9 / 10
“Dell Undervalued
in Sale Process”
continued
Valuation Vantage
Fall 2016 | 9
In the DCF valuation, the Petitioners’ and Respondents’ experts
used terminal year growth rates 1% and 2% respectively.
The Court used 3% for the terminal year growth rate since it
considered the rate of inflation to be the floor for terminal year
growth rates.
For the tax rate applied in his DCF valuation, the Petitioners’
expert used 21%, which was consistent with the September
Case and valuation models prepared by the Company’s financial
advisors. The Respondent’s expert used a 17.8% tax rate during
the projection periods and 35.8% tax rate for the terminal
period. The Court agreed with the Petitioners’ expert use of
a 21% tax rate since effective tax rates ranged from 16.5% to
29.2% in the five years up to the MBO. During the same period,
cash tax rates ranged from 9.6% to 24.1%.
Also, the Company planned to indefinitely reinvest its earnings
in foreign countries rather than reinvesting its foreign earnings
domestically.
THE COURT’S CONCLUSION
The Court concluded that the Committee did not breach its
fiduciary duty. However, the Court found the final merger
consideration to be well below fair value. The Court equally
weighted the DCF analyses based on the Respondent’s expert’s
adjusted BCG 25% Case forecast and the Respondent’s expert’s
adjusted Bank Case forecast. The first DCF analysis resulted in a
per share value of $16.43. The second DCF analysis resulted in
a per share value if $18.81. Based on equal weighting the DCF
analyses, the Court determined a fair value for Dell’s stock of
$17.62 per share.