communications Corp., 1997 WL 538676, at *10 (Del.Ch.) ("Respondent correctly notes that this Court has repeatedly rejected the use of a petitioner's investment rate of return (as a rate reflective of the compensatory principle) in favor of an objective standard."); Chang's Holdings, S.A. v. Universal Chems. Coatings, 1994 WL 681091, at *4 ("Because the prudent investor standard is an objective test, Mr. Chang's personal investment prowess has no bearing on the prudent investment rate.").
[T]here is no single portfolio that is applicable to all prudent investors. A prudent investor is best described as one who invests in a manner that is consistent with the investor's investment needs and ability to accept risk. The prudent portfolio is that portfolio that best satisfies the investor's investment needs and ability to accept that risk. . . . Thus, two investors, both economically rational and prudent, could have two quite different investment portfolios, both of which would be considered prudent.
Final Report at 63.
Those statements merely indicate that different individuals with different risk tolerances may have subjectively prudent, but differing, portfolios. As stated above, however, for appraisal purposes, an objective prudent investor model is used.
The Expert suggested that if the ordinary prudent investor is viewed as a typical investor represented by the typical U.S. family, an objective standard could be determined. The expert compared the portfolio of this objective standard with the portfolios suggested by Kobak and Whitman. Far from agreeing that Kobak's prudent investment model was just as acceptable as Whitman's — from an objective point of view — the Expert stated that "Kobak grossly overestimates the portion of the prudent investor portfolio that should be in common stocks and grossly understates the portion of the prudent investor portfolio that should be in money market-type instruments." Thus, although Kobak's portfolio might be subjectively appropriate for a particular highly risk-tolerant investor, it does not accurately reflect the ordinary prudent investor. The Expert stated that based on an ordinary prudent investor standard "the Survey of Consumer Finances data provide strong support for the portfolio allocations suggested by Whitman and adopted by the Court of Chancery in this matter"
The Expert compared the portfolios suggested by the parties' experts to an objective standard based on the holdings of the typical U.S. family as set forth in the 1983 Survey of Consumer Finances published by the Board of Governors of the Federal Reserve System. As Gonsalves notes, the information contained in this publication predates the merger by nearly three years. This publication. however, is not the basis on which the Expert formulated his own prudent investor model but was merely an objective model which he used to compare the prudent investor portfolios suggested by Whitman and Kobak.
Final Report at 65-66. Kobak's suggested prudent investor portfolio consists of 60% broadly diversified common stocks, 30% intermediate-term and long-term U.S. Treasury notes and bonds, and 10% money market-type instruments. Whitman's suggested prudent investor portfolio consists of 20% broadly diversified common stocks, 40% in U.S. Treasury and corporate bonds, and 40% in money market-type instruments or their equivalent, i.e., bank certificates of deposit. Id. at 61-62.
Id. at 66.
As I noted in the Remand Opinion, Kobak did not provide sufficient explanation for the calculations upon which he ultimately based petitioner's proposed prudent investor rate, while Whitman thoroughly explained and supported the calculations used to determine SAP's proposed rate. Gonsalves has still failed to convince me that Kobak's model more accurately reflects the ordinary prudent investor than Whitman's model. Furthermore, it is the unbiased conclusion of the Expert that Whitman's suggested portfolio allocations fairly represent those of an ordinary prudent investor. Therefore, after a reexamination of all of the record evidence before me, I again adopt Whitman's prudent investor portfolio allocation as representative of Gonsalves' opportunity cost. The post-merger interest rate to be applied to the fair value of Gonsalves' SAP shares will be an average of 1) SAP's cost of borrowing based on the prime rate of interest less .25% compounded monthly since the date of the merger and 2) Gonsalves' opportunity cost based on Whitman's prudent investor rate. The resulting rate of interest will be compounded monthly.
Remand Opinion at 327-28.
III. CONCLUSION
The parties shall instruct their experts to recalculate the interest award based on an equal weighting of respondent's cost of borrowing and petitioner's opportunity cost as defined above. In addition, the parties shall inform the Court as to their decision with regard to pursuing a final determination from this Court as to any appropriate adjustments for the value of the land asset and an inherent minority discount resulting from the comparable companies valuation methodology. If the parties are content to accept my valuation without further adjustment, I conclude that the fair value of Gonsalves' SAP stock at the time of the merger was $262.96 per share.
Counsel shall confer and agree upon an appropriate form of implementing Order.