Verition Partners Master Fund Ltd. v. Aruba Networks, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
VERITION PARTNERS MASTER FUND )
LTD. and VERITION MULTI-STRATEGY )
MASTER FUND LTD., )
)
Petitioners, )
v. ) C.A. No. 11448-VCL
)
ARUBA NETWORKS, INC., )
)
Respondent. )
MEMORANDUM OPINION
Date Submitted: January 26, 2018
Date Decided: February 15, 2018
Stuart M. Grant, Michael J. Barry, Christine M. Mackintosh, Michael T. Manuel, Rebecca
A. Musarra, GRANT & EISENHOFFER P.A., Wilmington, Delaware; Attorneys for
Petitioners.
Michael P. Kelly, Steven P. Wood, McCARTER & ENGLISH, LLP, Wilmington,
Delaware; Marc J. Sonnenfeld, Karen Pieslak Pohlmann, Laura Hughes McNally,
MORGAN, LEWIS & BOCKIUS LLP, Philadelphia, Pennsylvania; Attorneys for
Respondent.
LASTER, V.C.
In May 2015, Hewlett-Packard Company (“HP”) acquired Aruba Networks, Inc.
(“Aruba” or the “Company”). The transaction was governed by an Agreement and Plan of
Merger by and among Aruba, HP, and Aspen Acquisition Sub., Inc., a wholly owned
subsidiary of HP. Under the merger agreement, each share of Aruba common stock was
converted into the right to receive consideration of $24.67 per share, subject to the holder’s
statutory right to eschew the merger consideration and seek appraisal.1 The petitioners
perfected their appraisal rights and litigated this statutory appraisal proceeding. This is the
court’s post-trial decision on the issue of fair value.
The Delaware Supreme Court’s decisions in Dell2 and DFC3 endorse using the
market price of a widely traded firm as evidence of fair value.4 As in Dell and DFC, the
market for Aruba’s shares exhibited attributes associated with the premises underlying the
efficient capital markets hypothesis. Under Dell and DFC, these attributes provide
sufficient evidence of market efficiency to make Aruba’s stock price “a possible proxy for
fair value.”5 Aruba’s thirty-day average unaffected market price was $17.13 per share.
1
See 8 Del. C. § 262.
Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd, – A.3d –, 2017 WL
2
6375829 (Del. Dec. 14, 2017).
3
DFC Glob. Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346 (Del. 2017).
4
See Dell, 2017 WL 6375829, at *16; DFC, 172 A.3d at 369-70, 373.
5
Dell, 2017 WL 6375829, at *1; see also id. at *17 (“[T]he price produced by an
efficient market is generally a more reliable assessment of fair value than the view of a
single analyst, especially an expert witness who caters her valuation to the litigation
imperatives of a well-heeled client.”); DFC, 172 A.3d at 369-70 (“Market prices are
typically viewed superior to other valuation techniques because, unlike, e.g., a single
1
The Delaware Supreme Court’s decisions in Dell and DFC endorse using the deal
price in a third-party, arm’s-length transaction as evidence of fair value.6 When evaluating
the reliability of the deal price, a trial judge must remember that
the purpose of an appraisal is not to make sure that the petitioners get the
highest conceivable value that might have been procured had every domino
fallen out of the company’s way; rather, it is to make sure that they receive
fair compensation for their shares in the sense that it reflects what they
deserve to receive based on what would fairly be given to them in an arm’s-
length transaction.7
Put differently, “[t]he issue in an appraisal is not whether a negotiator has extracted the
highest possible bid. Rather, the key inquiry is whether the dissenters got fair value and
were not exploited.”8
In this case, the merger was an arm’s-length transaction that provided stockholders
with consideration of $24.67 per share. By definition, it provided stockholders with “fair
compensation” in the sense of “what would fairly be given to them in an arm’s-length
transaction.”9 The petitioners proved that the Company’s negotiators might have done
better, but there is no reason to believe that they left any of Aruba’s fundamental value on
person’s discounted cash flow model, the market price should distill the collective
judgment of the many based on all the publicly available information about a given
company and the value of its shares.”)
6
Dell, 2017 WL 6375829, at *22; DFC, 172 A.3d at 367.
7
DFC, 172 A.3d at 370-71.
8
Dell, 2017 WL 6375829, at *24.
9
DFC, 172 A.3d at 371.
2
the bargaining table. When the merger consideration of $24.67 per share is compared to
the unaffected market price of $17.13 per share, it is not possible to say that Aruba’s
stockholders were exploited. The deal price therefore provides reliable evidence of fair
value.
The Dell and DFC decisions recognize that a deal price may include synergies, and
they endorse deriving an indication of fair value by deducting synergies from the deal
price.10 The respondent’s expert cited a study that provides data on the base rates at which
targets successfully extract a share of anticipated synergies from acquirers. Using that data,
this decision arrives at a midpoint valuation indication for Aruba of $18.20 per share. I
personally believe that Aruba’s negotiators did not extract as great a share of the synergies
as they might have, which suggests that deal-price-less-synergies figure is slightly higher.
The Dell and DFC decisions caution against relying on discounted cash flow
analyses prepared by adversarial experts when reliable market indicators are available.11
The decisions teach that discounted cash flow models should be “used in appraisal
proceedings when the respondent company was not public or was not sold in an open
10
Dell, 2017 WL 6375829, at *13; DFC, 172 A.3d at 371.
11
See Dell, 2017 WL 6375829, at *26 (describing the management buy-out in that
proceeding and stating that “this appraisal case does not present the classic scenario in
which there is reason to suspect that market forces cannot be relied upon to ensure fair
treatment of the minority”); DFC, 172 A.3d at 369 n.118 (explaining that discounted cash
flow models are “often used in appraisal proceedings when the respondent company was
not public or was not sold in an open market check”).
3
market check.”12 When market evidence is available, “the Court of Chancery should be
chary about imposing the hazards that always come when a law-trained judge is forced to
make a point estimate of fair value based on widely divergent partisan expert testimony.”13
In this case, the discounted cash flow analysis prepared by the petitioners’ expert generated
a value of $32.57, which was inconsistent with the market evidence. The discounted cash
flow analysis prepared by the respondent’s expert generated a value of $19.75, nestled
nicely between the unaffected market price and the deal price. Its methodological
underpinnings, however, provided cause for concern, as did the meandering route by which
the expert arrived at his final figure. I do not rely on the discounted cash flow valuations.
The two most probative indications of fair value are Aruba’s unaffected market
price of $17.13 per share and my deal-price-less-synergies figure of approximately $18.20
per share. In the context of this case, the unaffected market price provides the most
persuasive evidence of fair value. My deal-price-less-synergies figure suffers from two
major shortcomings.
First, my deal-price-less-synergies figure is likely tainted by human error.14
Estimating synergies requires exercises of human judgment analogous to those involved in
12
DFC, 172 A.3d at 369 n.118.
13
Dell, 2017 WL 6375829, at *26.
14
To cite just a few possibilities, my specific allocation of synergies to the sell-side
in this case, while well intentioned, could be erroneous. The size of the original synergy
estimates, while the best available under the circumstances, represented predictions about
4
crafting a discounted cash flow valuation. The Delaware Supreme Court’s preference for
market indications over discounted cash flow valuations counsels in favor of preferring
market indications over the similarly judgment-laden exercise of backing out synergies.15
Second, my deal-price-less-synergies figure continues to incorporate an element of
value derived from the merger itself: the value that the acquirer creates by reducing agency
costs.16 A buyer’s willingness to pay a premium over the market price of a widely held firm
reflects not only the value of anticipated synergies but also the value created by reducing
agency costs.17 The petitioners are not entitled to share in either element of value, because
complex matters and could be wrong. More broadly, the baseline data about the manner in
which buyers and sellers allocate synergies could reflect sampling or measurement errors.
15
See Dell, 2017 WL 6375829, at *26; DFC, 172 A.3d at 388; see also Applebaum
v. Avaya, Inc., 812 A.2d 880, 890 (Del. 2002) (“[A] well-informed, liquid trading market
will provide a measure of fair value superior to any estimate the court could impose.”).
16
See William J. Carney & Mark Heimendinger, Appraising the Nonexistent: The
Delaware Court’s Struggle with Control Premiums, 152 U. Pa. L. Rev. 845, 847-48, 857-
58, 861-66 (2003) [hereinafter Control Premiums]; Lawrence A. Hamermesh & Michael
L. Wachter, Rationalizing Appraisal Standards in Compulsory Buyouts, 50 B.C. L. Rev.
1021, 1023-24, 1034-35, 1044, 1046-54, 1067 (2009) [hereinafter Rationalizing
Appraisal]; Lawrence A. Hamermesh & Michael L. Wachter, The Short and Puzzling Life
of the “Implicit Minority Discount” in Delaware Appraisal Law, 156 U. Penn. L. Rev. 1,
30-36, 49, 52, 60 (2007) [hereinafter Implicit Minority Discount]; Lawrence A.
Hamermesh & Michael L. Wachter, The Fair Value of Cornfields in Delaware Appraisal
Law, 31 J. Corp. L. 119, 128, 132-33, 139-42 (2005) [hereinafter Fair Value of Cornfields].
17
See Rationalizing Appraisal, supra, at 1023-24, 1038, 1046-54, 1067; Implicit
Minority Discount, supra, at 30-36, 52; Fair Value of Cornfields, supra, at 139-41. The
concept of reduced agency costs is the flipside of the benefits of control, which includes
the ability to make changes in corporate management, strategy, and policy. See DFC, 172
A.3d at 369 n.117 (citing ability to change dividend policy). The key point is that control
creates value distinct from synergy value. See Fair Value of Cornfields, supra, at 148
(“[E]xcluded gains [for purposes of appraisal] include, for example, those resulting from
5
both “aris[e] from the accomplishment or expectation of the merger.” 18 The synergy
deduction compensates for the one element of value arising from the merger, but a further
downward adjustment would be necessary to address the other.19
Fortunately for a trial judge, once Delaware law has embraced a traditional
formulation of the efficient capital markets hypothesis, the unaffected market price
provides a direct route to the same endpoint, at least for a company that is widely traded
and lacks a controlling stockholder.20 Adjusting down from the deal price reaches,
economies of scale or increased market share, or those that derive from the acquirer’s plans
to operate the post-merger enterprise more efficiently.”); id. at 151 (same); accord Implicit
Minority Discount, supra, at 4 (explaining that stockholders in an appraisal proceeding “do
not receive value that includes synergies or benefits of control”).
18
8 Del. C. § 262(h); see Rationalizing Appraisal, supra, at 1038 (“[T]hird-party
sale value is an inappropriate standard for determining the fair value of dissenting shares
because it incorporates elements of value—associated with acquisitions of control by third
parties—that do not belong to the acquired enterprise or to shares of stock in that
enterprise.”); Implicit Minority Discount, supra, at 30 (“The value of the firm is not its
third-party sale value (V3PS). In an arm’s-length transaction, an acquirer will pay a premium
to VE in purchasing the firm. The premium largely reflects synergies arising from the
merger, but it can also reflect benefits of control.”); Fair Value of Cornfields, supra, at 148
(“[E]xcluded gains [for purposes of appraisal] include, for example, those resulting from
economies of scale or increased market share, or those that result from the acquirer’s plans
to operate the post-merger enterprise more efficiently.”); id. at 151 (concluding that Section
262(h) excludes value arising from both “synergies dependent on the consummation of an
arm’s-length acquisition” and “operating efficiencies that arise from the acquirer’s new
business plans”).
19
See Rationalizing Appraisal, supra, at 1055 (discussing an acquisition of a widely
held firm and explaining that “the firm’s going concern value can be estimated in this case
as the actual purchase price minus synergies minus control value”).
20
See Control Premiums, supra, at 858 (“The basic conclusion of the Efficient
Capital Markets Hypothesis (ECMH) is that market values of companies’ shares traded in
competitive and open markets are unbiased estimates of the value of the equity of such
6
indirectly, the result that the market price already provides. Aruba’s unaffected market
price provides the most persuasive evidence of fair value.
By awarding fair value based on the unaffected market price, this decision is not
interpreting Dell and DFC to hold that market price is now the standard for fair value.
Rather, Aruba’s unaffected market price provides the best evidence of its going concern
value.21 The fair value of Aruba is $17.13 per share.
I. FACTUAL BACKGROUND
The parties reached agreement on 180 stipulations of fact in the Pre-Trial Order.
Trial took place over three days. The parties submitted 996 exhibits, including eleven
firms.”); Implicit Minority Discount, supra, at 52 (“Take the case of a publicly traded
company that has no controller. Efficient market theory states that the shares of this
company trade at the pro rata value of the corporation as a going concern.”); id. at 60 (“As
a matter of generally accepted financial theory . . . , share prices in liquid and informed
markets do generally represent th[e] going concern value . . . .”). Professors Hamermesh
and Wachter make the same point indirectly in Rationalizing Appraisal, where they explain
that market prices should not be used to determine fair value where there is either no public
market price at all, where the shares are illiquid or thinly traded, or where there is a
controlling stockholder. See Rationalizing Appraisal, supra, at 1033-34. Outside of these
scenarios, they appear to agree that “because financial markets are efficient, one can simply
use the market price,” and they note that courts already rely on market price data when
using the capital asset pricing model to select a discount rate or when adding a small stock
premium. See id.
21
See Control Premiums, supra, at 879 (noting that the appraisal statute requires
consideration of all relevant factors and stating that “in an efficient market, absent
information about some market failure, market price is the only relevant factor”); id. at 849
(“[W]e urge courts to presume that market value is the best measure of fair value.”).
7
deposition transcripts. Three fact witnesses and three experts testified live. The parties
proved the following facts by a preponderance of the evidence.
A. Aruba
Aruba was a Delaware corporation headquartered in Sunnyvale, California. Aruba
went public in 2007. Until its acquisition by HP, Aruba’s common stock traded on the
NASDAQ under the symbol “ARUN.”22
Aruba principally sold components for enterprise wireless local area networks
(“WLANs”).23 From 2008 until 2014, its market share increased from 8.6% to 12.8%.
Shortly before the merger, Aruba’s market share peaked at 14%.24 Although Aruba was a
significant player in the industry, Cisco Systems, Inc. dominated it.25 For those same years,
Cisco’s market share hovered around 50%.26
During the years leading up to the merger, Dominic Orr served as Aruba’s CEO.27
Before joining Aruba, Orr already had enjoyed a successful career in the technology and
22
Pre-Trial Order ¶¶ 27, 28. This decision cites the Pre-Trial Order as “PTO.”
23
Id. ¶¶ 63-64.
24
Id. ¶ 79.
25
See, e.g., Warmenhoven Tr. 126 (referring to Cisco as “the 800-pound gorilla”);
Orr Tr. 472 (suggesting Cisco was “[p]robably more than 800 pounds”).
26
PTO ¶ 80.
27
Id. ¶ 151.
8
telecommunications sectors.28 In 2002, in his early fifties, Orr retired to pursue a range of
personal interests.29
In 2006, the Aruba board of directors (the “Board”) lured Orr out of retirement. Orr
anticipated serving for three years. But when his first term ended in 2009, the Board had
not identified a successor. Orr agreed to stay on for a second three-year term, but when that
term ended, the Board still had not identified a successor. At that point, Orr agreed to stay
on “year by year,” on the condition that Aruba seriously engage in succession planning.30
The Board agreed but did not move rapidly. The Board did not engage an executive search
firm until 2014. Even then, the Board limited the engagement to developing a position
specification for a “CEO succession review.”31 Active recruitment would require a separate
engagement.32 There remained “[n]o firm date” for Orr’s retirement.33
28
See id. 56.
29
Orr Tr. 371-73 (describing activities during retirement, including spending time
with his children, learning to cook, traveling to Japan and taking Japanese classes, working
with The Philanthropy Workshop, and pursing other philanthropic endeavors including
founding a non-profit business that provides low-power, solar-panel-driven phones).
30
Orr Tr. 377. See generally id. at 368-79.
31
JX 248 at 1 (search firm engagement letter); see also JX 1529 (completed position
specification).
32
JX 248 at 2.
33
Warmenhoven Tr. 278; see also id. at 286 (agreeing Orr “wouldn’t have retired
until the successful candidate had been identified”); id. at 291 (“There’s no date certain.”);
accord Orr Tr. 459 (testifying he would remain until suitable replacement found “[t]o a
certain limit. Ultimately, you know, I’m not getting younger every year.”).
9
By the time he led the merger negotiations with HP in late 2014 and early 2015, Orr
was ready to return to an active retirement.34 As a responsible and conscientious individual,
he was not about to leave Aruba in the lurch, and he cared deeply about the Company and
its employees.35 But he also had other things that he wanted to do with his life. The sale of
Aruba to HP gave Orr a path to an honorable personal and professional exit.
B. Wall Street Analysts Question Aruba’s Financial Performance.
One of the precipitating events for the merger talks between HP and Aruba was a
negative stock market reaction to Aruba’s results for the third quarter of 2014.36 In May
2014, Aruba announced its quarterly results. Revenue exceeded both Aruba’s own
guidance and the Wall Street consensus estimates.37 But the Company reported a gross
34
See Warmenhoven Tr. 228-31; id. at 273 (Orr’s “going to be 66 in March. He’s
told me many times that he did not want to be in a regular employment situation when he
turned 65”); id. at 289 (“[H]e was going to leave before his 65th birthday.”).
35
See Orr Tr. 380 (citing a “moral obligation to make sure that the transaction goes
through, that things are reasonably integrated”); id. at 458 (agreeing he “wouldn’t suddenly
resign [his] position and leave Aruba without a successful, valid succession plan in place”);
Warmenhoven Dep. 154 (calling Orr “the cornerstone of the entire company” and “the face
to the customers, the face to the partners, and the face to the employees”).
36
Aruba operated on a fiscal year that ended on July 31. For Aruba, fiscal year 2015
began on August 1, 2014. Marcus Tr. 25.
37
See JX 47 (Barclays report); JX 48 (Janney Capital Markets report).
10
margin of 70.5%, below the consensus estimate of 72% and Aruba’s “longstanding target
of 71-73%.”38
The resulting analyst coverage was harsh. Wall Street firms headlined their reports
with titles like “Weak Gross Margins Outweigh Sales Upside; Maintain Market Perform”
and “FY3Q14: Disappointing Gross Margin Offsets Ongoing 802.11ac Ramp.” 39 Aruba’s
stock price dropped 12.11% on the news, from $20.06 to $17.63.40
Internally, Aruba management was disappointed.41 They had not anticipated the
furor over gross margins.42 Orr vented to the Board: “[W]e, as an executive team, are finally
sick of wall st discrediting our tremendous come back in revenue growth because they said
we are not as profitable as Ubiquiti (give me a break!).”43
38
JX 47 at 1.
39
JX 259 at 2-3 (email collecting analyst coverage).
40
The parties originally provided limited data on the stock price. See JX 245. As
part of the supplemental briefing process, the respondent provided more extensive data.
See Dkt. 188 Ex. A (publicly available stock-price data for Aruba and S&P 500). The
trading data is suitable for judicial notice. See Lee v. Pincus, 2014 WL 6066108, at *4 n.11
(Del. Ch. Nov. 14, 2014) (“I take judicial notice of these reported stock prices because they
are not subject to reasonable dispute.” (citing D.R.E. 201(b)(2); In re Gen. Motors
(Hughes) S’holder Litig., 897 A.2d 162, 169 (Del. 2006))).
41
See JX 260 at 5-6 (email thread among management); Warmenhoven Tr. 235 (“It
was very frustrating for the management team, I must say. I mean, in -- in fiscal year 2014,
they had 20 percent year-over-year growth, and we were delivering everything to the street,
and the stock really didn’t move.”).
42
JX 260 at 1 (email from Aruba’s Vice President of Sales that he was “not sure we
had any real insights [into the gross margins] until it was too late.”)
43
JX 267; see also JX 269 at 2 (Orr email to Aruba’s CFO: “Between you and me,
if we do all these and our stock price stays $13-20, you and I fail miserably. I don’t know
11
To improve margins, Aruba management developed a cost optimization plan called
“Project Greyhound.”44 It contemplated eliminating approximately 130 employees and
relocating another eighty to “lower-cost geographies.”45 Management undertook the
project because the “Company value [was] not adequately reflected in [the] stock price.”46
In August 2014, Aruba announced its results for the full year of 2014, including
quarterly results for the fourth quarter. Aruba achieved record revenue. Orr told investors
that Aruba had achieved “significant market share gains” and had a “strong platform for
why we are doing all these [sic] tough stuff. I really don’t.”). Ubiquiti Networks, Inc. is
one of Aruba’s competitors.
44
PTO ¶ 101.
45
JX 280 at 10-11 (internal Aruba deck on Project Greyhound); JX 285 (email from
Orr announcing Project Greyhound internally as part of an effort to “continue to evaluate
all aspects of our business to ensure that we achieve our full potential and that we are able
to invest in our strategic initiatives and infrastructure”); see also Warmenhoven Tr. 217-
18 (discussing Project Greyhound); Orr Tr. 413-14 (same); id. at 477-78 (reaffirming
statements in JX 285).
46
JX 273 at 2 (draft internal talking points); see also Orr Tr. 486 (suggesting Project
Greyhound was motivated, in part, by management’s belief that the stock price “does not
reflect what we believe is our commitment to deliver to what the analysts and the investors
want us to do”); Galvin Tr. 597-98 (acknowledging Aruba undertook Project Greyhound,
in part, because “we did have pressure from Wall Street to improve what we were dropping
to the bottom line”); id. at 600 (agreeing “Greyhound was initiated because there was a
perception that the company value was not adequately reflected in the stock price”).
12
future growth.”47 Aruba simultaneously announced the implementation of Project
Greyhound.48
The analysts’ reactions were mixed. Some were positive.49 Others were more
cautious.50 Traders bid up Aruba’s stock price by 8%, from $20.24 to $22.01.51
C. HP Approaches Aruba.
HP had been monitoring Aruba as an acquisition candidate. HP felt it had strong
offerings in the wired networking space and wanted to combine those products with
47
JX 828 (press release announcing results); see also JX 637 at 3 (earnings call
transcript announcing “[o]ur Q4 results exceeded our guidance on all fronts,” “[w]e saw
bookings growth in all of our major [sic] with particular sequential strength in North
America,” and “[w]e delivered solid year-over-year growth in all of our core verticals plus
notable strength in the enterprise markets”); Orr Tr. 477 (confirming revenue for fiscal year
2014 grew 21% from prior year); Galvin Tr. 545-46 (discussing fiscal year 2014 generally
and acknowledging it “was a strong year for the company”).
48
JX 828; JX 637 at 4 (announcing “we have identified opportunities to optimize
our cost structure by eliminating certain positions”).
49
See JX 59 at 2 (JMP Securities report commenting favorably on revenue); JX 62
at 1 (BMO Capital Markets report commenting favorably on Project Greyhound); see also
JX 309 at 7 (Aruba Board deck summarizing analyst reports and noting that fifteen analysts
increased their target price).
50
See JX 61 at 1 (Wells Fargo Securities report positing that “[g]ood news mostly
priced in” and advising caution “due to valuation and increased competition from Cisco”);
JX 64 at 1 (Deutsche Bank report affirming “hold” recommendation in light of risks that
“1) unpredictable sales cycles could adversely impact sales 2) highly competitive
marketplace could pressure margins”).
51
JX 245.
13
Aruba’s wireless offerings. HP believed the combined product set could compete
effectively with Cisco and take significant market share.52
On August 27, 2014, the day after Aruba announced its full-year earnings, HP
approached Aruba about a deal. Antonio Neri, a Senior Vice President at HP, contacted
Orr.53 Orr promptly notified Daniel Warmenhoven, Aruba’s lead independent director.54
Warmenhoven, in turn, contacted Frank Quattrone, a senior investment banker at Qatalyst
Partners LP.55
The next day, Warmenhoven notified the full Aruba Board of HP’s interest. He also
reported that he had contacted Quattrone and that Orr would contact Stuart Francis, an
investment banker who had recently left Barclays Capital Inc. to join Evercore Group
52
See, e.g., Johansson Dep. 59-60 (“[T]here was a strong desire from customers to
have a converged network portfolio and a converged product solution, and we felt that
combining the two companies we would really create a unique offering in the market,
which today you can only get from Cisco.”); id. at 248 (acknowledging anticipated $1.6
billion in synergies from transaction); Whitman Dep. 54 (“Hewlett-Packard would feel
entitled to those synergies because probably our go-to-market, our G&A, would be
enabling those synergies.”); see also Orr Tr. 396 (acknowledging “[t]his is a really, really
optimal situation to leverage two companies’ assets” because HP had “the switching line”
but “a very, very weak wireless” and “Aruba has the mobility software and the security
software . . . and the wireless reputation and portfolio”); id. at 434 (confirming “that the
HP-Aruba combination offered synergies to both”); JX 345 at 5 (internal HP deck touting
deal as providing “complementary go to market and wireless capabilities, bolstering our
Enterprise Mobility offering, and uniquely positioning HP as the market moves towards a
unified wired/wireless solution”).
53
PTO ¶ 151.
54
See Warmenhoven Tr. 236-37.
JX 291 at 5 (email from Quattrone to Orr: “I just spoke to Dan [Warmenhoven].
55
Can we chat early tomorrow morning, say around 7am?”).
14
L.L.C.56 Warmenhoven told the other directors that HP wanted to proceed “quickly and
present the proposal to the [HP] board on Sept[ember] 16.”57
Qatalyst jumped at the potential engagement. Immediately after hearing from
Warmenhoven, Quattrone reached out to Orr and sent him a proposed engagement letter.58
Two days later, George Boutros, another senior banker with Qatalyst, sent Orr a “[s]cript
for [d]iscussion with H[P].”59 Meanwhile, Warmenhoven reconsidered reaching out to
Francis. Warmhoven “had no experience with Evercore” and “didn’t know the team.”60
On August 29, 2014, Neri again spoke with Orr. Neri insisted that HP was serious.
Orr tried to “delicately set expectations that this is going to be a high premium deal.”61
On September 1, 2014, Neri and Orr met in person. A talking point that Boutros
prepared for the meeting stressed the importance of price: “[T]here will have to be a very
substantial premium to market, well in excess of the typical m&a premium, in order to fully
56
See JX 288 (email from Warmenhoven to Aruba Board); see also JX 859 (press
release announcing Francis’s new position); see also Warmenhoven Tr. 240; id. at 249
(calling Francis “probably the world’s best banker”).
57
JX 288.
58
JX 289 (email from Quattrone to Orr forwarding draft engagement letter); JX 291
at 4-5.
59
JX 291 at 3.
60
Warmenhoven Tr. 241.
61
JX 291 at 2.
15
reflect both the substantial upside potential we have as an independent company, and our
strategic value to you and others.”62
On September 2, 2014, Warmenhoven spoke with HP’s CEO, Meg Whitman. She
confirmed HP’s interest.63 Later that day, the Aruba Board met. Orr described the
developments with HP and reported that HP had not yet proposed “any financial terms or
other parameters regarding a possible strategic transaction.”64
During the meeting, members of the Board expressed concern about having Qatalyst
advise the Company in discussions with HP. Qatalyst had represented Autonomy
Corporation PLC when HP bought it for $11 billion in 2011.65 The deal was widely
understood to have been a “disaster”66 for HP that resulted in an $8.8 billion write-down
and protracted litigation.67 HP’s acquisition of Aruba would be its first significant deal
since Autonomy. The directors wondered if HP would balk at working across from
Qatalyst.68
62
JX 292 at 1.
63
JX 909 at 47. This decision cites Aruba’s definitive proxy statement, introduced
as JX 909, as the “Proxy.”
64
JX 228 at 1 (minutes).
65
PTO ¶¶ 32-35.
66
JX 731 (Financial Times article).
67
PTO ¶¶ 32-34.
68
Warmenhoven Tr. 243 (“And the question was, does [the Autonomy transaction]
leave any residual -- negative residual with Hewlett-Packard. And would it cause a problem
if Qatalyst represented it in another transaction to HP.”); Orr Tr. 331-32 (confirming Aruba
16
When Warmenhoven raised these concerns with Quattrone and Boutros, they
reassured him that (i) Qatalyst had worked off of Autonomy’s audited financials and was
as much a victim as anyone else, (ii) HP understood this, (iii) the entire HP M&A team had
turned over since Autonomy, and (iv) Qatalyst had a good relationship with the new team.
The Aruba Board accepted these reassurances.69
With the Autonomy concerns allayed, Qatalyst and Aruba negotiated the terms of
Qatalyst’s engagement letter. Qatalyst projected that a deal price “around $30” per share
was “the most likely outcome” and proposed a fee equal to 1.25% of the transaction value
for a deal at $30 per share or higher.70 Qatalyst proposed a richer fee of 1.5% for a price at
$36 or higher. Qatalyst felt that a price below $30 warranted 1% of deal value.71
Aruba’s CFO, Mike Galvin, pushed back. He pointed out that “it’s universally
thought that [Aruba] is undervalued right now” and, therefore, a price at the higher end of
Board “discussed the fact that Qatalyst had previously represented Autonomy in the sale
to Hewlett-Packard” as well as “whether that prior history might ‘put a strain on the
relationship’ between . . . Qatalyst and HP”).
69
Warmenhoven Tr. 243-44 (testifying Qatalyst representatives were “candid and
direct in their answers” and asserted that “they were representing audited financials . . . so
they didn’t think that HP would harbor any grudge,” that “[t]here had been a complete
turnover of the M&A team,” and that “[w]e work well with these people”); see also Orr
Tr. 332 (confirming “Qatalyst assured the board that [Autonomy] wasn’t going to be a
problem”).
70
JX 303 at 2 (internal Aruba email recounting negotiations).
71
Id.
17
the range was a strong possibility.72 Orr agreed with Galvin’s assessment. He stressed that
the “board doesn’t want [a] deal below $30; I want it above $33.”73 He further advised that
he was “not comfy [with] a ramp from 30 to 33,” because “[i]t would not be spicy enough”
to incentivize Qatalyst “to focus on the 33-35 target range we want.”74 After heated
negotiations, the final engagement letter provided for a flat 1% fee.75
D. The Discussions With HP Move Forward.
Orr and Neri met again on September 10, 2014. Orr emphasized Aruba’s strong
results, its willingness to remain independent, and the synergies that a deal would
produce.76 Internal HP analyses confirmed the potential for substantial synergies.77
72
Id. at 1.
73
Id.
74
Id.; see also Orr Tr. 512-14 (discussing JX 303 but stating Boutros had advised
that “without . . . a truly competing situation, I think the deal’s going to get done with a 2
in front of it” and that “[s]tarting with a 3 [in front] would be unrealistic”)
75
PTO ¶ 42; JX 305 at 2-3 (signed engagement letter).
76
See JX 308 (talking points for Orr including, “we are not trying to sell the
company and both the management team and the board are very bullish about our prospects
as an independent company,” “a combination could be very powerful,” and “the price
would have to be very compelling to take us off our current path which we know will result
in significant shareholder value”).
77
See JX 310 at 1-2 (internal HP email summarizing conversation between Orr and
Neri, stating Aruba “would like to have a deeper conversation around how serious we are
and our willingness to execute the plan/synergies,” and requesting a write-up on “why
[Aruba]+HP is better” and “[o]ur view of the synergies”); JX 312 at 3, 5 (resulting write-
up stressing “[w]e believe that there are meaningful revenue synergies” because
“[c]ombined, the companies would have a leading converged campus solution” and
significant “cross-selling” opportunities).
18
On September 15, 2014, HP kicked off its due diligence. From that point on,
management representatives at various levels met on a series of occasions.78 The speed and
intrusiveness of HP’s diligence surprised Orr.79 In a discussion with Neri on September 18,
Orr stressed that for a transaction to occur, HP would “have to pay a very compelling price
that reflects both the significant upside potential that we have ahead of us, and the strategic
value of Aruba . . . . This means that this deal will not happen at a conventional M&A
premium.”80
E. No Other Strategic Buyers Show Interest.
On September 25, 2014, the Aruba Board authorized Qatalyst to contact other
potential buyers to gauge their interest. Qatalyst developed a preliminary list.81 The Board
instructed Qatalyst to focus on “a limited number of third parties with financial
wherewithal and a strategic interest in mobile technology” that would enjoy “compelling
synergies” so that the buyer could be “competitive with any potential proposal from
[HP].”82 The Board instructed Qatalyst not to contact any private equity firms, believing
78
See JX 319 at 2-5 (emails coordinating meetings between Aruba and HP
management); Proxy at 48-49.
79
JX 319 at 6 (Aruba talking points prepared for Orr: “I was frankly surprised by
the breadth and scope of the information request, as it was not consistent with the message
I thought you conveyed to me when we last spoke.”).
80
Id.
81
JX 229 at 1 (minutes); accord JX 327 at 3 (Qatalyst board deck).
82
JX 229 at 1-2.
19
that “given the Company’s volatile revenues and unpredictable cash flows and the potential
for synergies between Aruba’s business with a strategic acquiror, private equity firms
would not be competitive in their potential valuations.”83
Qatalyst identified thirteen “Selected Potential Partners.”84 Between September 29
and October 4, 2014, Qatalyst approached five of them.85 By October 9, each had
declined.86 Boutros explained that “[i]t was very clear that none of them had any interest
in an acquisition” and that it had “nothing to do with price.” 87 Orr concluded that “[n]ow
our only (but strong) weapon is to say we go alone.” 88 Boutros was “not at all troubled by
that,” observing that it was “what we expected anyway.”89
83
Id. at 2; accord Proxy at 48; Warmenhoven Tr. 259 (testifying Aruba did not
contact financial bidders because “they like steady-state businesses, cash-cow businesses,
and, you know, something that’s just this volatile doesn’t fit that profile” and because
“they’re what I will refer to as bottom-feeders,” describing them as “generally low-ball
bidders, very small premiums”).
84
JX 757 at 17 (draft Qatalyst board deck).
85
JX 760 (Qatalyst “Outreach Summary”); see Warmenhoven Tr. 256-58, 329-31
(describing outreach); Orr Tr. 440-42 (same).
86
JX 760 at 2 (chart showing status of each investor as “Declined to Proceed”);
Proxy at 48-49.
87
Boutros Dep. 219; accord Warmenhoven Tr. 260 (“[I]t was definitive
noninterest.”); id. 329-30 (agreeing potential bidders provided “feedback” that they “had
no strategic interest in acquiring Aruba” and that it “[h]ad nothing to do with the price”).
88
JX 341 at 1.
89
Id.
20
F. The Parties’ Initial Valuations
In early October 2014, Aruba provided HP with a set of internal projections based
on figures from Aruba’s revised three-year strategic financial plan, which Aruba had
prepared in the ordinary course of business in June (the “June Plan”).90 In August, Galvin
and his finance team had updated the June Plan to incorporate the effects of Project
Greyhound and to make the plan more conservative. They had reduced the anticipated
revenue growth rate for 2016 and 2017 and adopted more conservative assumptions for
bookings, gross margin, and operating margin.91 In September, the Aruba team reviewed
the numbers with Qatalyst, describing the plan as a “medium” case that was “more
moderate” than the June Plan.92 By early October, the Aruba team and Qatalyst had created
a more bullish set of projections that forecasted revenue consistent with the June Plan (the
90
See Warmenhoven Tr. 219-20; id. at 313-14 (confirming Galvin prepared the June
Plan “in the spring of 2014, as part of the normal operations” of the Company); Galvin Tr.
553-54 (discussing development of “top-down” projections incorporating “broader
strategic assumptions” discussed by the Aruba Board regularly at the “June meeting”). See
generally PTO ¶¶ 110-14.
91
See JX 297 at 2 (email from Galvin to member of the finance team: “I think we
need to make this more conservative than the 3 [year] plan.”); see also Warmenhoven Tr.
314-15 (discussing Aruba’s ordinary process of preparing a yearly operating plan in
September); Galvin Tr. 586 (acknowledging September figures adjusted margins,
reflecting “[t]he overall impacts” of Project Greyhound).
92
JX 315 at 1 (email from Galvin to Qatalyst banker).
21
“October Projections”).93 Using the October Projections and a discounted cash flow
methodology, Qatalyst derived a valuation range for Aruba of $23.50 to $31.08 per share.94
HP’s internal deal team used the October Projections to prepare a discounted cash
flow valuation of its own. HP estimated Aruba’s value as a standalone company at $18.76
per share.95 But HP also estimated that a transaction between Aruba and HP would generate
$1.4 billion in revenue synergies and another $300 million in cost synergies. 96 With
synergies, the team estimated that the pro forma value of Aruba could be as high as $32.05
per share.97
G. HP Begins Recruiting Orr.
While the HP deal team was internally developing its pricing parameters, the senior
members of the team continued their discussions with Orr. Neri and Orr had a “pretty open
dialogue,” and Orr “remain[ed] positive about [HP’s] approach.”98 Neri understood from
Orr that Aruba was “not running a sales process,” and Orr made no effort to “postur[e]
about trying to pin [HP] against someone else.”99
93
Proxy at 64; see also Warmenhoven Tr. 315; Galvin Tr. 587.
94
JX 342 at 4 (internal Qatalyst emails attaching draft discounted cash flow model).
95
JX 345 at 20.
96
Id. at 15-16.
97
Id. at 20.
98
JX 348 (email from Neri to Whitman).
99
Johansson Dep. 112.
22
In early November 2014, HP’s Global Head of Corporate Development, Joakim
Johansson, met with Orr. In an email to Qatalyst and other Aruba executives, Orr recounted
that Johansson let him “know clearly that, post combination, they expect me to run the
whole networking business.”100 Orr said that Johansson wanted “to look me in the eye and
see that I have no objection. I told him I have no objection.”101
HP’s solicitation of Orr violated the terms of a confidentiality agreement that HP
had entered into with Aruba on October 2, 2014. That agreement contained a non-solicit
provision, which stated:
HP hereby agrees that, except to the extent expressly authorized by the board
of directors of the Company (or any authorized committee thereof) in
advance, neither HP nor any of its Representatives acting on its behalf will
directly or indirectly have any formal or informal discussions, or directly or
indirectly enter into any agreement, arrangement or understanding (whether
or not binding), with any director, officer or other employee of the Company
relating to (i) any retention, severance or other compensation, incentives or
benefits that may be or become payable to any directors, officers or
employees of the Company in connection with the Transaction or following
the consummation thereof, or (ii) any directorship, employment, consulting
arrangement or other similar association or involvement of any directors,
officers or other employees of the Company with HP or any of its businesses
or operations following the consummation of a Transaction.102
The Aruba Board had not authorized HP’s solicitation of Orr.103
100
JX 349 at 1.
101
Id.; see also Orr Tr. 462-66 (confirming solicitation and that “part of the reason
they are willing to pay a premium for the Aruba price is for my leadership”).
102
JX 3 § 8.
103
Orr Tr. 463-64 (agreeing Aruba Board had not authorized discussion).
23
H. The HP Board Balks.
On November 6, 2014, the HP deal team asked Whitman to approve paying up to
$3 billion for Aruba, or $26.66 per share.104 In its presentation to Whitman, the deal team
scaled back the synergies slightly, with revenue synergies of $1.26 billion and cost
synergies of $295 million.105 The pro forma, with-synergies discounted cash flow value of
Aruba declined to $31.17 per share.106 Whitman backed the acquisition; the next step was
to obtain authority from HP’s board of directors (the “HP Board”).107
On November 20, 2014, Aruba announced its earnings for the first quarter of 2015.
Management described an “outstanding quarter” that included “[r]ecord revenues” that
exceeded “the top end of [their] guidance range.”108 Management also reported that Project
Greyhound had improved margins, “with non-GAAP operating margin growing to
21.8%.”109 But Aruba also announced a range of revenue guidance for the second quarter
of 2015 that was 1% lower at the midpoint than the pre-announcement analyst consensus.110
104
JX 350 at 4 (internal deck prepared for presentation to Whitman).
105
Id. at 14-15.
106
Id. at 20.
107
JX 356 (internal deck prepared for HP Board subcommittee). See generally
Johansson Dep. 22-24 (discussing HP approval process).
108
JX 638 at 3 (transcript from Aruba earnings call).
109
Id. at 4.
110
JX 363 (internal HP email transmitting Barclays analyst report).
24
Analysts fixated on the lowered guidance. Although Aruba management explained that
they were trying to be prudent,111 Aruba’s stock dropped by 14%, closing at $18.82.112
The HP deal team saw the price drop as an opportunity to buy Aruba at a discount.113
Internally, HP acknowledged that Aruba’s results were “better than we expected,”114 that
they validated the case that the deal team had presented to the HP Board,115 and that “[t]he
softer guidance did not cause us to change our financial model.”116
111
JX 638 at 13 (Galvin stating Aruba was “just being prudent in a mixed
environment” and “[n]ot getting ahead of our skis”); see also JX 355 at 1 (email from
Galvin to Aruba Board: “our guide is shaping up to be more cautious than our strong
results”).
112
JX 245.
113
See JX 357 at 1 (internal email among members of the HP deal team: “They are
down 8% after hours though because of guidance below consensus for this quarter
(although it looks like the range of guidance is still within expectations). Good time to pull
the trigger and snap them up I would say.”); Hardegree Dep. 193 (observing that the stock
price drop “probably did, on balance” put HP “in a more tacti[cally] advantaged position”).
114
JX 362 at 1.
115
JX 357 at 1 (Neri: “We told our story and we were on point.”); see also JX 360
(email from HP Senior Vice President of Corporate Development: “I thought the results
were pretty good. . . . They blew past the revenue expectations for the quarter. But they
guided soft, below consensus.”).
116
JX 780 at 2 (internal HP deck discussing November earnings announcement).
25
The HP Board, however, remained skittish after the Autonomy fiasco, and it was
not ready to authorize a bid. Neri told Orr that the HP Board had questions about the deal
and that it would take another two or three weeks to answer them.117
Orr felt the process had dragged on long enough, and he recommended that the
Aruba Board terminate discussions.118 With the Aruba Board’s backing, management
conveyed that Aruba was moving on.119 Aruba formally terminated discussions on
November 25.120
I. HP Engages Advisors And Continues Analyzing The Deal.
After Aruba terminated discussions, HP continued working on the deal. In late
November 2014, HP engaged McKinsey & Company to validate its business case for the
JX 328 (email from Orr to Aruba Board reporting that “Antonio [Neri] said that
117
[HP] needs another 2-3 weeks to address the board’s questions”).
118
Id. (“We have been in dialogue with [HP] since August 27, and have not received
a proposal in all this time. . . . We cannot continue to wait for them.”); accord Proxy at 48-
49
119
JX 372 at 1 (email from Aruba General Counsel relaying conversation with
Johansson during which she explained that “[w]e feel it’s time to suspend discussions”
because “it has reached a point where we need to focus on running our business and not be
distracted by discussions that did not seem to be progressing”); see also Orr Tr. 448-49
(“So we are basically saying, if you cannot get it done, let’s cool off. And when you are
ready, contact me again.”).
120
See JX 328; JX 367 (email from Aruba to Qatalyst advising it had “decided to
terminate discussions with [HP] at this time” and that it would “let [Qatalyst] know if
discussions resume”).
26
acquisition. McKinsey concluded that HP could expect market share gains and revenue and
cost synergies that were in line with HP management’s estimates.121
In December 2014, HP engaged Barclays as its financial advisor.122 At the time,
Barclays had an existing relationship with Aruba, having worked with Aruba on a potential
convertible debt financing since June 2013.123 The debt financing had been ready to launch
in September 2014, but Aruba declined to move forward. The lead banker at Barclays
inferred that Aruba was considering a major M&A transaction.124 Barclays spent the next
three months trying to get a role representing Aruba, until they secured the engagement for
HP.125 Barclays also was one of two banks executing Aruba’s ongoing share repurchase
JX 383 at 1, 3 (McKinsey report projecting “share gains in line with what is in
121
the business case (2.6-3.1% share gain in wired vs. 3% in the business case and
correspondingly 4.3-5.6% share gain in wireless vs. 7% in the business case)”).
122
See JX 387 (internal Barclays email dated December 19: “HP wants to have our
views on value on Monday”); JX 389 (email from Barclays to HP on December 22
providing “the deck we plan to review on our 10am conference call”).
123
See PTO ¶¶ 51, 54; JX 224 (Aruba Board subcommittee minutes); Galvin Tr.
601. Evercore was also advising in connection with the potential debt financing. See JX
286 (email from Francis to Orr and Galvin discussing fiscal year 2014 results ahead of
“meeting on the convertible market”).
124
JX 325 at 1 (email from Galvin relaying conversation wherein he told Barclays
banker Aruba would not be executing the convertible offering and banker responded “in
my business, when this happens, either an exec is leaving the company or a major M&A
[transaction] is in process”).
125
See, e.g., JX 335 at 2 (email from Barclays banker to Aruba management:
“[W]e’re hearing (from non-Aruba sources) that HP has reinitiated dialogue with you” and
“[w]e want to be as helpful as we can.”); id. at 1 (describing phone call in which Barclays
banker reminded Orr that “we helped you with the Barclay IT people, we walked away
from [the] Ruckus IPO when Galvin said it was competitive . . . , [and] we have done a lot
[o]f work to support you in the last 8 years”); id. (banker telling Orr that Barclays “would
27
program, which had been in place since June 2012.126 In February 2014, the Aruba Board
had authorized management to repurchase up to $500 million of Aruba’s common stock in
the open market at prices up to $25 per share.127 When approving the repurchases, the
Board made the following determination: “The recent trading price of the Company’s stock
on the NASDAQ Global Select Market has been depressed and the Board believes that the
trading price of the Company’s common stock may be undervalued . . . .” 128 Aruba
management suspended the repurchases in October 2014 because of the discussions with
HP.129 After terminating discussions with HP in November 2014, Orr recommended
resuming the repurchase program and buying shares worth up to $75 million, because “the
stock is underperforming.”130 Aruba resumed its repurchases at up to $25 per share,
believing its shares to be undervalued below that figure.131
be disappointed if the HP rumor is true and you do not work with us”); JX 384 (email
between Barclays bankers: “I am trying to get back in front of the Aruba team. Seems like
we have given up on the HP side.”).
126
PTO ¶ 53; JX 227 (minutes). See generally Galvin Tr. 594-96 (discussing share
repurchase program).
127
JX 226 at 1-2 (minutes).
128
PTO ¶ 133.
129
See id. ¶ 136.
130
JX 328.
131
See JX 373 at 1 (internal Aruba emails discussing share repurchase program);
see also Orr Tr. 448 (testifying that, in breaking off discussions, he considered that “[w]e
have a stock buy-back program that . . . we have to resume”); Galvin Tr. 595-96 (discussing
28
Using consensus analyst estimates for Aruba’s standalone performance, Barclays
provided HP with a range of discounted cash flow values for Aruba as a standalone
company and compared them with pro forma values for Aruba that incorporated
synergies.132
Discount Rate Perpetuity Growth Rate
2% 3% 4%
Street Synergy Street Synergy Street Synergy
11% $19.31 $29.49 $20.86 $32.29 $22.85 $35.89
12% $17.61 $26.45 $18.80 $28.62 $20.30 $31.32
13% $16.21 $23.98 $17.16 $25.69 $18.32 $27.78
Barclay’s valuation work confirmed the HP deal team’s internal estimates.
J. HP Approaches Aruba Again.
Meanwhile, Aruba’s stock price remained stuck around $18-19 per share, and
analysts continued to criticize the Company. Orr felt that the analysts had soured on Aruba
and were complaining about everything.133 Galvin expressed frustration that analysts
the share repurchase and stating “[w]e had a standard set of language that, when we
approached these things, that it may be depressed, it may be undervalued”).
132
JX 389 at 16-17 (Barclays deck).
133
Orr Tr. 454 (comparing analysts to “somebody [who] has decided to get out of a
relationship” because “the other party can learn how to cook, clean the floor, you know, be
available on the weekend, and so on. Something is always wrong.”); see also JX 406 at 1
(email from Orr: “we simply cannot miss Q2 and have the stock tanked further, risking
employee morale and retention getting into an unrepairable state”).
29
seemed unwilling to “acknowledge the 6 very strong [quarters] in a row we’ve had.”134
One analyst suggested to Aruba management that the stock price was low enough to justify
an accelerated buyback, observing that if management did not pursue that option, an
activist might.135 A group of investors met with management and privately criticized the
Company’s performance.136
Against this backdrop, in late December 2014, Whitman and Neri invited Orr to
dinner.137 The meeting took place on January 21, 2015. Whitman told Orr that HP still
wanted to acquire Aruba.138 Orr responded positively and suggested that they try to sign
up a deal by early March. He told Whitman that Aruba had “over 2000 customers and
partners coming to Atmosphere 2015 in Vegas the week of March 1-5,” and “[i]t would be
silly not to announce it there.”139 Whitman “completely agreed,” observing “that, in her
experience, mergers need forcing function and let this be the one.”140
134
JX 378 at 2 (email among Aruba executives).
135
JX 374 at 1 (email from Jason Adler, analyst at William Blair & Company).
136
See JX 377 (email from Galvin recapping meeting).
137
PTO ¶ 154; JX 392 (correspondence between Orr and Neri scheduling dinner).
138
PTO ¶ 155.
139
JX 423 (email from Orr relaying conversation to Aruba management); see also
Orr Tr. 524-25.
140
JX 423; see also Orr Tr. 527 (“We’re saying that let’s use this as a forcing
function.”).
30
Whitman also told Orr that HP would not work with Qatalyst under any
circumstances. That same night, Orr told Warmenhoven that “Meg [Whitman] spoke with
conviction and emotion over dinner that they [Qatalyst] were guilty. Qatalyst will argue
the reverse, but it does not matter.”141 Orr concluded that “if we don’t insert [a] buffer
person, our negotiation will suffer severely.”142 To resolve the problem, Warmenhoven
doubled back to the solution he had previously dismissed: using Francis. Warmenhoven
reminded Orr that Francis “is in a new firm and not conflicted, and Meg [Whitman] knows
and (I think) trusts him.”143 He offered to call Whitman to see if involving Francis would
be acceptable.144
141
JX 412 at 1. Warmenhoven disputed at trial whether he correctly understood Orr
to be saying that Whitman felt that Qatalyst, rather than Autonomy, was guilty. His
deposition transcript indicates that his counsel planted this idea. See Warmenhoven Tr.
336-40; Warmenhoven Dep. 141-43 (“[Aruba counsel]: If you are going to move off of
this, would you mind if I clarify one point? [Verition counsel]: Okay, that’s fine. [Aruba
counsel]: Mr. Warmenhoven, if you don’t mind my interjecting -- The Witness: No, I know
where you’re going. . . . That’s how I interpreted it at that time. That’s not right. Meg
[Whitman’s] conviction was that Autonomy was guilty -- not Qatalyst -- that Autonomy
was guilty of fraud.”). Aruba’s counsel should not have influenced the substance of
Warmenhoven’s testimony during his deposition. Nor should counsel have been reshaping
Warmenhoven’s recollection of the facts.
142
JX 412 at 1; see also Warmenhoven Tr. 247-49 (discussing JX 412); Orr Tr. 449-
51 (same).
143
JX 412 at 1.
144
Id.; accord Warmenhoven Tr. 249-51; Orr Tr. 451 (“Obviously, the top of mind
is the person that I started out with, and that has been a trusted advisor to the company and
to me, and that was Stu [Francis].”).
31
On January 23, 2015, Warmenhoven updated the Aruba Board. He reported that
Aruba should receive a formal offer letter soon. He explained that “[w]e do have a bit of
an issue and that is our choice of advisors. [HP] is very anti [Qatalyst].”145 He reminded
the Board that the Company already had a signed engagement letter with Qatalyst, so Aruba
would have to pay Qatalyst regardless, but he suggested hiring Francis to handle the
negotiations. Warmenhoven pointed out that “Evercore is new in the tech sector, so they
may be willing to do a deal at ¼% just to get a deal done that they can brag about
publicly.”146
Warmenhoven spoke with Whitman that same day. She told him that “Qatalyst,
Frank [Quattrone] & George [Boutros] are not welcome in the negotiations. The issue is
bigger than Autonomy and goes back to EBay & Yahoo.”147 Whitman described Boutros
as “evil.”148 But Whitman said that she would happily negotiate with either Francis or
145
JX 413.
146
Id.; accord JX 414 (email from Orr to Warmenhoven: “I think Qatalyst will not
be willing to carve out fees for Stu [Francis].”); JX 426 at 2 (internal Aruba email
summarizing discussions with Francis concerning fees: “He started at Evercore 5 months
ago and is their first tech sector person. They want this deal to establish a presence in
tech.”); see also PTO ¶ 46 (“J. Stuart Francis is a Senior Managing Director of Evercore.
Mr. Francis joined Evercore in the summer of 2014.”).
147
JX 420 (email from Warmenhoven recounting discussion to Aruba Board and
management).
148
Id.
32
Warmhoven, as long as Qatalyst stayed “in the back room.”149 She also wanted Qatalyst
“squeezed a bit” on their fees.150
Aruba retained Evercore that day. Francis reported to his partners that the “[d]eal
timing is to try to sign a merger agreement and announce by mid February.”151 His partners
were thrilled. One replied: “Truly amazing! This is a franchise transaction! Well done!”152
Another responded: “This is franchise defining. Well done, and it shows the power of
loyalty, which you have always eschewed! [sic]”153 A third offered: “Just remarkable,
Stu[.] What a coup! Would be, as you say, a dynamic advance for Evercore in The
Valley.”154
K. Qatalyst Tries To Repair Its Relationship With HP.
Qatalyst was as crushed by the news as Evercore was elated. When Orr told Boutros,
he was “so emotional, defensive AND offensive (to Meg [Whitman]) that he hardly let me
149
Id.; accord Warmenhoven Tr. 252-53 (Whitman told Warmenhoven “I don’t care
who you get, but it can’t be Qatalyst” and that “I’m not going to take into my boardroom
a deal proposed by Qatalyst”); id. at 341-45; Orr Tr. 530.
150
JX 432 at 1 (email among Aruba management discussing negotiation of
Qatalyst’s fees).
151
JX 422 at 1 (email among Evercore senior bankers).
152
JX 427.
153
Id.
154
JX 428; accord JX 439 (congratulatory emails from two additional senior
bankers).
33
talk.”155 Quattrone asked Warmenhoven to intervene with Whitman on his behalf, and
Warmenhoven asked Whitman to meet personally with Quattrone. 156 Quattrone then sent
Whitman an email of his own:
I was very surprised and disappointed to learn from Dan Warmenhoven today
that you recently expressed very strong negative feelings about our firm,
some of our people (including me) and our current representation of Aruba.
I would greatly appreciate the opportunity to speak or meet with you at your
earliest convenience to understand from you directly what your concerns are
and give me the opportunity to address them. . . . [W]hile our loyalties are
always to our client on any assignment, I am confident we can address your
concerns, play a constructive role and engage with your team in a
professional manner.157
When Whitman did not respond, Warmenhoven followed up the next day, vouched for
Qattrone, and expressed confidence that “if you two could ‘clear the air’ [then] Frank
[Quattrone] and [Qatalyst] could be constructive participants in getting this deal done.”158
In an email to Aruba management, Warmenhoven explained why the dispute with
Whitman was so important to Quattrone:
The issue is not Aruba. It is about the [Qatalyst] brand . . . . If word spreads
that they were tossed from this deal because HP will not engage with them
on any M&A transaction, that creates a big issue for them. . . . Frank
155
JX 426 (email from Orr to Aruba management updating on negotiations with
Qatalyst). Orr expressed his opinion that Boutros “reacted so strongly cause (1) pride of
their brand (2) reaction to Stu [Francis] coming in[to] the picture [and] (3) protecting their
fees.” Id. He noted that “[n]one of the above related to the benefits of [A]ruba!” Id.
156
JX 430.
157
JX 434 at 1.
158
JX 436 at 1. See generally Warmenhoven Tr. 344-45 (recounting process of
attempting to ingratiate Qatalyst with HP).
34
[Quattrone] wants to save his firm . . . . The relationship, or lack thereof,
between [Qatalyst] and HP / Meg [Whitman] is now their focus.159
Orr wondered “how much time we allow” before saying “sorry, [Qatalyst]. We need to
protect our transaction. [W]e cannot worry about your brand!”160
Whitman finally spoke with Quattrone on January 29, 2015.161 She repeated the
concerns she had relayed to Warmenhoven and again emphasized that “we cannot have
[Qatalyst] as the primary representation for Aruba interacting with us and with our
board.”162 On February 1, Aruba formally retained Evercore for a contingent fee equal to
0.25% of the deal value.163
L. HP’s Initial Proposal
By the time Whitman and Neri had dinner with Orr at the end of January 2015, HP
had worked with Barclays to analyze a range of prices from $23 to $26.50 per share. Based
on this analysis, HP anticipated making an “opening bid” of $24.00 and received board
159
JX 437 at 1; see also JX 438 (Quattrone sending Warmenhoven what he
described as a cordial rejection by Whitman of a social invitation as evidence that she had
no bias against Qatalyst and was bluffing to gain leverage in the negotiations).
160
JX 440 at 1 (email from Orr to Aruba management).
161
JX 447 at 1 (email from Whitman to Quattrone dated January 28, 2015: “Will
call you tomorrow.”).
162
Whitman Dep. 127-28.
163
PTO ¶ 47; see also JX 5 (executed engagement letter); JX 232 (Aruba Board
minutes authorizing Evercore engagement).
35
approval to go up to $25.00.164 After the dinner and Orr’s enthusiastic response, HP revised
its strategy. On January 31, Johansson called Orr to notify him that HP was preparing a
written offer.165 Orr remained eager. He suggested accelerating the timeline and “getting a
deal announced by [Aruba’s] earnings on Feb 26.”166 He offered that to achieve that
timeline, Aruba “would respond as early as Monday/Tuesday of this week.”167
Later that day, HP sent Aruba a written indication of interest for a cash transaction
at $23.25 per share, for an aggregate valuation of $2.563 billion.168 The price per share
represented a 40.2% premium to Aruba’s closing price on the previous day and a 35.1%
premium to the stock’s thirty-day average price.169 The price exceeded Barclays’ latest
stand-alone discounted cash flow valuations of Aruba based on analyst estimates, which
ranged from $17.47 to $22.61 per share.170 The price was seventy-five cents below the
opening bid of $24.00 per share that HP had been considering at the beginning of the
month. The offer was $3.80 per share below the low end of Barclays’ most recent pro forma
164
JX 398 at 1-2 (cover email for internal deck seeking HP Board approval); JX 805
at 12 (internal HP deck).
165
JX 455 at 1 (email from Orr to Aruba management and Qatalyst recounting call).
166
JX 454 (internal Barclays email summarizing Johansson’s relay of the call).
167
Id.
168
JX 452 at 3 (“Indicative Non-Binding Proposal”).
169
Id. at 3-4.
170
JX 782 at 4 (Barclays deck).
36
discounted cash flow valuations that included synergies, which valued Aruba at between
$27.05 and $37.61 per share.171
M. Aruba Responds.
The Aruba Board initially met to consider HP’s proposal on January 31, 2015. The
directors decided to defer any detailed consideration of the proposal until after management
presented revised projections and Evercore and Qatalyst had an opportunity to analyze
them.172
On February 2, 2015, the Aruba Board met again. Management presented an
updated version of the October Projections, prepared in the ordinary course of business,
that reflected the Company’s performance to date (the “February Projections”).173 Qatalyst
reported that they had spoken with a sixth potential strategic partner who also was not
interested in acquiring Aruba.174
While the Aruba Board was meeting, a new analyst report criticized the Company,
and the stock price fell.175 Aruba’s General Counsel forwarded the report to Evercore and
171
Id.
172
JX 461 at 2 (internal Evercore email relaying what Aruba’s General Counsel
anticipated to be the timeline of events).
173
JX 233 (minutes); JX 910 at 3 (Aruba 8-K comparing October Projections and
February Projections); Galvin Tr. 558-63 (discussing process of extending ordinary course
six-month budgeting projections out to three years to create February Projections).
174
Proxy at 51.
175
JX 466 at 1-2 (internal Aruba email distributing report).
37
Qatalyst, telling them that they should inform HP that “today’s stock price does not reflect
reality.”176 She noted that Aruba was going to beat its guidance for the quarter, but that “no
one knows that yet.”177 Francis was similarly concerned that the negative analyst reports
had depressed the stock price and created a buying opportunity for HP.178 But he also
worried that HP would disengage if Aruba waited to release its quarterly results first and
then negotiated from a place of strength; to get a deal done, it was “now or never.”179
On February 4, 2015, the Aruba Board met again and received a presentation from
Evercore on valuation.180 Using the February Projections, Evercore generated the
following discounted cash flow valuation range for Aruba on a standalone basis:
Perpetuity Growth Rate
4.0% 4.3% 4.5% 4.8% 5.0%
10.5% $23.97 $24.80 $25.71 $26.69 $27.76
11.0% 22.03 22.73 23.49 24.31 25.20
WACC
11.5% 20.35 20.95 21.60 22.29 23.03
12.0% 18.88 19.40 19.95 20.54 21.17
12.5% 17.58 18.03 18.51 19.01 19.56
176
Id. at 1.
177
Id.
178
JX 470 at 1 (email from Francis to other Evercore bankers: “I am thinking about
the analyst downgrades and if there [is] anything we can do.”).
179
Id.
180
JX 794 at 14 (Evercore deck).
38
Based on these figures, the Board authorized a counteroffer at $29 per share.181
Evercore conveyed the counteroffer to Barclays. Evercore emphasized that “now is
not an opportune time for a sale, given the stock is at a 52-week low.”182 Evercore also told
Barclays that “[t]he low stock price reflects a misperception in the market that [Aruba] will
miss its quarter. In fact, [Aruba] will beat consensus and have good guide.”183 Barclays
responded that the counteroffer was “not even within the realm of possibility.”184
N. HP Counters At Effectively The Same Price.
After receiving Aruba’s counter, HP management caucused with its advisors. They
prepared talking points which stated, contrary to HP’s synergy-based valuations, that HP
did “not have the ability to reach anywhere near” Aruba’s counteroffer.185 The talking
points also focused on timing, stressing that “[i]f we don’t seize the opportunity now, there
are many external pressure points that impact HP’s ability to do a transaction with [Aruba]
in the foreseeable future.”186
181
JX 234 (minutes); accord Warmenhoven Tr. 261 (testifying the Aruba Board
came to the figure because “[w]e wanted to reaffirm that we thought there was great value
there, meaning they should bid higher, but we felt like if we put a 3 in the first digit and
started at 30, that they might conclude that’s too big a gap to close and stop discussion”).
182
JX 477 at 1 (Barclays email relaying counteroffer to HP).
183
Id.
184
Id.
185
JX 484 at 1.
186
Id.
39
On February 7, 2015, Barclays told Evercore that any price increase would be on
the scale of “quarters, not dollars.”187 Evercore’s reaction “was pretty constructive.”188
Evercore “emphasized that [Aruba would] like to announce deal at or before the [Aruba]
earnings announcement” because Aruba was “afraid stock runs like Ubiquiti’s did which
could make the deal more challenging from the [Aruba] perspective.”189
During the call with Barclays, Evercore also explained that Aruba’s share
repurchases had rendered outdated the share count contained in its public disclosures.
Aruba in fact had 119.1 million shares outstanding, which was 4.5 million fewer than
reported. Evercore told Barclays that HP should increase its price per share to account for
the change.190
On February 9, 2015, Barclays recalculated the deal price based on the new share
count. With fewer shares, the same aggregate consideration of $2.563 billion resulted in a
price per share of $23.89.191 This was still below the opening bid of $24.00 per share that
HP had contemplated before Whitman and Neri had dinner with Orr. That opening bid had
187
Proxy at 51.
188
JX 491 (email from Barclays to HP recounting exchange).
189
Id. Ubiquiti announced financial results on February 5, 2015 that beat the
consensus estimates, and its stock rose by 14%. See JX 639 (Ubiquiti earnings transcript);
JX 902 (Ubiquiti 8-K announcing results).
190
JX 491; accord JX 488 at 4 (internal Evercore emails confirming change in
shares outstanding and suggesting repurchases caused the change).
191
JX 798 at 2 (Barclays slide entitled “Impact of New Share Count and B/S Data
on Offer Price”).
40
equated to aggregate deal consideration of approximately $3 billion. With the lower share
count, that same $3 billion enterprise value generated a price of $24.67 per share.192 HP
decided to tell Aruba that its best and final bid was $24.67 per share, a figure that yielded
the same enterprise value that HP originally intended to offer as its opening bid. Internally,
HP described $24.67 as “the new $24.00,” because the price merely adjusted for the change
in Aruba’s public share count.193
On February 9, 2015, Barclays communicated the counter of $24.67 per share to
Evercore. The Aruba Board immediately met and authorized a counter at $25.00.194 Orr
conveyed Aruba’s ask of $25 per share to Neri.195 Orr also spoke to Whitman. Neither
budged on price.196 Later that day, HP sent Aruba a “Revised Indicative Non-Binding
Proposal” that proposed a cash price of $24.67 per share.197 HP described the bid as its
“best and final offer.”198 The proposal represented a 51.6% premium to Aruba’s closing
192
Id.
193
JX 497 (internal HP email from Johansson); accord JX 805 at 12 (timeline
showing “02/08 – HP offer $24.00 and present as best and final. [Aruba] provide new
shares outstanding and cash information supporting paying $24.67 at the same enterprise
value.”).
194
Proxy at 52.
195
Id.; accord JX 494 at 2 (email from Neri to Whitman summarizing conversation).
196
JX 496 at 1 (email from Francis to Aruba management transmitting revised
proposal: “They did not move up just as Meg [Whitman] said to you.”).
197
Id. at 3.
198
Id.
41
price on the previous day and a 48.9% premium to Aruba’s thirty-day average trading
price.199
O. Aruba Accepts.
On February 10, 2015, the Aruba Board met to consider HP’s revised proposal.
Evercore, Orr, and Warmenhoven reported that the revised price resulted from considerable
negotiation. They believed it represented HP’s best and final offer. Qatalyst advised that it
was unlikely that any other party would offer a higher price.200 The Board discussed “the
recent weakness” in Aruba’s share price and considered the alternative of continuing as a
standalone company.201 The Board also considered standing firm on its ask for $25 per
share. Ultimately, the Board decided to accept HP’s offer of $24.67 per share.202
On February 18, 2015, the Aruba Board considered whether to permit HP to speak
with Orr and other members of Aruba’s senior management about employment
opportunities.203 No one disclosed to the Board that HP previously had made clear to Orr
that they wanted him to run Aruba after the merger, or that Orr had told HP that he was
199
Id.
200
JX 235 at 1-2 (minutes); accord Proxy at 52; Boutros Dep. 219-20 (describing
lack of interest from other strategic bidders); Warmenhoven Dep. 104 (same).
201
JX 235 at 1-2; see also Warmenhoven Tr. 265-66 (testifying prospects of
standing alone “were looking extremely challenging” because the “core market” was
“going to zero growth” and Aruba was experiencing difficult “market conditions” and
“competitive positioning”).
202
JX 235 at 1-2; accord Proxy at 52; Warmenhoven Tr. 263.
203
JX 237 (minutes).
42
willing to do so. The Board consented to the discussions and waived the non-solicitation
provision in the confidentiality agreement with HP.204
With approval from the Aruba Board in hand, HP conducted additional due
diligence. Evercore approached this phase as an extended audition for future work from
HP. In late February 2015, Francis reported to his partners about “a really interesting
negotiating dinner at Meg’s house Thursday night” and that “it was fun to be the only
banker in the room to help both sides think through some issues.”205 A senior Evercore
banker responded “That’s HUGE! Meg is going to be very active. . . . Would be a great
new relationship.”206 Francis bragged about having effectively acted as HP’s advisor:
Agreed… I think we made a pretty good impact from an advisory
perspective, and she and I have known each other a long time socially
through [P]rinceton events and when our kids were at Menlo school…please
pardon the “pat on the back” nature of this comment, but after the meeting
one of the people on our side said we had done a “masterful” job of taking
[M]eg [Whitman] through the issues as if we were her advisor…let’s hope
that can help us get some traction in the future with her…207
Rather than acting as a banker for Aruba, Evercore acted as a banker for the deal.
204
Id.; accord Proxy at 52. See generally Orr Tr. 466-70 (discussing negotiation of
new employment agreement with HP).
205
JX 505 at 1 (internal Evercore email).
206
Id.
207
Id. (reproduced in full, ellipses in original); see also Reisenberg Dep. 248-54
(discussing JX 505).
43
P. The Deal Leaks.
On February 25, 2015, one day before Aruba was scheduled to announce its
earnings, Bloomberg News ran a story on the merger.208 Internally at Qatalyst, Boutros
speculated that HP had leaked the news so that Aruba’s “results and subsequent stock price
reaction won’t be easy to measure.”209 Aruba’s stock price jumped from $18.37 to $22.24
on the news.210 An analyst issued a report positing that, in light of the synergies from the
merger, a deal price of “$28 or a premium of 25% from today’s close is reasonable [for
Aruba].”211
On February 26, 2015, Aruba released its second quarter results. The Company beat
analyst expectations and hit management’s guidance.212 Analysts called the results
“impressive”213 and “[b]etter-[t]han-[e]xpected.”214 One praised Aruba for “[a]nother
208
JX 866 (article).
209
JX 510 (internal Qatalyst email); see also Boutros Dep. 206-07 (“[N]ow the stock
is going to trade based on takeover speculation and no more based on fundamentals, pure
fundamentals. There is a lot of noise.”).
210
Proxy at 53.
211
JX 152; accord JX 155 (JMP Securities report stating “[w]e believe the
acquisition would be a logical step for HP” and anticipating “that Aruba’s board would
look for an acquisition price in the $23-$27 range”).
212
JX 514 at 1, 3 (internal Barclays email discussing results).
213
JX 156 (Macquarie Research report).
214
JX 159 (William Blair report).
44
[s]trong [q]uarter.”215 An analyst at Citi doubted that Aruba would be willing to sell “at
prices near the current trading level” and suggested that Aruba would not take “less than
$30/share.”216
On February 27, 2015, Aruba’s stock closed at $24.81 per share, above the merger
price.217 That evening, the Aruba Board met to discuss how to respond. Qatalyst advised
the Board that the deal still represented a 28% premium to Aruba’s average trading price
and a 44% premium to its thirty-day average price.218 Qatalyst also explained that the 10%
price bump that Aruba enjoyed after its earnings release matched the price performance of
peer firms after reporting similar results.219
Despite Qatalyst’s report on the market reaction to peer companies reporting similar
results, the Aruba Board concluded that “the higher trading price was primarily being
driven by market speculation of a transaction, and not by changes in the fundamentals of
the business.”220 The Board discussed renewing its request for $25 per share but rejected
the idea in favor of using the stock price as leverage to insist on a lower termination fee
215
JX 157 (Jeffries report).
216
JX 168 at 3-4 (Citi report).
217
Proxy at 53.
218
JX 517 at 3 (Qatalyst board deck).
219
Id. at 6.
220
Proxy at 53.
45
and stronger deal terms.221 After the meeting, Aruba notified HP that it would not “be
asking for a higher price.”222
Q. The Final Board Approvals
On February 28, 2015, the HP Board met to consider the definitive merger
agreement. Barclays prepared a discounted cash flow analysis based on Aruba’s
“management case”—the February Projections. The analysis produced a valuation range
of $26.20 to $33.64 per share for Aruba on a standalone basis.223 With synergies, Barclays
valued Aruba at between $27.53 and $39.69 per share.224 Not surprisingly, Barclays opined
that the deal price of $24.67 per share was fair to HP and its stockholders. The HP Board
approved the merger agreement.225
On March 1, 2015, the Aruba Board convened to consider the definitive merger
agreement. Both Qatalyst and Evercore gave valuation presentations. Qatalyst’s discounted
cash flow valuation ranged from $23.23 to $26.76 per share.226 Evercore’s discounted cash
flow valuation ranged from $21.12 to $29.78 per share.227 Both firms opined that the deal
221
Id.
222
JX 520 (internal Barclays email).
223
JX 806 at 14 (Barclays deck).
224
Id. at 15.
225
JX 238 at 1-3 (HP Board minutes).
226
JX 811 at 19 (Qatalyst deck).
227
JX 812 at 14 (Evercore deck).
46
price of $24.67 per share was fair to Aruba and its stockholders. The Aruba Board approved
the merger agreement.228
Getting the Aruba deal signed was a key step in Qatalyst’s effort to get back in HP’s
good graces. Afterwards, Quattrone reported to his partners that Whitman had “asked [Orr]
to pass along the message to us that there is now a path towards ‘rehabilitation’ of our
relationship.”229 Quattrone proposed to contact Whitman and “get her assurance that if we
don’t send the blast email” announcing Qatalyst’s role in the deal, then Qatalyst would
have “a clean slate going forward” with HP.230 His partners supported this approach, so
Quattrone sent Whitman an email asking for a “clean slate.”231 Quattrone also added “an
appeal to your fairness,” noting that “we have already been embarrassed and our business
damaged by what has already occurred.”232
228
Proxy at 53.
229
JX 521 at 1; see also Boutros Dep. 270 (testifying he understood Whitman to be
amenable to “resolution of the issues she had and the feelings she had towards Qatalyst”).
230
JX 521 at 2.
231
JX 522 at 2 (“[W]e do want to have a good relationship with you, and we are
willing to explore alternatives to our normal course of business in marketing this deal, if I
can have your assurance that by doing so, we will have a ‘clean slate’ with you and HP
immediately going forward.”).
232
Id. at 3. Aruba and HP announced the merger before Whitman responded.
Qatalyst held off on publicity efforts pending her response. On March 3, 2015, Whitman
told Quattrone he should “go ahead and do whatever communication feels right to you
under the circumstances.” Id. at 1-2. On March 4, Qatalyst sent out a blast announcing its
role in the deal. JX 541 at 2. Whitman also told Quattrone that she was willing to “get
together . . . and discuss the path forward.” JX 522 at 2. The meeting eventually took place
in October 2015. Afterwards, Quattrone sent Whitman a follow-up email which
47
R. Stockholder Approval
On March 2, 2015, Aruba and HP formally announced the merger.233 The final
merger agreement (i) prohibited Aruba from soliciting competing offers and required the
Aruba Board to continue to support the merger, subject to a fiduciary out and an out for an
unsolicited superior proposal; (ii) included a $90 million termination fee; and (iii) provided
a drop-dead date of February 28, 2016.234 Orr and Keerti Melkote, Aruba’s co-founder and
Chief Technology Officer, entered into voting agreements supporting the merger.235
No competing bidder emerged. On May 1, 2015, Aruba held a meeting of
stockholders to consider the merger.236 Under Delaware law, unless a corporation’s
constitutive documents impose a higher voting requirement, a merger requires the approval
of a majority of the voting power represented by the corporation’s outstanding shares.237
Approximately 80.88% of Aruba’s outstanding shares were represented at the meeting
either in person or by proxy. Approximately 98% of those shares voted in favor of the
emphasized that he was “look[ing] forward to next steps in building a strong long-term
relationship between our firms.” JX 572 at 1-2.
233
JX 907 (8-K announcing signing).
234
Id. at 3-4, 73-78.
235
Id. at 4.
236
Proxy at 1.
237
See 8 Del. C. § 251.
48
merger. 238 As a result, approximately 80% of the outstanding shares voted in favor of the
merger, clearing the statutory requirement. The transaction closed on May 18, 2015.239
S. This Litigation
At the effective time of the merger, petitioners Verition Partners Master Fund Ltd.
and Verition Multi-Strategy Master Fund Ltd. (jointly, “Verition”) owned in the aggregate
2,288,234 shares of Aruba’s common stock.240 Verition filed this appraisal proceeding on
August 28, 2015. The parties engaged in discovery for nearly two years. During discovery,
Aruba’s counsel took several aggressive and credibility-impairing positions.
On May 5, 2016, Verition noticed Whitman’s deposition. Aruba promptly filed for
a protective order seeking to limit the deposition to three hours. Aruba asserted that
Whitman had “limited involvement in HP’s acquisition of Aruba,” that “Aruba and HP are
aware of nothing in the vast discovery in this case to suggest there were any
communications between Ms. Whitman and any representative of Aruba negotiating
pricing terms of the Aruba deal,” and that her view towards Qatalyst was immaterial
because it “has no bearing on the fair value of Aruba as a stand-alone company.”241 While
238
Aruba Networks, Inc., Current Report (Form 8-K) (May 1, 2015). Although the
parties did not submit this filing as an exhibit, the Delaware Supreme Court has taken
judicial notice of public filings in an appraisal case and relied on them for the truth of their
contents. See, e.g., DFC, 172 A.3d at 351 n.7.
239
JX 914 at 2 (8-K announcing closing).
240
See PTO ¶¶ 11, 17.
241
Dkt. 56 at 11-13 (motion opening brief).
49
perhaps technically correct, these representations created a misleading picture of
Whitman’s involvement. Verition submitted exhibits in response to the motion that made
the assertions look silly, and the evidence at trial subsequently reinforced their misleading
character. I denied the motion for protective order and required Whitman to testify from
day to day until the deposition was completed.242
The parties next clashed when Verition moved to strike aspects of the report of
Kevin Dages, Aruba’s valuation expert. In his report, Dages relied on an email exchange
between Aruba management and the Company’s lawyers at Wilson Sonsini Goodrich &
Rosati, P.A. for information about stock-based compensation. During Dages’s deposition,
it became evident that Aruba had withheld the communication as privileged. Dages then
attempted, unpersuasively, to suggest the citation had been a typographical error and that
he had actually drawn the information from a different source that Aruba had produced.
Complicating matters further, Verition showed that, during the deposition of another
witness (Galvin), Aruba’s lawyers engaged in substantive discussions about the email with
the witness during a break. At the hearing, I expressed significant concern about Aruba’s
discovery conduct, but I concluded that I could address the matter by weighing the evidence
rather than by striking a portion of Dages’s report.243
242
Dkt. 65.
243
See Dkt. 125 (transcript and rulings on motion to strike).
50
Verition dug deeper. Aruba had served a vast privilege log containing 20,000 entries
and spanning 1,462 pages. Verition confirmed that at least 529 entries asserted privilege
for communications about Aruba’s projections and stock-based compensation. Those
communications took place during the preparation of Aruba’s proxy statement, and Wilson
Sonsini lawyers were copied on the communications as part of the team, but the
communications were not privileged. Aruba had asserted privilege for those
communications simply because a lawyer appeared on the document. After Aruba
produced them, Verition renewed its motion to strike. This time, I found that Verition had
shown a broader pattern of problematic conduct that had prejudiced Verition. It was too
late to remedy the prejudice through other means, and I therefore struck the portions of
Dages’s report relating to stock-based compensation.244
Trial took place from December 13-15, 2016. Through no fault of the parties, the
post-trial proceedings became protracted. The parties initially completed post-trial briefing
by March 30, 2017, and post-trial argument was scheduled for May 17. I postponed the
hearing once it became clear that the Delaware Supreme Court’s forthcoming decision in
DFC likely would have a significant effect on the legal landscape. The Delaware Supreme
Court issued its decision on August 1. Both sides submitted supplemental briefs addressing
the implications of DFC, and post-trial argument took place on September 29.
244
See Dkt. 153 (transcript and rulings on renewed motion to strike).
51
While this matter was under submission, on December 14, 2017, the Delaware
Supreme Court issued its decision in Dell. I invited the parties to provide supplemental
submissions addressing the implications of Dell and the extent to which attributes of the
market for Aruba’s stock resembled the attributes that the Delaware Supreme Court
emphasized in Dell. The parties filed their submissions on January 26, 2018.
II. LEGAL ANALYSIS
Delaware’s appraisal statute “allows stockholders who perfect their appraisal rights
to receive ‘fair value’ for their shares as of the merger date instead of the merger
consideration.”245
[T]he purpose of an appraisal is not to make sure that the petitioners get the
highest conceivable value that might have been procured had every domino
fallen out of the company’s way; rather, it is to make sure that they receive
fair compensation for their shares in the sense that it reflects what they
deserve to receive based on what would fairly be given to them in an arm’s-
length transaction.246
Put differently, “[t]he issue in an appraisal is not whether a negotiator has extracted the
highest possible bid. Rather, the key inquiry is whether the dissenters got fair value and
were not exploited.”247
245
Dell, 2017 WL 6375829, at *1.
246
DFC, 172 A.3d at 370-71.
247
Dell, 2017 WL 6375829, at *24.
52
The trial court’s “ultimate goal in an appraisal proceeding is to determine the ‘fair
or intrinsic value’ of each share on the closing date of the merger.” 248 To accomplish this
task, “the court should first envisage the entire pre-merger company as a ‘going concern,’
as a standalone entity, and assess its value as such.”249 “Because the court ‘strives to value
the corporation itself as distinguished from a specific fraction of its shares as they may
exist in the hands of a particular shareholder,’ the court should not apply a minority
discount when there is a controlling stockholder.” 250 The court should exclude “any
synergies or other value expected from the merger giving rise to the appraisal
proceeding.”251 “[O]nce the total standalone value is determined, the court awards each
petitioning stockholder his pro rata portion of this total . . . plus interest.”252
When seeking to prove fair value, parties may introduce “proof of value by any
techniques or methods which are generally considered acceptable in the financial
248
Id. at *13 (quoting Cavalier Oil Corp. v. Hartnett, 564 A.2d 1137, 1142-43 (Del.
1989)).
249
Id. (quoting Cavalier Oil, 564 A.2d at 1144).
250
Id. (quoting Cavalier Oil, 564 A.2d at 1144).
251
Glob. GT LP v. Golden Telecom, Inc. (Golden Telecom Trial), 993 A.2d 497,
507 (Del. Ch. 2010) (Strine, V.C.), aff’d, 11 A.3d 214 (Del. 2010); accord DFC, 172 A.3d
at 368 (“[B]y valuing the company on its value as a ‘going concern,’ the [Delaware
Supreme] Court [in Cavalier Oil] seemed to require the excision of any value that might
be attributable to expected synergies by a buyer.”); M.P.M. Enters., Inc. v. Gilbert, 731
A.2d 790, 797 (Del. 1999) (“[S]ection 262(h) requires that the Court of Chancery discern
the going concern value of the company irrespective of the synergies involved in a
merger.”).
252
Dell, 2017 WL 6375829, at *14.
53
community and otherwise admissible in court.”253 “[T]he statute assigns the Court of
Chancery the duty to consider the relevant methods of valuation argued by the parties and
then determine which method (and inputs), or combination of methods, yields the most
reliable determination of value.”254 “But, whatever route it chooses, the trial court must
justify its methodology (or methodologies) according to the facts of the case and relevant,
accepted financial principles.”255 “Although the Court of Chancery has broad discretion to
make findings of fact, those findings of fact have to be grounded in the record and reliable
principles of corporate finance and economics.”256
In this case, “the relevant methods of valuation argued by the parties” are (i) Aruba’s
unaffected market price, (ii) the deal price, and (iii) competing discounted cash flow
analyses. The degree of emphasis that the parties have placed on these methodologies has
evolved. During discovery and at trial, both sides focused on their experts’ discounted cash
flow valuations. As the number of opinions that focused on the deal price mounted, the
respondent placed greater emphasis on that metric, and the petitioners responded by
attacking the process that led to the deal. After DFC, the respondent stressed a combination
of the unaffected market price and the deal price. After Dell, the respondent redoubled its
emphasis on the combination of the unaffected market price and the deal price.
253
Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983).
254
Dell, 2017 WL 6375829, at *15 n.105.
255
Id. at *15.
256
DFC, 172 A.3d at 372.
54
A. The Unaffected Market Price
The Delaware Supreme Court’s recent decisions in DFC and Dell teach that if a
company’s shares trade in a market having attributes consistent with the assumptions
underlying a traditional version of the semi-strong form of the efficient capital markets
hypothesis,257 then the unaffected trading price provides evidence of the fair value of a
257
By “traditional,” I mean a framing of the efficient capital markets hypothesis
consistent with Eugene Fama’s seminal work and its baseline Chicago-school assumptions.
See Eugene F. Fama, Efficient Capital Markets: A Review of Theory and Empirical Work,
25 J. Fin. 383 (1970).
At the trial court level in Dell, I cited some points of entry into a significant and
growing body of literature that raises question about the assumptions undergirding the
traditional model, which suggest a need for greater nuance. See In re Appraisal of Dell,
Inc. (Dell Trial Fair Value), 2016 WL 3186538, at *25 n.16 (Del. Ch. May 31, 2016), rev’d
in pertinent part sub nom. Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd, –
A.3d –, 2017 WL 6375829 (Del. Dec. 14, 2017). In the legal field, much of this work has
responded to the United States Supreme Court’s relatively high-level framing of the
efficient capital markets hypothesis as the cornerstone for using the fraud-on-the-market
theory to create a presumption of reliance in securities fraud actions. See Basic Inc. v.
Levinson, 485 U.S. 224, 241-42, 243-44, 246 (1988). The field of behavioral economics
has yielded particularly powerful insights. See, e.g., Donald C. Langevoort, Theories,
Assumptions, and Securities Regulation: Market Efficiency Revisited, 140 U. Pa. L. Rev.
851 (1992); Larry E. Ribstein, Fraud on a Noisy Market, 10 Lewis & Clark L. Rev. 137
(2006); Jeff Schwartz, Fairness, Utility, and Market Risk, 89 Or. L. Rev. 175 (2010). Noise
trading theory and chaos theory have yielded additional insights. See, e.g., Lawrence A.
Cunningham, From Random Walks to Chaotic Crashes: The Linear Genealogy of the
Efficient Capital Markets Hypothesis, 62 Geo. Wash. L. Rev. 546 (1994); Lawrence A.
Cunningham, Capital Market Theory, Mandatory Disclosure, and Price Discovery, 51
Wash & Lee L. Rev. 843 (1994); Andrei Schleifer & Lawrence H. Summers, The Noise
Trader Approach to Finance, 4 J. Econ. Persp. 19 (1990).
Perhaps future appraisal litigants will retain experts on market efficiency, as is
common in federal securities actions, and maybe future appraisal decisions will consider
subtler aspects of the efficient capital markets hypothesis. This decision does not provide
any opportunity for doing so. In its supplemental submissions on the implications of Dell
and DFC, the petitioners alluded to potential objections to the Delaware Supreme Court’s
55
proportionate interest in the company as a going concern. That evidence is more reliable
than the single estimate of any one individual, be he a knowledgeable market participant,
corporate insider, valuation professional, or trial judge.258 Under this standard, Aruba’s
unaffected market price provides persuasive evidence of fair value.
1. The Efficient Capital Markets Hypothesis
Both Dell and DFC endorse the efficient capital markets hypothesis and its
predictions about the reliability of market prices. In DFC, the Delaware Supreme Court
stated that “real world transaction prices can be the most probative evidence of fair value
even through appraisal’s particular lens.”259 The high court observed that “[m]arket prices
are typically viewed superior to other valuation techniques because, unlike, e.g., a single
person’s discounted cash flow model, the market price should distill the collective
judgment of the many based on all the publicly available information about a given
company and the value of its shares.”260 The court added that, from the perspective of
economics, when the subject company’s shares are “widely traded on a public market based
upon a rich information base,” then the fair value of a proportionate interest in the company
framing of the efficient capital markets hypothesis, but they did not develop those
objections in any meaningful way. Absent a case-specific expert opinion supported by
credible evidence and the weight of social-science research, I do not believe a trial judge
has the flexibility to disregard the Delaware Supreme Court’s framing of the efficient
capital markets hypothesis.
258
Dell, 2017 WL 6375829, at *17; DFC, 172 A.3d at 369-70.
259
DFC, 172 A.3d at 370.
260
Id. at 369-70.
56
as a going concern would “likely be best reflected by the prices at which [the] shares were
trading as of the merger.”261
In Dell, the Delaware Supreme Court stated that “the price produced by an efficient
market is generally a more reliable assessment of fair value than the view of a single
analyst, especially an expert witness who caters her valuation to the litigation imperatives
of a well-heeled client.”262 The court explained that, when the market for a company’s
stock has attributes associated with efficient trading, the stock price
reflects the judgments of many stockholders about the company’s future
prospects, based on public filings, industry information, and research
conducted by equity analysts. In these circumstances, a mass of investors
quickly digests all publicly available information about a company, and in
trading the company’s stock, recalibrates its price to reflect the market’s
adjusted, consensus valuation of the company.263
The court concluded that, when the market for a company’s shares has the requisite
attributes, the stock price is “likely a possible proxy for fair value.”264
Under Dell and DFC, the critical question is whether the market for the subject
company’s shares has attributes associated with market efficiency. In Dell, the high court
described the relevant attributes as follows: “A market is more likely efficient, or semi-
261
Id. at 367.
262
Dell, 2017 WL 6375829, at *17.
263
Id. (internal quotation marks and footnote omitted).
264
Id. at *1 (reversing trial court’s fair value determination because, among other
reasons, “[h]ere, the trial court gave no weight to Dell’s stock price because it found its
market to be inefficient. But the evidence suggests that the market for Dell’s shares was
actually efficient and, therefore, likely a possible proxy for fair value.”).
57
strong efficient, if it has many stockholders; no controlling stockholder; highly active
trading; and if information about the company is widely available and easily disseminated
to the market.”265
In both Dell and DFC, the Delaware Supreme Court found that the market for the
subject company’s shares had the necessary attributes. The Dell decision described the
market for Dell’s stock as follows:
Dell’s stock traded on the NASDAQ under the ticker symbol DELL. The
Company’s market capitalization of more than $20 billion ranked it in the
top third of the S&P 500. Dell had a deep public float and was actively traded
as more than 5% of Dell’s shares were traded each week. The stock had a
bid-ask spread of approximately 0.08%. It was also widely covered by equity
analysts, and its share price quickly reflected the market’s view on breaking
developments. Based on these metrics, the record suggests the market for
Dell stock was semi-strong efficient, meaning that the market’s digestion and
assessment of all publicly available information concerning Dell was quickly
impounded into the Company’s stock price. For example, on January 14,
2013, Dell’s stock jumped 9.8% within a minute of Bloomberg breaking the
news of the Company’s take-private talks, and the stock closed up 13% from
the day prior—on a day the S&P as a whole fell 0.1%.266
The DFC decision described the market for DFC’s stock in similar, albeit more
abbreviated, terms:
DFC’s shares were traded on the NASDAQ exchange from 2005 until the
merger. Throughout its history as a public company, the record suggests that
DFC never had a controlling stockholder, it had a deep public float of 39.6
million shares, and, it had an average daily trading volume just short of one
million shares. DFC’s share price moved sharply in reaction to information
265
Id. at *17 (internal quotation marks omitted).
266
Id. at *3 (footnotes omitted).
58
about the company’s performance, the industry, and the overall economy . .
. .267
The high court later noted that “DFC’s stock was listed on a major U.S. exchange, traded
actively, and had moved sharply over the years when the company was poised for growth
or facing dimming prospects.”268
In neither case did an expert render an opinion on market efficiency, as is common
in federal securities law actions when a plaintiff seeks to invoke the presumption of reliance
associated with the fraud-on-the-market theory.269 Nor was all of the market evidence part
of the trial record. In DFC, the Delaware Supreme Court cited record evidence for some of
the information about DFC’s stock profile; it drew other information from DFC’s public
filings with the SEC or from an expert report addressing valuation issues.270 In Dell, the
267
DFC, 172 A.3d at 352.
268
Id. at 372.
269
See, e.g., Amgen Inc. v. Conn. Ret. Plans & Tr. Funds, 568 U.S. 455, 471 n.6
(2013) (noting trial court relying on “unchallenged expert report . . . expressly found that
the market for Amgen’s stock was efficient”); IBEW Local 98 Pension Fund v. Best Buy
Co., Inc., 818 F.3d 775, 779 (8th Cir. 2016) (noting “plaintiffs submitted a report by their
expert” to support their “motion for class certification [which] relied on Basic’s fraud-on-
the-market presumption”); Schleicher v. Wendt, 618 F.3d 679, 682 (7th Cir. 2010) (“A
financial economist concluded, in an expert report that the district judge credited, that the
market for Conseco’s shares was efficient . . . and that investors therefore can use the fraud-
on-the-market doctrine as a replacement for person-specific proof of reliance and
causation.”). See generally 7AA Charles Alan Wright, Arthur R. Miller & Mary Kay Kane,
Federal Practice and Procedure § 1781.1 (3d ed. 2005).
270
See DFC, 172 A.3d at 352-53 (citing analyst reports and petitioners’ and
respondent’s expert reports on valuation).
59
Delaware Supreme Court similarly drew much of the market-related information from
public filings with the SEC or from an expert report addressing valuation issues.271
In this case, as in Dell and DFC, no expert offered an opinion, pro or con, on whether
the subject company’s shares traded in an efficient market. During trial, the parties did not
emphasize the attributes of the market for Aruba’s common stock. Nevertheless,
information drawn from sources comparable to those the Delaware Supreme Court used in
Dell and DFC indicates that the market for Aruba’s common stock had basic attributes
consistent with what the high court found sufficient in those decisions:
● Aruba’s shares traded on the NASDAQ through the date of the merger
under the symbol ARUN.272
● Aruba did not have a controlling stockholder.
● Aruba made public filings in compliance with the disclosure
requirements imposed by federal securities laws.
● Thirty-three securities analysts covered Aruba.273
271
See Dell, 2017 WL 6375829, at *3 nn.9-15 (citing public filings with SEC and
report of Dell’s valuation expert).
272
See Marcus Tr. 59 (Verition’s expert testifying that “the stock was trading well”);
Marcus Dep. 198-99 (Verition’s expert testifying that Aruba was “actively traded” as
contrasted with “a company that, you know, is thinly traded” and where “there might be
some efficiency issues”); see also Aruba Networks, Inc., Notification of Removal from
Listing and/or Registration Under Section 12(b) of the Securities Exchange Act of 1934
(Form 25) (May 19, 2015).
See Marcus Opening Report Ex. 3-1 (“Summary of Analyst Price Targets”);
273
Marcus Tr. 59 (Verition’s expert noting that “[t]here was lots of analyst coverage”);
Marcus Dep. 198-99 (Verition’s expert noting that Aruba had “30 plus analysts covering
them”).
60
● Aruba’s weekly trading volume was 9.5 million shares or 8.7% of
total shares outstanding.274
● Aruba’s bid-ask spread was 0.055%.275
The following table compares the numerical attributes of Aruba’s common stock
with the comparable attributes for the subject companies in Dell and DFC.
DFC Dell Aruba
Market Cap. $375 million $20 billion $2.5 billion
Shares in public 37.5 million 1.45 billion 104 million
float
Public float as % 95% 85% 96%
of outstanding
Bid-ask spread 0.098% 0.08% 0.055%
# of analysts 10 33 33
Given these attributes, Aruba’s stock price is “likely a possible proxy for fair value.” 276
In addition, as in Dell, there is evidence that the Company’s stock price reacted
quickly to the release of news about the Company.277
274
JX 164 (BMO Capital Markets report containing trading statistics); see also Dell,
2017 WL 6375829, at *3 n.10 (citing 5 Alan R. Bromberg et al., Bromberg & Lowenfels
on Securities Fraud § 7:484 (2d ed. June 2017 Update) (“Turnover measured by average
weekly trading of 2% or more of the outstanding shares would justify a strong presumption
that the market for the security is an efficient one.”)).
See Dell, 2017 WL 6375829, at *3 (stating that Dell’s spread of approximately
275
0.08% was indicative of market efficiency).
276
Id. at *1; see also DFC, 172 A.3d 367-68.
277
See, e.g., JX 245; Dkt. 162 at 13 (Petitioners’ Opening Post-Trial Brief
containing stock price chart); Dkt. 188 Ex. A (publicly available stock-price data for Aruba
& S&P 500).
61
 When Aruba announced Project Greyhound after the market closed
on August 26, 2014, the stock price rose by 5% the next day, closing
at $21.26 on a day when the S&P 500 was stagnant.
 When Aruba announced its first quarter fiscal year 2015 earnings after
the market closed on November 20, 2014, Aruba’s stock price
dropped by 14% on November 21 on a day when the S&P 500 was up
0.5%.
 When Bloomberg News reported that HP was in talks to buy Aruba
on February 25, 2015, Aruba’s stock price rose 21%. The news came
out at 3:02 p.m. and, within one minute, Aruba’s stock price had
increased 12.7%. By 3:11 p.m., the price had increased to $22.86,
before closing at $22.24 at 4 p.m. The same day, the S&P 500
decreased 0.1%.
 When Aruba announced its second quarter fiscal year 2015 earnings
after the market closed on February 26, 2015, the stock price increased
the next day by 9.7%. That same day, the S&P 500 decreased by 0.3%.
 When the merger was confirmed and the merger price of $24.67
announced on March 2, 2015, the stock price decreased slightly to
close at $24.65.
Obviously, these are anecdotal observations and not event studies, but they compare
favorably with the Dell court’s observation that Dell’s share price “quickly reflected the
market’s view on breaking developments,” citing, as an example, that “on January 14,
2013, Dell’s stock jumped 9.8% within a minute of Bloomberg breaking the news of the
Company’s take-private talks, and the stock closed up 13% from the day prior—on a day
the S&P 500 as a whole fell 0.1%.”278 Similar evidence in this case reinforces the
278
Dell, 2017 WL 6375829, at *3.
62
conclusion that Aruba’s stock price leading up to the merger is “likely a possible proxy for
fair value.”279
2. Evidence Of Market Mispricing
The petitioners dispute the reliability of Aruba’s market price in this case,
contending that HP timed its acquisition to take advantage of a trough in the market. They
rely on a range of authorities, including the Delaware Supreme Court’s decision in
Glassman v. Unocal Exploration Corp., which stated that, if an acquisition “was timed to
take advantage of a depressed market, or a low point in the company’s cyclical earnings,
or to precede an anticipated positive development, the appraised value may be adjusted to
account for those factors.”280
The petitioners argue that the market mispricing in this case began after the
Company reported positive quarterly results in May 2014. Revenue exceeded both
management guidance and Wall Street consensus estimates,281 but the Company reported
a gross margin of 70.5%, below the consensus estimate of 72% and Aruba’s “longstanding
target of 71-73%.”282 The miss triggered harsh analyst coverage,283 and Aruba’s stock price
279
Id. at *1; see also DFC, 172 A.3d at 367-68.
280
777 A.2d 242, 248 (Del. 2001).
281
See JX 47 (Barclays report); JX 48 (Janney Capital Markets report).
282
JX 47 at 1.
283
JX 259 at 2-3 (email collecting analyst coverage).
63
dropped 12.11% on the news, declining from $20.06 to $17.63. As evidence of the market
overreaction, the petitioners rely on internal assessments by Aruba management.284
To address the gross margin issue, Aruba management developed Project
Greyhound.285 Management undertook the project because the “Company value [was] not
adequately reflected in [the] stock price.”286 Aruba announced record results in August
2014 and simultaneously announced the implementation of Project Greyhound.287 Analysts
had mixed reactions.288 Aruba’s stock price rose by roughly 9%, from $20.24 to $22.01.289
284
See JX 260 at 5-6 (email thread among management discussing market reaction);
JX 267 (Orr reporting to the Aruba Board: “[W]e, as an executive team, are finally sick of
wall st discrediting our tremendous come back in revenue growth because they said we are
not as profitable as Ubiquiti (give me a break!).”); JX 269 at 2 (Orr email to Galvin:
“Between you and me, if we do all these and our stock price stays $13-20, you and I fail
miserably. I don’t know why we are doing all these [sic] tough stuff. I really don’t.”); see
also Warmenhoven Tr. 235 (“It was very frustrating for the management team, I must say.
I mean, in -- in fiscal year 2014, they had 20 percent year-over-year growth, and we were
delivering everything to the street, and the stock really didn’t move.”).
285
See JX 280 (internal Aruba deck on Project Greyhound).
286
JX 273 at 2 (draft internal talking points); see also Orr Tr. 486 (suggesting Project
Greyhound was motivated, in part, by sense stock price “does not reflect what we believe
is our commitment to deliver to what the analysts and the investors want us to do”); Galvin
Tr. 597-98 (acknowledging Aruba undertook Project Greyhound, in part, because “we did
have pressure from Wall Street to improve what we were dropping to the bottom line”); id.
at 600 (agreeing “Greyhound was initiated because there was a perception that the company
value was not adequately reflected in the stock price”).
287
JX 828 (press release announcing results).
288
Compare JX 59 at 2 and JX 62 at 1 with JX 61 at 1 and JX 64 at 1. See also JX
309 at 7 (Aruba Board deck summarizing analyst reports and noting that fifteen analysts
increased their target price).
289
JX 245.
64
As evidence of continued mispricing, the petitioners rely on Aruba management’s internal
view that it would take “a couple of quarters” after the implementation of Project
Greyhound for Wall Street to credit the results.290
The petitioners contend that matters worsened in November 2014. That month,
Aruba reported on an “outstanding quarter” that included “[r]ecord revenues” that
exceeded “the top end of [its] guidance range” and improved margins thanks to Project
Greyhound.291 But Aruba also announced a range of revenue guidance for the upcoming
quarter that was 1% lower at the midpoint than the pre-announcement analyst consensus.292
Analysts fixated on the lowered guidance. Aruba’s stock dropped by 14%, closing at
$18.82.293 As evidence of the market overreaction, the petitioners rely on the internal
assessments of Aruba management, who explained that they lowered guidance simply to
be prudent and not because of any change in the business dynamics. 294 They also rely on
internal assessments by the HP deal team, who viewed Aruba’s strong results as validating
290
Galvin Tr. 602-03 (testifying that, with respect to Project Greyhound, “there were
things that would play out over time”); Galvin Dep. 82 (agreeing “that it would take a
couple of quarters after announcement of the initiation of the transformation to see the real
results and have the results on Wall Street”).
291
JX 638 at 3 (transcript from Aruba earnings call).
292
JX 363 (internal HP email summarizing the earnings announcement).
293
JX 245.
294
JX 638 at 13 (Galvin stating Aruba was “just being prudent in a mixed
environment” and “[n]ot getting ahead of our skis”); see also JX 355 at 1 (email from
Galvin to Aruba Board: “our guide is shaping up to be more cautious than our strong
results”).
65
their internal business case295 and saw the price drop as an opportunity to buy Aruba at a
discount.296
After Dell and DFC, I do not believe that the petitioners’ evidence provides any
basis to question the integrity of Aruba’s pre-announcement market price as an indicator
of fair value. As a threshold matter, it is not clear that Glassman has continuing relevance
to a widely held, publicly traded entity. Although the Delaware Supreme Court in
Glassman did not limit its comments about the appraisal standard to any particular context,
the case involved a short-form merger in which a controlling stockholder eliminated the
minority.297 Aruba was not a controlled company, and the market for its shares exhibited
the attributes that the Delaware Supreme Court in Dell and DFC found sufficient to give
effect to the implications of the semi-strong form of the efficient capital markets
hypothesis.
295
See JX 357 at 1 (Neri: “We told our story and we were on point.”); JX 360 (email
from HP’s Senior Vice President of Corporate Development: “I thought the results were
pretty good. . . . They blew past the revenue expectations for the quarter. But they guided
soft, below consensus.”); JX 780 at 2 (internal HP deck discussing Aruba’s November
earnings announcement and commenting that “[t]he softer guidance did not cause us to
change our financial model”)
296
See JX 357 at 1 (internal email among members of the HP deal team: “They are
down 8% after hours though because of guidance below consensus for this quarter
(although it looks like the range of guidance is still within expectations). Good time to pull
the trigger and snap them up I would say.”); Hardegree Dep. 193 (observing that the stock
price drop “probably did, on balance” put HP “in a more tacti[cally] advantaged position”).
297
See 777 A.2d at 243 (“In this appeal, we consider the fiduciary duties owed by a
parent corporation to the subsidiary’s minority stockholders in the context of a ‘short-form’
merger.”).
66
In Dell, at the trial level, I found “widespread and compelling evidence of a
valuation gap between the market’s perception and the Company’s operative reality.”298
As I viewed the evidence, “[t]he gap was driven by (i) analysts’ focus on short-term,
quarter-by-quarter results and (ii) the Company’s nearly $14 billion investment in its
transformation, which had not yet begun to generate the anticipated results.”299 In making
this finding, I relied on record evidence indicating that (i) Michael Dell and other members
of management valued the company at levels significantly above the market price in light
of its ongoing transformation and a related cost-savings initiative,300 (ii) the financial
advisors to the special committee running the sale process generated valuations implying
values for the company that far exceeded its market price, 301 and (iii) Mr. Dell and the
special committee’s advisors (including two financial advisors and a consulting firm)
believed that the valuation gap existed because the company’s stockholders were focused
on the short-term rather than the long-term.302
On appeal, the Delaware Supreme Court held that, in light of the attributes of the
market for Dell’s shares and the implications of the semi-strong form of the efficient capital
298
Dell Trial Fair Value, 2016 WL 3186538, at *32.
299
Id.
300
See id. at *1-2, *34.
301
See id. at *34.
302
See id. at *34-35 (citing JX 96; JX 110; JX 137; JX 170; JX 226; JX 344; JX
530).
67
markets hypothesis, my reliance on the views of these knowledgeable insiders constituted
an abuse of discretion.303 I had cited various analyst reports as evidence of the contrast
between external views and the insiders’ assessments. The high court found that the analyst
reports showed “just the opposite: analysts scrutinized Dell’s long-range outlook when
evaluating the Company and setting price targets, and the market was capable of
accounting for Dell’s recent mergers and acquisitions and their prospects in its valuation
of the Company.”304 More broadly, the Delaware Supreme Court held that my finding
“ignored the efficient market hypothesis long endorsed by this court.”305 The high court
303
Dell, 2017 WL 6375829, at *19 (“In short, the record does not adequately support
the Court of Chancery’s conclusion that the market for Dell’s stock was inefficient and that
a valuation gap in the Company’s market trading price existed in advance of the lengthy
market check, an error that contributed to the trial court’s decision to disregard the deal
price.”).
304
Id. at *16 & n.112 (citing analyst reports discussing Dell’s M&A activity).
305
Id. at *17 (citing DFC, 172 A.3d 346). Legal historians can debate how
longstanding that endorsement had been. See Cede & Co. v. Technicolor, Inc. (Technicolor
II), 684 A.2d 289, 301 (Del. 1996) (observing, in context of appraisal of publicly traded
company following arm’s-length deal, that “the market price of shares may not be
representative of fair value” (internal quotation marks omitted)); Rapid-Am. Corp. v.
Harris, 603 A.2d 796, 806 (Del. 1992) (describing the Court of Chancery’s rejection of
market value in Chicago Corp. v. Munds, 172 A. 452 (Del. Ch. 1934), and observing that
“Munds’ succinct evaluation of the market has lost none of its luster”); see also Cede &
Co. v. Technicolor, Inc. (Technicolor I), 542 A.2d 1182, 1187 n.8 (Del. 1988)
(“Information and insight not communicated to the market may not be reflected in stock
prices; thus, minority shareholders being cashed out may be deprived of part of the true
investment value of their shares. The issue we are addressing is not the manipulation of the
transaction, nor the suppression or misstatement of material information by insiders
defrauding the market. Instead, we recognize that the majority may have insight into their
company’s future based primarily on bits and pieces of nonmaterial information that have
value as a totality.” (citations omitted)). See generally Implicit Minority Discount, supra,
at 8 (“Delaware appraisal law has never been particularly friendly to the idea that stock
68
found that “[t]he apparent efficiency of Dell’s pre-signing stock market and the long-term
approach of its analysts undermine concerns of a ‘valuation gap.’”306
market prices always accurately represent a proportional share of the value of the enterprise
as a going concern.”). If the lens is broadened to take in fiduciary duty cases, the
longstanding nature of the endorsement becomes even more debatable. See, e.g., Unitrin,
Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1384 (Del. 1995) (reaffirming the Delaware
Supreme Court’s recognition of the threat of substantive coercion, defined as “the risk that
shareholders will mistakenly accept an underpriced offer because they disbelieve
management’s representations of intrinsic value” (internal quotation marks and citation
omitted)); Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1150 n.12 (Del. 1989)
(“Thus, we endorse the Chancellor’s conclusion that it is not a breach of faith for directors
to determine that the present stock market price of shares is not representative of true value
or that there may indeed be several market values for any corporation’s stock.”); Smith v.
Van Gorkom, 488 A.2d 858, 875-76 (Del. 1985) (“[I]n the absence of other sound valuation
information, the fact of a premium [over market price] alone does not provide an adequate
basis upon which to assess the fairness of an offering price. . . . Using market price as a
basis for concluding that the premium adequately reflected the true value of the Company
was a clearly faulty, indeed fallacious, premise, as the defendants’ own evidence
demonstrates.”), overruled on other grounds by Gantler v. Stephens, 965 A.2d 695 (Del.
2009). See generally Bernard Black & Reinier Kraakman, Delaware’s Takeover Law: The
Uncertain Search for Hidden Value, 96 Nw. U. L. Rev. 521 (2002) (surveying Delaware
takeover decisions and explaining their reliance on a theory of hidden value inconsistent
with the efficient capital markets hypothesis). If the management-buyout in Dell had
instead been an unsolicited, all-cash, all-shares offer at the deal price, I have no doubt that
the Dell board of directors could have defended against that offer based on management’s
belief in the considerably greater long-term value of the company. See Air Prods. &
Chems., Inc. v. Airgas, Inc., 16 A.3d 48, 108-13 (Del. Ch. 2011).
Setting temporal characterizations aside, I do not question the authority of the
Delaware Supreme Court to endorse a traditional framing of the efficient capital markets
hypothesis as a method of assessing the reliability of market prices in appraisal
proceedings. Once the Delaware Supreme Court has done so, the obligation of a trial judge
is to adhere to that endorsement and its implications.
306
Dell, 2017 WL 6375829, at *25.
69
In this case, I regard the petitioners’ evidence of market mispricing as considerably
weaker than what I abused my discretion by crediting in Dell. The evidence in Dell
involved the company’s likelihood of successfully completing a corporate transformation
after spending $14 billion to acquire eleven businesses over three years. The evidence in
this case concerns revenue guidance for an upcoming quarter and the implications of a cost-
cutting effort (Project Greyhound). As in Dell, the analyst reports show that market
observers were assessing these variables. As in Dell, there is no indication that management
did not try to communicate forthrightly with the market. In contrast to Dell, the internal
concerns that Orr and other members of management expressed in this case lacked the
degree of analytical and valuation-based support that accompanied the critiques by Mr.
Dell, his management team, and the special committee’s advisors. In this case, the internal
concerns seem more like reactive expressions of frustration. To reiterate, the evidence in
Dell was insufficient to support my finding regarding the existence of a valuation gap.
Indeed, the Delaware Supreme Court regarded it as the equivalent of no evidence at all.307
307
See id. at *17 (“The record before us provides no rational, factual basis for such
a ‘valuation gap.’”); id. (“There is also no evidence in the record that investors were
‘myopic’ or shortsighted.”). The senior tribunal believed that, without any evidence, I
“presumed” that “‘investor myopia’ and hangover from the Company’s ‘nearly $14 billion
investment in its transformation, which had not yet begun to generate the anticipated
results,’ produced a ‘valuation gap’” and this “presumption contributed to the trial court’s
decision to assign no weight to Dell’s stock price or deal price.” Id. at *16 (quoting Dell
Trial Fair Value, 2016 WL 3186538, at *32, *34).
I did not use the term “presumption,” and I regret that poor drafting on my part
seemingly created the impression that I had applied a presumption of some sort. I
personally thought I was relying on record evidence that took the form of contemporaneous
assessments by knowledgeable insiders about investors’ growing short-term focus and a
70
divergence between the trading price and indications of fundamental value. See Dell Trial
Fair Value, 2016 WL 3186538, at *2 (discussing divergence between management’s
internal valuation and the market price, including Mr. Dell’s testimony that the market just
“didn’t get” Dell (Tr. 409) and his belief that, in spite of Dell’s transformation, “Dell [was]
still seen as a PC business” (JX 44 at 1)); id. (discussing management’s hiring consultants
to address market misperception (JX 46 at 1)); id. at *4 (discussing Mr. Dell’s assessment
of divergence between short-term results and long-term value (JX 109 at 7; JX 110 at 1));
id. (discussing management’s reports to board regarding short-term challenges and need to
“sacrifice short term results” to create long-term value (JX 96 at 2; JX 97 at 16)); id. at *5
(discussing JP Morgan report explaining that Dell’s recent earnings misses “have put
investors in a ‘wait and see mode’ with increased focus on quarter-by-quarter execution
and improved visibility” (JX 137 at 7)); id. at *7 (discussing views of JPMorgan and
Goldman Sachs regarding factors contributing to low market valuation that appeared
disconnected from fundamentals (JX 170)); id. at *9 (discussing Mr. Dell’s reasons for
proposing a going-private transaction including that his initiatives would be “poorly
received by the public markets” and that they “could best be accomplished in an
environment without quarterly earnings pressure” (JX 231 at 2)); id. at *19 (discussing
buyout group presentations to financing sources and ratings agencies, including
management’s explanation that poor short-term performance had resulted from “conscious
trade-offs to reposition and transform the company” (JX 660 at 32)); id. at *17 (comparing
analyst response to results which focused on quarterly earnings miss with Boston
Consulting Group’s internal analysis concluding that Dell’s long-term earning power
would not be adversely affected (JX 536)); id. at *19 (comparing International Data
Corporation’s response to quarterly results with buyout group’s long-term projections to
lenders and related assessment of company (JX 669; JX 678)); id. at *34-35 (summarizing
evidence of valuation gap, including JX 96; JX 109; JX 110; JX 137; JX 170; JX 226; JX
344; JX 530).
That said, I do not question the Delaware Supreme Court’s authority to elevate the
importance for a fair value determination of a trading price generated by a market with
attributes associated with semi-strong form efficiency. I also do not question the Delaware
Supreme Court’s authority to hold that a trial court should require evidence sufficient to
make findings undermining market efficiency before considering and regarding as
persuasive case-specific evidence of the views of knowledgeable insiders. See Dell, 2017
WL 6375829, at *17 (observing that I did not make any findings inconsistent with the
premises of market efficiency, such as findings that “Dell lacked a vast and diffuse base of
public stockholders, that information about the Company was sparse or restricted, that there
was not an active trading market for Dell’s shares, or that Dell had a controlling
stockholder—or that the market for its stock lacked any of the hallmarks of an efficient
market”).
71
The weaker evidence here is insufficient to undermine the reliability of Aruba’s unaffected
market price.
The DFC decision points to the same conclusion. There, the Court of Chancery
found DFC’s performance “appeared to be in a trough, with future performance depending
on the outcome of regulatory decision-making that was largely out of the company’s
control.”308 The trial court relied on record evidence that the acquirer “was aware of DFC’s
trough performance and uncertain outlook” and that “these attributes were at the core of
[the acquirer’s] investment thesis to obtain assets with potential upside at a favorable
price.”309 On appeal, the Delaware Supreme Court explained that “the market’s assessment
of the future cash flows necessarily takes regulatory risk into account as it does with all the
other reasonable uncertain factors that affect a company’s future.”310 The senior tribunal
found that “the record reveals that equity analysts, equity buyers, debt analysts, debt
providers and others were in fact attuned to the regulatory risks facing DFC.”311 The same
reasoning applies here in terms of the ability of equity analysts and other market
participants to assess the risk associated with Project Greyhound and Aruba’s ability to
meet management guidance.
308
In re Appraisal of DFC Glob. Corp. (DFC Trial), 2016 WL 3753123, at *22
(Del. Ch. July 8, 2016), rev’d sub nom. DFC Glob. Corp. v. Muirfield Value P’rs, L.P.,
172 A.3d 346 (Del. 2017).
309
Id. (citing Barner Tr. 533-37 and JX 428 at 16).
310
DFC, 172 A.3d at 372.
311
Id. at 373.
72
The Delaware Supreme Court in DFC also questioned whether a trial court should
have relied on evidence that the buyer thought it was getting a good deal to support the
possibility of underpricing:
One would expect a buyer to think it made a wise decision with an upside,
and, to be candid, it is in tension with the statute itself to argue that the
subjective view of post-merger value of the acquirer can be used to value the
respondent company in an appraisal, as the statute’s exclusion of transaction-
specific value seems to be directed at the concern a buyer who pays fair value
should not have its economic upside for taking that risk expropriated in the
appraisal process, a result that if it were the law, would discourage sales
transactions valuable to selling stockholders. That a buyer views itself as
having struck a good deal is far from reliable evidence that the resulting price
from a competitive bidding process is an unreliable indicator of fair value. .
. . [O]ne would think that the buyer who paid the highest price in a
competitive process had the most confidence there was an upside and must
think that post-purchase gains would justify its purchase; otherwise, no sale
would ever occur in the world. That [the acquirer] expected to profit does not
mean that the collective view of value that results from the deal price is not
a reliable indicator of fair value; to hold otherwise, is to adopt a non-binary
view of fair value in which only the upside view of what could happen in the
future is taken into account.312
312
Id. at 374 n.145. To the extent a buyer bases its assessment on synergistic gains
or other aspects of value that would not exist but for the transaction, the Delaware Supreme
Court’s “candid” observation regarding tension with the statutory standard makes sense to
me. To the extent that a buyer is assessing the target’s standalone value in its pre-deal
configuration, it is not clear to me why any tension would exist. I personally would regard
the beliefs of knowledgeable market participants, including the buyer, as relevant evidence
of fair value. See In re Appraisal of Dole Food Co., Inc., 114 A.3d 541 (Del. Ch. 2014)
(ordering production of valuation materials prepared by appraisal petitioners when
deciding whether to purchase or sell shares of the subject company’s stock). The market
price is, after all, merely an aggregation of the views of knowledgeable market participants.
Id. at 559 (“The market price . . . represents an aggregation of the views that many lay
people hold about the value of a stock.”); see also DFC, 172 A.3d at 367 (discussing “the
collective judgment of value embodied in a market price”). Nor would one need to exclude
the possibility of downside risk when evaluating the buyer’s valuation, to the extent that
the buyer had not already taken that risk into account. A court could consider evidence
showing that the buyer’s assessment was overly optimistic. In the past, courts deciding
73
This passage cautions against regarding HP’s belief that it had seized upon an opportune
time to purchase Aruba as sufficient to undercut the reliability of Aruba’s market price.
3. Bundling Aruba’s Earnings Release With The Merger Announcement
So far, the petitioners’ evidence of a market trough or other mispricing is
conceptually similar to the types of evidence that the Delaware Supreme Court rejected in
Dell and DFC. But the petitioners advanced another argument that falls into a slightly
different category because it involved Aruba and HP making conscious decisions about
when to release information. At the end of January 2015, HP offered to acquire Aruba for
$23.25 per share. During the first week of February, while Aruba was considering its
response, another analyst report criticized the Company, and the stock price fell again,
closing around $16.07 the day after the report.313 Contrary to the market’s perception,
appraisal cases have considered conceptually similar valuation indications. Chancellor
Allen considered the fact that “knowledgeable officers and directors all sold their stock” at
the transaction price. Cede & Co. v. Technicolor, Inc., 1990 WL 161084, at *32 (Del. Ch.
Oct. 19, 1990) (Allen, C.), aff’d in part and rev’d in part on other grounds, 634 A.2d 345
(Del. 1993). Chancellor Chandler considered third-party offers to purchase corporate
assets, such as a wholly owned subsidiary whose operations were not affected by the
merger giving rise to appraisal rights. See Ryan v. Tad’s Enters., Inc., 709 A.2d 682, 702
(Del. Ch. 1996) (considering offers to purchase one of corporation’s two remaining
businesses four months after the merger, one year after the merger, and two years after the
merger).
That said, I do not question the Delaware Supreme Court’s authority to instruct the
trial courts that when determining fair value, they should give less weight to the views of
individual market participants, such as the buyer, and more weight to the collective views
of many market participants, aggregated through trading, or the information generated by
a sale process.
313
JX 466 at 1-2 (internal Aruba email distributing report).
74
Aruba management knew internally that Aruba was having an excellent quarter and would
beat its guidance.314 But, rather than correcting the market’s perception, Aruba
management proposed to time the announcement of the merger to coincide with the
announcement of Aruba’s February 2015 earnings.315 Companies often announce
significant items as part of an earnings release, particularly if the earnings are bad and the
news is good (or vice versa).316 In this case, Aruba management believed that an increase
Id. at 1 (email from Aruba General Counsel suggesting the stock price “reflects
314
the misconception that we missed. We actually beat guidance but no one knows that yet”).
315
The idea of announcing the merger along with Aruba’s strong quarterly results
came from Aruba management, not HP. When Whitman and Neri first re-engaged with Orr
at dinner on January 21, 2015, Orr suggested announcing the deal at an industry conference
at the beginning of March. JX 423 (email from Orr relaying exchange to Aruba
management). When Johansson contacted Orr at the end of January to notify him HP
intended to bid imminently, Orr accelerated the timeline, proposing “getting a deal
announced by [Aruba’s] earnings on Feb 26.” JX 454 (internal Barclays email summarizing
Johansson’s relay of the call). When Evercore later attempted to negotiate with HP’s
banker, Evercore again “emphasized that [Aruba would] like to announce [the] deal at or
before the [Aruba] earnings announcement” because Aruba was “afraid stock runs like
Ubiquiti’s did which could make the deal more challenging from the [Aruba] perspective.”
JX 491 (email from Barclays to HP recounting exchange).
316
See, e.g., DFC Trial, 2016 WL 3753123, at *13 (“[D]iscouraging financial
results [were] issued on April 2, 2014, the same day the transaction was announced.”); In
re Dollar Thrifty S’holder Litig., 14 A.3d 573, 591 (Del. Ch. Sept. 8, 2010) (Strine, V.C.)
(“Dollar Thrifty’s advisors were suspicious that Hertz wanted to use the deal to cover up
what would be an otherwise disappointing earnings announcement, but eventually
concluded that Frissora’s eagerness was attributable to a normal desire to announce the
deal in conjunction with an earnings release.”); In re Trans World Airlines, Inc. S’holders
Litig., 1988 WL 111271, at *4 (Del. Ch. Oct. 21, 1988) (“The proposal now under
consideration was announced . . . the same day on which the Company announced very
favorable financial results for the first quarter of 1988.”), abrogated on other grounds by
Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110 (Del. 1994); see also Boutros Dep. 203
(“[I]t’s very customary, very, very customary, if you’re pursuing an M&A transaction and
it’s close to being done, . . . and you have an earnings release, to make the two concurrent,
75
in the stock price would hurt their chances of getting the deal approved. Providing both
pieces of information simultaneously would blur the market’s reaction to Aruba’s strong
quarterly results and help get the deal approved.317
In Dell, the Delaware Supreme Court implied that a petitioner might be able to call
into question the integrity of the market price if they proved that management had withheld
information from the market or misled investors. As one of its several reasons for holding
that I abused my discretion, the high court noted that I “expressly found no evidence that
information failed to flow freely or that management purposefully tempered investors’
expectations for the Company so that it could eventually take over the Company at a fire-
sale price.”318 My prediction of the law before the Delaware Supreme Court’s decision in
Dell would have been that scienter did not matter for an appraisal case where the sole
litigable question is valuation rather than culpability. But this passage indicates that
because these are two material events that will impact the stock price, and the last thing
you want to do is release material information piecemeal to your shareholders.”); cf. In re
Smurfit-Stone Container Corp. S’holder Litig., 2011 WL 2028076, at *8 (Del. Ch. May 20,
2011) (“[The bidder] threatened to suspend the merger discussions if the proposed
transaction could not be finalized before the end of the weekend and the release of both
companies’ earnings announcements the following week.”).
317
HP agreed to this course of action, which favored HP’s interests. HP also may
have leaked news of the deal to further mask the significance of Aruba’s strong earnings.
On February 25, 2015, one day before Aruba was scheduled to announce its earnings,
Bloomberg News ran a story on the merger. JX 866 (article). Qatalyst speculated internally
that HP had leaked the news so that Aruba’s “results and subsequent stock price reaction
won’t be easy to measure.” JX 510. Aruba’s stock price jumped from $18.37 to $22.24.
Proxy at 53.
318
Dell, 2017 WL 6375829, at *18
76
whether management causes an informational distortion is pertinent not only for a breach
of fiduciary duty claim or fraud action, but for an appraisal proceeding as well.
In this case, the petitioners contend that Aruba and HP manipulated the timing of
announcing Aruba’s strong quarterly results and the merger to interfere with investors’
ability to perceive Aruba’s standalone value. The petitioners do not contend that
management never provided the quarterly results or falsified the quarterly results, only that
they bundled them together with the announcement of the merger.
As framed by the Delaware Supreme Court in Dell and DFC, the semi-strong form
of the efficient capital markets hypothesis does not contemplate that directional error will
arise from the order in which information is released or from bundling information
together. Releasing information simultaneously or in close proximity might make it
difficult for an expert to disentangle the price reaction for purposes of an event study, but
the market still would have the information and would respond. As the high court stated in
Dell, when a market is efficient, “a mass of investors quickly digests all publicly available
information about a company and, in trading the company’s stock, recalibrates its price to
reflect the market’s adjusted, consensus valuation of the company.”319 And as the high
court observed in DFC, “in an efficient market, you can trust prices, for they impound all
available information about the value of each security.”320 Aruba’s stock traded briefly
319
Dell, 2017 WL 6375829, at *17.
320
DFC, 172 A.3d at 370 (citation and internal quotation marks omitted).
77
above the deal price, indicating the market took into account both the announcement of the
deal and Aruba’s strong results. Viewed within the framework established by DFC and
Dell, the record does not provide a persuasive reason to question the reliability of Aruba’s
trading price based on the decision by Aruba management to bundle together two pieces of
information.321
4. The Conclusion Regarding The Market Price Evidence
Aruba’s thirty-day average unaffected market price was $17.13.322 Viewed within
the framework established by DFC and Dell, Aruba’s market price provides reliable
evidence of the going concern value of the firm.
B. The Deal Price
The Delaware Supreme Court’s recent decisions in DFC and Dell hold that when a
widely held, publicly traded company has been sold in an arm’s-length transaction, the deal
price has “heavy, if not overriding, probative value.”323 Applying that standard in this case,
321
But cf. Jonathan R. Macey & Geoffrey P. Miller, Good Finance, Bad Economics:
An Analysis of the Fraud-on-the-Market Theory, 42 Stan. L. Rev. 1059, 1084-85 (1990)
(explaining that efficient markets may process different types of information at different
rates and with different effects). Perhaps in an appropriate case an expert could opine that
the order in which information was released or the fact that information was bundled
together had some meaningful effect. No one made that argument or offered that opinion
here. Absent a case-specific expert opinion supported by credible evidence and the weight
of social-science research, I do not believe a trial judge has the flexibility to disregard the
Delaware Supreme Court’s framing of the implications of the efficient capital markets
hypothesis.
322
JX 659.
323
Dell, 2017 WL 6375829, at *22.
78
the merger price carries heavy weight, although the inclusion of elements of value arising
from the merger requires adjustments to generate an indication of fair value.
1. The Role Of The Deal Price
On three occasions, the Delaware Supreme Court has declined to establish a
presumption regarding the relationship between the deal price and fair value. In Golden
Telecom, the high court explained that “Section 262(h) neither dictates nor even
contemplates that the Court of Chancery should consider the transactional market price of
the underlying company. Rather, in determining ‘fair value,’ the statute instructs that the
court ‘shall take into account all relevant factors.’”324 The court reasoned that “[r]equiring
the Court of Chancery to defer—conclusively or presumptively—to the merger price, even
in the face of a pristine, unchallenged transactional process, would contravene the
unambiguous language of the statute and the reasoned holdings of our precedent.”325
In DFC, the Delaware Supreme Court again rejected a request to establish a
presumption that the deal price reflects fair value, seeing “no license in the statue for
creating a presumption” and expressing doubt about “our ability to craft, on a general basis,
the precise pre-conditions that would be necessary to invoke a presumption of that kind.”326
At the same time, the Delaware Supreme Court cautioned that its
324
Golden Telecom, Inc. v. Glob. GT LP, 11 A.3d 214, 217-18 (Del. 2010) (quoting
8 Del. C. § 262(h)).
325
Id. at 218.
326
DFC, 172 A.3d at 366.
79
refusal to craft a statutory presumption in favor the deal price when certain
conditions pertain does not in any way signal our ignorance to the economic
reality that the sale value resulting from a robust market check will often be
the most reliable evidence of fair value, and that second-guessing the value
arrived upon by the collective views of many sophisticated parties with a real
stake in the matter is hazardous.327
The Delaware Supreme Court also cautioned that “we have little quibble with the economic
argument that the price of a merger that results from a robust market check, against the
back drop of a rich information base and a welcoming environment for potential buyers, is
probative of the company’s fair value.”328
The DFC court reversed a decision by this court to give only one-third weight to the
deal price. The high court noted that the trial court had made the following post-trial
findings of fact:
i) the transaction resulted from a robust market search that lasted
approximately two years in which financial and strategic buyers had an open
opportunity to buy without inhibition of deal protections;
ii) the company was purchased by a third party in an arm’s length sale; and
iii) there was no hint of self-interest that compromised the market check.329
The high court further observed that
[a]lthough there is no presumption in favor of the deal price, under the
conditions found by the Court of Chancery, economic principles suggest that
the best evidence of fair value was the deal price, as it resulted from an open
process, informed by robust public information, and easy access to deeper,
327
Id.
328
Id.
329
Id. at 349 (formatting added).
80
non-public information, in which many parties with an incentive to make a
profit had a chance to bid.330
The Delaware Supreme Court determined that the Court of Chancery’s “decision to give
one-third weight to each metric was unexplained and in tension with the Court of
Chancery’s own findings about the robustness of the market check.”331 The senior tribunal
therefore reversed and remanded the case so the trial court could “reassess [its] conclusion
as to fair value in light of our decision.”332
Most recently, in Dell, the Delaware Supreme Court reiterated that “there is no
requirement that the court assign some mathematical weight to the deal price.” 333 On the
facts presented, however, the high court held that I “erred in not assigning any
mathematical weight to the deal price” under circumstances suggesting that “the deal price
deserved heavy, if not dispositive weight.”334 Those circumstances included (i) stock
market attributes associated with efficient trading335 and (ii) a sale process that involved
330
Id.
331
Id. at 388.
332
Id. at 388-89.
333
Dell, 2017 WL 6375829, at *16.
334
Id.; accord id. at *22 (“Overall, the weight of evidence shows that Dell’s deal
price has heavy, if not overriding, probative value.”).
335
Id. at *17.
81
“fair play, low barriers to entry, outreach to all logical buyers, and the chance for any
topping bidder to have the support of Mr. Dell’s own votes.”336
The decisions in DFC and Dell identify factors that make the deal price so probative
that a trial court abuses its discretion by failing to give it enough weight, but they provide
less guidance for determining when a process is sufficiently bad to warrant discounting the
deal price. One passage in the DFC decision suggests an answer to the latter inquiry by
stating that
the purpose of an appraisal is not to make sure that the petitioners get the
highest conceivable value that might have been procured had every domino
fallen out of the company’s way; rather, it is to make sure that they receive
fair compensation for their shares in the sense that it reflects what they
deserve to receive based on what would fairly be given to them in an arm’s-
length transaction.337
This test focuses on whether the deal in question was an arm’s-length transaction, and it
appears to rule out inquiry into whether a different transaction process might have achieved
a superior result. A passage from Dell points in a similar direction, where the high court
stated: “The issue in an appraisal is not whether a negotiator has extracted the highest
possible bid. Rather, the key inquiry is whether the dissenters got fair value and were not
exploited.”338 As with the passage from DFC, the passage from Dell appears to discount
whether a different approach might have done better. The Dell test turns on exploitation.
336
Id. at *26.
337
DFC, 172 A.3d at 370-71.
338
Dell, 2017 WL 6375829, at *24. The reference to “dissenters” in this sentence
strikes me as odd because the dissenters have opted not to receive the merger consideration.
82
2. The Deal Price In This Case
In this case, the HP-Aruba transaction was a third-party, arm’s-length merger. HP
was not a controller engaged in squeezing out the minority. Nor was the transaction a
management buyout where insiders’ informational advantages might have raised concerns.
The transaction did not involve particular stockholders, such as members of management
or a large blockholder, rolling over their shares or otherwise receiving differential
treatment. Nothing about the deal structure could be considered exploitive.
The ultimate decision makers for Aruba—the Board and the stockholders—did not
labor under any conflicts of interest. The Board was disinterested and independent. Of its
eight members, six were experienced, outside directors. Aruba’s stockholder base was
widely dispersed. No one identified any stockholders with a dominant position or divergent
interests.
Aruba negotiated with HP over the price. On January 31, 2015, HP sent Aruba a
written indication of interest for a cash transaction at $23.25 per share, for an aggregate
valuation of $2.563 billion.339 Aruba countered at $29 per share.340 While HP considered
By seeking appraisal, they avoided the possibility of being “exploited” by the deal. The
larger point seems to be for the trial judge to assess whether the deal price is somehow
exploitive such that it would exploit the dissenters for the court to use it as the basis for
awarding fair value.
339
JX 452 at 3 (“Indicative Non-Binding Proposal”).
340
JX 234 (minutes); accord Warmenhoven Tr. 261 (testifying the Aruba Board
came to the figure because “[w]e wanted to reaffirm that we thought there was great value
there, meaning they should bid higher, but we felt like if we put a 3 in the first digit and
started at 30, that they might conclude that’s too big a gap to close and stop discussion”).
83
Aruba’s counter, it learned that Aruba in fact had fewer shares outstanding than HP had
believed.341 HP had based the $23.25 per share price on Aruba’s old share count. When HP
recalculated its offer to reflect the correct share count, the same aggregate consideration of
$2.563 billion resulted in a price per share of $23.89.342 Based on that calculation, HP
raised its bid to $24.67 per share, or just over 3% on an as-adjusted basis.343 Aruba asked
for $25.00 per share, but HP held firm.344
There is evidence that the price credited Aruba with a portion of the substantial
synergies that the transaction would generate from combining Aruba’s strength in wireless
networking with HP’s strength in wired systems.345 HP’s final internal analysis, reflecting
341
JX 491 (email from Barclays to HP relaying Evercore’s counter); accord JX 488
at 4 (internal Evercore emails confirming change in shares outstanding and suggesting
repurchases caused the change).
342
JX 798 at 2 (Barclays slide entitled “Impact of New Share Count and B/S Data
on Offer Price”).
343
Proxy at 52.
344
Id.
345
See Marcus Tr. 151; Warmenhoven Tr. 264 (describing HP and Aruba as a
“perfect match” because “HP had all the switches and routers” but “no WiFi to speak of”);
id. at 276-77 (calling the synergies “[v]ery substantial” and noting the acquisition “was
part of not just acquiring share in networking, but a bigger, broader enterprise strategy”);
Orr Tr. 434-35 (discussing the benefits the transaction offered to both Aruba and HP);
Galvin Tr. 578 (“[T]he win-win is HP provided us the muscle that we never had to really
stand up to Cisco in the high end of the corporate stack, in the big deals. And particularly
when you start to talk about a wired-wireless convergence, they provided a tremendous
amount of muscle for us to do that.”); DePuy Tr. 682 (“[W]hen you put those two together,
they could attack customers in a way they could neither do individually.”); Dages Tr. 753-
54, 783; see also JX 805 at 2 (late-stage internal HP approval deck noting the acquisition
“will provide complementary go to market and wireless capabilities and uniquely position[]
HP as the market moves towards a unified wired/wireless solution”); id. at 7-8 (estimating
84
independent research and validation by McKinsey, anticipated total synergies of $1.41
billion, consisting of revenue synergies of $1.175 billion and cost synergies of $235
million.346
approximately $1.4 billion in synergies); id. at 26 (slide titled “[Aruba] Fills Key Product
Gaps Across HPN’s WLAN Product Portfolio”).
346
JX 805; see also JX 350 (similar deck for earlier approval); JX 356 (same); JX
383 (McKinsey synergy analysis). The petitioners argued that the court cannot rely on HP’s
analyses because they are hearsay. The petitioners raised their objections in the Pre-Trial
Order and again at trial. See PTO ¶¶ 585-86 & Ex. A (objecting to JX 350 and JX 805);
Warmenhoven Tr. 273-74 (objecting to JX 350 as “hearsay posed” to Warmenhoven
because “[h]e’s never seen the document”).
Hearsay “is a statement, other than one made by the declarant while testifying at the
trial or hearing, offered in evidence to prove the truth of the matter asserted.” D.R.E.
801(c). “Hearsay is not admissible except as provided by law or by [the Delaware Uniform
Rules of Evidence].” D.R.E. 802. Rule of Evidence 803(6) recognizes an exception for
documents
made at or near the time by, or from information transmitted by, a person
with knowledge, if kept in the course of a regularly conducted business
activity, and if it was the regular practice of that business activity to make
the [document], all as shown by the testimony of the custodian or other
qualified witness . . . unless the source of information or the method or
circumstances of preparation indicate lack of trustworthiness.
D.R.E. 803(6). “The business records exception to the hearsay rule permits the admission
of hearsay documents that are likely to be trustworthy because a business regularly
maintains and relies on them.” Brown v. Liberty Mut. Ins. Co., 774 A.2d 232, 239 (Del.
2001). “The principal precondition to admission of documents as a business record . . . is
that the records have sufficient indicia of trustworthiness to be considered reliable.” Id.
(quoting Saks Int’l, Inc. v. M/V Exp. Champion, 817 F.2d 1011, 1013 (2d Cir. 1987)).
Johansson testified extensively by deposition about HP’s thorough, routine approval
process for reviewing and approving transactions of this nature. See PTO ¶ 575 (stipulating
Johansson would testify “by deposition”). He testified that the process regularly includes
an “Approval to Negotiate,” such as the one contained in JX 350, and an “Approval to
Sign,” such as the one contained in JX 805. See Johansson Dep. 22-25. Although
Johansson’s testimony did not explicitly address those two exhibits, his testimony satisfies
85
HP and Aruba agreed to terms for the merger agreement that the petitioners have
not meaningfully challenged. The merger agreement contained a no-shop clause that
prevented Aruba from communicating with third parties about an acquisition proposal
unless both the Aruba Board’s fiduciary duties required it and the acquisition proposal was
reasonably likely to lead to a superior proposal.347 The merger agreement granted HP an
unlimited match right, with five days to match the first superior proposal and two days to
match any subsequent increase,348 and during the match period Aruba had to negotiate
exclusively and in good faith with HP.349 The merger agreement provided that if the Aruba
Board complied with the no-solicitation provision, including the match right, then the
Aruba Board could terminate the merger agreement to accept a superior proposal after first
paying HP a termination fee of $90 million, or 3% of equity value.350 This combination of
defensive provisions would not have supported a claim for breach of fiduciary duty.351
me that HP prepared and maintained them in the ordinary course of its business. They
therefore have the indicia of trustworthiness contemplated by Rule of Evidence 803(6).
The petitioners’ selective introduction of similar, and in some cases nearly identical,
documents bolsters this conclusion. See, e.g., JX 356 (draft Approval to Negotiate deck);
JX 398 at 6 (internal HP “discussion materials” deck); JX 780 (later-dated internal HP
“discussion materials” deck).
347
See JX 907 § 5.2(b)(ii).
348
Id. at § 5.2(b)(ii)(A), (B).
349
Id. at § 5.2(b)(ii)(B)(3).
350
Id. at § 7.2(b)(iv).
351
See, e.g., Dent v. Ramtron Int’l Corp., 2014 WL 2931180, at *8-10 (Del. Ch.
June 30, 2014) (rejecting fiduciary challenge to “(1) a no-solicitation provision; (2) a
standstill provision; (3) a change in recommendation provision; (4) information rights for
86
Considering these factors as a whole, the HP-Aruba merger looks like a run-of-the-
mill, third-party deal. Nothing about it appears exploitive. Particularly given the inclusion
of synergies, there is good reason to think that the deal price exceeded fair value and, if
anything, should establish a ceiling for fair value.352
[the acquirer]; and (5) a $5 million termination fee” where the termination fee represented
4.5% of equity value and the change of recommendation provision included an unlimited
match right); In re Novell, Inc. S’holder Litig., 2013 WL 322560, at *10 (Del. Ch. Jan. 3,
2013) (describing “the no solicitation provision, the matching rights provision, and the
termination fee” as “customary and well within the range permitted under Delaware law”
and observing that “[t]he mere inclusion of such routine terms does not amount to a breach
of fiduciary duty”); In re Answers Corp. S’holders Litig., 2011 WL 1366780, at *4 & n.47
(Del. Ch. Apr. 11, 2011) (describing “a termination fee plus expense reimbursement of
4.4% of the Proposed Transaction’s equity value, a no solicitation clause, a ‘no-talk’
provision limiting the Board’s ability to discuss an alternative transaction with an
unsolicited bidder, a matching rights provision, and a force-the-vote requirement” as
“standard merger terms” that “do not alone constitute breaches of fiduciary duty” (citation
omitted)); In re Atheros Commc’ns, Inc. S’holder Litig., 2011 WL 864928, at *7 n.61 (Del.
Ch. Mar. 4, 2011) (characterizing a no-solicitation provision, a matching right, and a
termination fee as “standard merger terms” that “do not alone constitute breaches of
fiduciary duty” (citation omitted)); In re 3Com S’holders Litig., 2009 WL 5173804, at *7
(Del. Ch. Dec. 18, 2009) (describing “the no solicitation provision, the matching rights
provision, and the termination fee” as “standard merger terms” that “do not alone constitute
breaches of fiduciary duty”).
352
See DFC, 172 A.3d at 371 (“[I]t is widely assumed that the sale price in many
M&A deals includes a portion of the buyer’s expected synergy gains, which is part of the
premium the winning buyer must pay to prevail and obtain control.”); Merion Capital L.P.
v. Lender Processing Servs., Inc., 2016 WL 7324170, at *11, *26 (Del. Ch. Dec. 16, 2016)
(noting that evidence supported the view that the merger consideration “included a portion
of the value that [the acquirers] expected to generate from synergies” and that “[t]he
existence of combinatorial synergies provides an additional reason to think that” the merger
consideration “exceeded the fair value of the Company”); see also Olson v. EV3, Inc., 2011
WL 704409, at *10 (Del. Ch. Feb. 21, 2011) (“In an arm’s-length, synergistic transaction,
the deal price generally will exceed fair value because target fiduciaries bargain for a
premium that includes . . . a share of the anticipated synergies . . . .”); Union Ill. 1995 Inv.
Ltd. P’ship v. Union Fin. Gp., Ltd., 847 A.2d 340, 356 (Del. Ch. 2003) (Strine, V.C.)
(“[A]cquirers typically share a portion of synergies with sellers in sales transactions and
87
a. The Absence Of Competition
In an effort to undermine the probative value of the deal price, the petitioners argue
that HP did not face a meaningful threat of competition. They note that the recent decisions
in Dell and DFC cited with approval the open nature of the deal processes in those cases.353
The Dell and DFC decisions did not hold that a deal price would be rendered
unreliable in the absence of competition. Instead, the high court indicated that, for an
that portion is value that would be left wholly in the hands of the selling company’s
stockholders, as a price that the buyer was willing to pay to capture the selling company
and the rest of the synergies.”).
353
See Dell, 2017 WL 6375829, at *20-22 (describing company’s efforts to generate
competition for the buy-out group); DFC, 172 A.3d at 349 (relying on the Court of
Chancery’s finding that “the transaction resulted from a robust market search that lasted
approximately two years in which financial and strategic buyers had an open opportunity
to buy without inhibition of deal protections”). Before Dell and DFC, a series of Court of
Chancery decisions had stressed the importance of competition during the sale process. See
In re PetSmart, Inc., 2017 WL 2303599, at *40 n.439 (Del. Ch. May 26, 2017) (giving
exclusive weight to merger price where “negotiated at arm’s-length, in real time, after a
well-run pre-signing auction that takes place in the midst of a fully functioning market”);
Merion Capital LP v. BMC Software, Inc., 2015 WL 6164771, at *14-15 (Del. Ch. Oct. 21,
2015) (giving exclusive weight to merger price where the company conducted “a robust,
arm’s-length sales process” that involved “two auctions over a period of several months,”
and “was able to and did engage multiple potential buyers during these periods,” and where
the lone remaining bidder “raised its bid multiple times because it believed the auction was
still competitive”); LongPath Capital, LLC v. Ramtron Int’l Corp., 2015 WL 4540443, at
*9 (Del. Ch. June 30, 2015) (relying on “thorough” sale process initiated in response to “a
well-publicized hostile bid and a target actively seeking a white knight”); In re Appraisal
of Ancestry.com, Inc., 2015 WL 399726, at *1 (Del. Ch. Jan. 20, 2015) (giving exclusive
weight to the deal price where the transaction resulted from an “auction process, which
process itself involved a market canvas and uncovered a motivated buyer”); Merlin P’rs
LP v. AutoInfo, Inc., 2015 WL 2069417, at *12 (Del. Ch. Jan. 9, 2015) (giving exclusive
weight to merger price that “was negotiated at arm’s length, without compulsion, and with
adequate information” and it was “the result of competition among many potential
acquirers”); Huff Fund Inv. P’ship v. CKx, Inc., 2013 WL 5878807, at *14 (Del. Ch. Nov.
1, 2013) (evaluating sale process and concluding that “the bidders were in fact engaged in
88
appraisal petitioner to call into question a deal process based on lack of competition, the
petitioner should be able to point to a likely bidder and make a persuasive showing that
increased competition would have led to a better result.354 The Dell decision stressed that
“[f]air value entails at minimum a price some buyer is willing to pay—not a price at which
no class of buyers in the market would pay.”355 “[I]f a company is one that no strategic
buyer is interested in buying, it does not suggest a higher value, but a lower one.” 356
Other aspects of the Dell and DFC decisions similarly discounted the importance of
competition. The DFC decision stressed that the purpose of an appraisal “is not to make
sure that the petitioners get the highest conceivable value,”357 and the Dell decision
a process resembling the English ascending-bid auction” involving direct competition
between bidders); Union Ill., 847 A.2d at 359 (using merger price as “best indicator of
value” where the merger “resulted from a competitive and fair auction” in which “several
buyers with a profit motive” were able to evaluate the company and “make bids with actual
money behind them”).
354
See Dell, 2017 WL 6375829, at *20 (“Nothing in the record suggests that
increased competition would have produced a better result.”); id. at *21 (“The Court of
Chancery stressed its view that the lack of competition from a strategic buyer lowered the
relevance of the deal price. But its assessment that more bidders—both strategic and
financial—should have been involved assumes there was some party interested in
proceeding. Nothing in the record indicates that was the case.”); see also id. at *23
(“[A]side from the theoretical, the Court of Chancery did not point to any bidder who
actually shied away from exploring an acquisition out of fear of the winner’s curse
phenomenon.”); id. at *25 (“[T]he court did not identify any possible bidders that were
actually deterred because of Mr. Dell’s status.”).
355
Id.
Id.; see also DFC, 172 A.3d at 375 n.154 (“[T]he absence of synergistic buyers
356
for a company is itself relevant to its value.”).
357
DFC, 172 A.3d at 370.
89
cautioned that “[t]he issue . . . is not whether a negotiator has extracted the highest possible
bid.”358 Competition might help a seller extract a higher price, but that is not the focus of
the inquiry under Dell and DFC.
The role of competition also must be evaluated in light of the Delaware Supreme
Court’s endorsement of the efficient capital markets hypothesis. At the trial level,
Chancellor Bouchard found in DFC and I found in Dell that the market prices of the
acquired firms were depressed and had not been representative of fair value. From that
factual starting point, we examined the sale processes for evidence of competition or a
meaningful threat of competition that would be sufficient to overcome the market
mispricing and generate fair value. On appeal in DFC and Dell, the Delaware Supreme
Court relied on the efficient capital markets hypothesis to hold that the factual findings
about market troughs constituted abuses of discretion. From that different factual starting
point, there is less need for competition among bidders to drive a meaningful sale process,
and less need for a court to delve into the details. With a reliable market price as the base
line, an arm’s-length deal at a premium is non-exploitive. By definition, it provides
stockholders with “fair compensation for their shares,” defined as “what they deserve to
receive based on what would fairly be given to them in an arm’s-length transaction.”359
358
Dell, 2017 WL 6375829, at *24.
359
DFC, 172 A.3d at 371.
90
In this case, the petitioners proved that HP knew it did not face a meaningful threat
of competition. In October 2014, during its first pass at Aruba, HP’s executives established
a “pretty open dialogue” with Orr,360 and he informed HP that Aruba was “not running a
sales process.”361 Orr did not make any effort to create the impression of competition by
“posturing about trying to pin [HP] against someone else.”362 HP consequently did not feel
any pressure to bid. After three full months of discussions and due diligence, HP still had
not put a number on the table.
Aruba has pointed out that, at the end of November 2014, Orr decided that the
discussion had dragged on long enough, and he terminated them with the Aruba Board’s
backing.363 Under different circumstances, this move might have given Aruba some
bargaining leverage by signaling that Aruba was prepared to pursue its standalone plan.364
360
See JX 348 (email from Neri to Whitman).
361
Johansson Dep. 112.
362
Id.
363
See Proxy at 48-49; see also JX 328 (“We have been in dialogue with [HP] since
August 27, and have not received a proposal in all this time. . . . We cannot continue to
wait for them.”); JX 367 (email from Aruba to Qatalyst advising it had “decided to
terminate discussions with [HP] at this time” and that it would “let [Qatalyst] know if
discussions resume”); JX 372 at 1-2 (email from Aruba General Counsel relaying
conversation with Johansson during which she explained that “[w]e feel it’s time to
suspend discussions” because “it has reached a point where we need to focus on running
our business and not be distracted by discussions that did not seem to be progressing”).
364
See Lender Processing, 2016 WL 7324170, at *19 (“The Board’s track record of
saying ‘no’ gave [the acquirers] a credible reason to believe that the Board would not sell
below its internal reserve price.”).
91
But in this case, Orr undercut that implication when he had dinner with Whitman and Neri
on January 21, 2015. After Whitman told Orr that HP still wanted to acquire Aruba,365 Orr
responded enthusiastically and proposed to announce the deal at an industry conference
during the first week of March.366 Days later, when an HP executive called Orr to say that
HP would be sending over its proposal, Orr suggested getting a deal announced by the end
of February.367
HP’s bidding tactics suggest that HP knew it did not face competition. Before the
dinner with Orr, HP planned to open with $24.00 per share and negotiate up to $25.00.368
After Orr’s response, HP lowered its opening bid to $23.25. 369 When Aruba countered at
$29, Barclays told Evercore that any price increase would be on the scale of “quarters, not
dollars.”370 Based on a new share count that Evercore provided, HP recalculated its opening
bid as equating to $23.89 per share.371 This was still below the planned opening bid of
$24.00 per share that HP contemplated before Whitman and Neri had dinner with Orr. With
365
PTO ¶ 155.
366
JX 423 (email from Orr relaying exchange to Aruba management).
367
JX 454 (internal Barclays email summarizing executive’s relay of the call).
368
JX 398 at 1-2 (cover email for deck seeking board approval); JX 805 at 12
(internal HP deck).
369
JX 452 at 3 (“Indicative Non-Binding Proposal”).
370
Proxy at 51.
371
JX 798 at 2 (Barclays slide entitled “Impact of New Share Count and B/S Data
on Offer Price”).
92
the lower share count, the same enterprise value generated a price of $24.67 per share.372
HP told Aruba that its best and final bid was $24.67, which HP internally called “the new
$24.00” because the price merely adjusted for the change in Aruba’s public share count.373
HP increased its bid to $24.67 and refused to budge. The deal ended up at the number HP
had planned to use for its opening bid.374
So far, so good for the petitioners. But although they proved that HP knew it did not
face a meaningful threat of competition, they failed to identify any other likely bidder who
would have paid more for Aruba. The Dell decision teaches that “[f]air value entails at
minimum a price some buyer is willing to pay.”375 Elaborating, the court emphasized that,
if no one else is interested in buying, “it does not suggest a higher value, but a lower one.”376
In this case, Aruba (through Qatalyst) contacted six potential strategic partners; none were
interested.377 Nor did anyone come forward after the deal announcement. Under Dell and
372
Id.
373
JX 497 (internal HP email from Johansson); accord JX 805 at 12 (timeline
showing “02/08 – HP offer $24.00 and present as best and final. [Aruba] provide new
shares outstanding and cash information supporting paying $24.67 at the same enterprise
value.”).
374
JX 235 at 1-2 (minutes); Proxy at 52.
375
Dell, 2017 WL 6375829, at *21.
Id.; see also DFC, 172 A.3d at 375 n.154 (“[T]he absence of synergistic buyers
376
for a company is itself relevant to its value.”).
377
See Warmenhoven Tr. 260 (“[I]t was definitive noninterest.”); id. 329-30
(agreeing potential bidders provided “feedback” that they “had no strategic interest in
acquiring Aruba” and that it “[h]ad nothing to do with the price”).
93
DFC, the petitioners failed to undermine the deal price by showing a lack of competition.
Instead, the lack of competition supports the reliability of the deal price.
Under Dell and DFC, the test instead is whether the Aruba-HP transaction was
exploitive. “[T]he purpose of an appraisal is not to make sure that the petitioners get the
highest conceivable value . . . .”378 This decision already has found that Aruba’s stock price
exhibited attributes associated with the premises of the efficient capital markets hypothesis.
The merger consideration of $24.67 per share provided Aruba’s stockholders with a
significant premium over a reliable market price. As a result, the Aruba-HP transaction
provided stockholders with “fair compensation for their shares,” defined as “what they
deserve to receive based on what would fairly be given to them in an arm’s-length
transaction.”379
b. The Negotiators’ Incentives
The petitioners next contend that the deal price in this case is unreliable because
Aruba’s negotiators were compromised. The petitioners argue that Aruba’s bankers catered
to HP, and that Orr faced divergent interests of his own. Citing DFC and various trial court
378
DFC, 172 A.3d at 370.
379
Id. at 371.
94
rulings, they argue that the deal price should be discounted because Aruba lacked
representatives who engaged in vigorous, arm’s-length bargaining on its behalf.380
As with the element of competition, the petitioners regard the negotiators’
incentives as a thread which, if pulled, could unravel the sweater. But like competition, the
concept of negotiation cannot be excised from the broader framework that the DFC and
Dell decisions established. The Dell opinion cautioned explicitly that “[t]he issue . . . is not
whether a negotiator has extracted the highest possible bid.”381 If this were a case where
the market price was depressed or unreliable, then perhaps a detailed inquiry into issues
like competition or negotiation might become important in assessing whether the deal
process achieved fair value. In a scenario where the underlying market price is reliable,
competition and negotiation become secondary. Under those circumstances, an arm’s-
380
See, e.g., DFC, 172 A.3d at 349 (relying on the Court of Chancery’s findings that
“the company was purchased by a third party in an arm’s length sale” and that “there was
no hint of self-interest” in the transaction); PetSmart, 2017 WL 2303599, at *40 n.439
(acknowledging the persuasiveness of a merger price that was “negotiated at arm’s-
length”); BMC, 2015 WL 6164771, at *14 (giving exclusive weight to merger price where
“[t]he record here demonstrates that the Company conducted a robust, arm’s-length sales
process”); AutoInfo, 2015 WL 2069417, at *12 (relying on the merger price where “[t]he
Merger was negotiated at arm’s length, without compulsion, and with adequate
information”); CKx, 2013 WL 5878807, at *13 (giving exclusive weight to merger price
where “the process by which CKx was marketed to potential buyers was thorough,
effective, and free from any specter of self-interest or disloyalty”); Highfields Capital, Ltd.
v. AXA Fin., Inc., 939 A.2d 34, 42 (Del. Ch. 2007) (stating that a reviewing court should
give “substantial evidentiary weight” to the deal price when “the transaction giving rise to
the appraisal resulted from an arm’s-length process between two independent parties”).
381
Dell, 2017 WL 6375829, at *24.
95
length deal at a premium over the market price is non-exploitive. By definition, it gives
stockholders “what would fairly be given to them in an arm’s-length transaction.”382
In this case, the petitioners proved that the Aruba’s bankers catered to HP. Once
Whitman refused to work opposite Qatalyst,383 Quattrone and Boutros perceived HP’s
stance as an existential threat to their technology-centered franchise.384 They wanted and
382
DFC, 172 A.3d at 371.
383
JX 412 at 1 (“Meg [Whitman] spoke with conviction and emotion over dinner
that they [Qatalyst] were guilty.” (referring to alleged fraud involving sale of Autonomy to
HP)); JX 420 (Warmenhoven reporting that Whitman said “Qatalyst, Frank [Quattrone] &
George [Boutros] are not welcome in the negotiations. The issue is bigger than Autonomy
and goes back to EBay & Yahoo.”); JX 426 (email from Orr to Aruba management
updating them on Qatalyst situation and reporting that, when Boutros learned of HP’s
position, he was “so emotional, defensive AND offensive (to Meg [Whitman]) that he
hardly let me talk”); accord Warmenhoven Tr. 252-53 (testifying that Whitman told him,
“I don’t care who you get, but it can’t be Qatalyst” and that “I’m not going to take into my
boardroom a deal proposed by Qatalyst”). Aruba has argued that, although Whitman
refused to work with Qatalyst, she did not pick Aruba’s banker. To my mind, these are
questions of degree, with vetoing a banker to reduce the other side’s choice set operating
as a less extreme version of picking the other side’s banker. In this case, however, vetoing
effectively meant picking. Warmenhoven testified that, when considering bankers, Francis
and Qatalyst were the only names who came up and that “there was no third name
mentioned.” Warmenhoven Tr. 238.
384
JX 437 at 1 (Warmenhoven explaining that, in Qatalyst’s view, “[t]he issue is
not Aruba. It is about the [Qatalyst] brand . . . . If word spreads that they were tossed from
this deal because HP will not engage with them on any M&A transaction, that creates a big
issue for them. . . . Frank wants to save his firm . . . . The relationship, or lack thereof,
between [Qatalyst] and HP / Meg [Whitman] is now their focus.”); see also JX 521
(Quattrone expressing concern that “Evercore will for sure be beating its chest about its
role in this deal and could very well be telling the world that HP wouldn’t do the deal if we
were the advisor”).
96
needed to get back on HP’s good side. Their primary goal from that point on was to
rehabilitate their relationship with HP.385
Evercore also wanted to get on HP’s good side. The firm was a new entrant in the
Silicon Valley market and had recently hired Francis as “their first tech sector person.”386
Evercore understood the value of completing a highly visible deal as their first Silicon
Valley transaction,387 and they saw the sale process as an extended audition for HP’s
385
See JX 430 (Quattrone asking Warmenhoven to intervene with Whitman on his
behalf); JX 434 at 1 (Quattrone asking Whitman for “the opportunity to speak or meet with
you at your earliest convenience to understand from you directly what your concerns are
and give me the opportunity to address them” and promising that “while our loyalties are
always to our client on any assignment, I am confident we can address your concerns, play
a constructive role and engage with your team in a professional manner”); JX 440 at 1
(email from Orr to Aruba management asking “how much time we allow” before saying
“sorry, [Qatalyst]. We need to protect our transaction. [W]e cannot worry about your
brand!”). At Quattrone’s behest, Warmenhoven sent at least three emails to Whitman in a
forty-eight-hour period in which he vouched for Qatalyst and asked Whitman to meet with
Quattrone. See JX 430 (asking Whitman to meet personally with Quattrone); JX 436
(vouching for Quattrone and expressing confidence that “if you two could ‘clear the air’
[then] Frank and [Qatalyst] could be constructive participants in getting this deal done”);
id. (following-up with Whitman and asking whether her objection was to Qatalyst or only
to Boutros).
386
JX 426 at 2 (internal Aruba email); see also JX 5 (executed engagement letter
with Evercore showing fee of ¼%); JX 413 (Warmenhoven observing that “Evercore is
new in the tech sector, so they may be willing to do a deal at ¼% just to get a deal done
that they can brag about publicly”); Warmenhoven Tr. 241 (explaining that, when HP first
approached Aruba in August 2014, he considered contacting Francis, but passed because
he had no prior experience with Evercore and “didn’t know the team”).
387
See, e.g., JX 427 (“Truly amazing! This is a franchise transaction! Well done!”);
id. (“This is franchise defining. Well done, and it shows the power of loyalty, which you
have always eschewed! [sic]”); JX 428 (“Just remarkable, Stu [Francis.] What a coup!
Would be, as you say, a dynamic advance for Evercore in The Valley.”); JX 439
(congratulatory emails from two additional senior bankers).
97
business.388 During meetings between Aruba and HP, Evercore positioned itself as the
banker to the deal. After one session, Francis reported to his colleagues that “it was fun to
be the only banker in the room and help both sides think through some issues.”389 He even
bragged about having done “a ‘masterful’ job of taking [M]eg [Whitman] through the
issues as if we were her advisor.”390 Even accepting that investment bankers are always on
the lookout for new clients, Evercore’s eagerness in this case went far enough to undermine
its role as Aruba’s advisor.
Warmenhoven testified that the bankers’ relationships with HP did not negatively
affect the negotiations and that having two bankers meant Aruba had “two star players on
the same team.”391 Orr testified similarly.392 Notwithstanding this testimony, I credit that
the bankers’ interests made them less effective negotiators than they might have been
The petitioners likewise proved that Orr had divergent interests, although his
motivations were subtler and less openly mercenary. The sale to HP helped Orr achieve a
combination of personal and professional goals that included hastening his return to a
388
JX 505 (Evercore bankers noting that that “[Whitman] is going to be very active”
and that HP “[w]ould be a great new relationship.”).
389
Id.
390
Id.
391
Warmenhoven Tr. 255.
392
Orr Tr. 452.
98
personally fulfilling retirement.393 That said, he was not about to leave Aruba under
circumstances that would hurt the Company or its employees. 394 From his standpoint,
selling Aruba to HP was the perfect solution.395
393
See Warmenhoven Tr. 228-31; id. at 273 (Orr’s “going to be 66 in March. He’s
told me many times that he did not want to be in a regular employment situation when he
turned 65”); id. at 289 (“[H]e was going to leave before his 65th birthday.”); Orr Tr. 371-
73 (describing activities during retirement, including spending time with his children,
learning to cook, traveling to Japan and taking Japanese classes, working with The
Philanthropy Workshop, and pursing other philanthropic endeavors including founding a
non-profit business that provides low-power, solar-panel-driven phones); id. at 377 (“So
every year I say, you know, it’s time. There’s a lot of things I need to do. I need to go back
to my philanthropic work. My kids in Africa keep yelling at me to go back and visit. . . .
So I was just getting really anxious to do my own things.”); id. at 378 (“I honestly am
having fun building this kind of transforming company against the incumbent, and enjoying
kind of stirring up a new way of doing things. But it’s getting to the point that I have to tell
myself there are other things I want to do in life.”).
Ironically, it was Aruba that stressed Orr’s desire to retire in its pre-trial brief and at
trial as a means of undermining the reliability of management’s projections, which Aruba
argued were too aggressive because they assumed that Orr would stay with the Company.
See Dkt. 138 at 20-21. Aruba also sought to use Orr’s desire to retire to blunt the
petitioners’ argument that HP’s unauthorized discussions with Orr about post-transaction
employment undermined the negotiations. As Aruba pitched it, Orr agreed to remain
reluctantly. See id. at 44 (“Orr will testify that he planned to retire, but he was motivated
by loyalty to his team and a request from HP to stay on.”). Once Aruba introduced the
retirement theory, the petitioners embraced it as an additional factor that undermined the
course of the negotiations, while disputing that Aruba’s ability to achieve its projections
depended on Orr.
Aruba also helped prove the petitioners’ case on this point by focusing at trial on an
email exchange from March 7, 2015, between Orr and an Aruba director that discussed
why the merger benefitted Aruba’s customers and employees, including its salesforce in
the field. See JX 535; see also Warmenhoven Tr. 177-83 (discussing JX 535); Orr Tr. 381-
97 (same). Aruba argued that this email showed that the HP deal was a good one. Whether
the deal was good for these corporate constituencies is a different question than whether it
provided fair value for stockholders. What the email did show is that Orr pursued the HP
deal (at least in part) because of loyalties to constituencies beyond the stockholders. In the
99
As with the issue of competition, the answer on negotiation is that the petitioners
proved what they sought to prove, but that is not enough to call into question the deal price
for purposes of appraisal. Once again, “[t]he issue in an appraisal is not whether a
negotiator has extracted the highest possible bid. Rather, the key inquiry is whether the
dissenters got fair value and were not exploited.”396 “[F]air value is just that, ‘fair.’ It does
not mean the highest possible price that a company might have sold for had Warren Buffett
negotiated for it on his best day and the Lenape who sold Manhattan on their worst.”397
grander scheme of life, I find that commendable. For the narrow purpose of Delaware
corporate law, those competing loyalties are factors that a court has to weigh.
394
See Warmenhoven Tr. 286 (“Dominic [Orr] guaranteed to us that he would go
through an orderly transition, that if we found the right person, he would step aside, and
we would just hire the person as CEO. And if we couldn’t find somebody of that
experience, he would stay on for a year and help groom him.”); id. at 290 (“Dom [Orr] was
a very committed CEO, and independent of the financial implications, he would not have
left abruptly. He was a founder of this company. And a founder is . . . it’s like having a
child. You don’t abandon it.”); Orr Tr. 458 (testifying that he would not have left without
a suitable replacement); JX 326 at 1 (Orr explaining that he wanted to sell at a premium,
take care of the employees, and ensure that “the organization and structure is [sic] set up
for success and maintaining fun and pride and minimiz[ing] large company pain”).
395
Aruba has argued that Orr could not have been motivated by a desire to retire
because he agreed to run the legacy business for HP for a period of time after the
acquisition. I think Orr was planning several moves ahead, and he realized that committing
to stay on for a period of time after the acquisition would help get the deal done. That, in
turn, would bring him closer to returning to a retirement during which he had engaged in a
variety of rewarding and commendable pursuits.
396
Dell, 2017 WL 6375829, at *24.
397
DFC, 172 A.3d at 370.
100
The evidence does not convince me that the bankers, Orr, the Aruba Board, and the
stockholders who approved the transaction all accepted a deal price that left a portion of
Aruba’s fundamental value on the table. Perhaps different negotiators could have extracted
a greater share of the synergies from HP in the form of a higher deal price. Maybe if Orr
had been less eager, or if Qatalyst had not been relegated to the back room, then HP would
have opened at $24 per share. Perhaps with a brash Qatalyst banker leading the
negotiations, unhampered by the Autonomy incident, Aruba might have negotiated more
effectively and gotten HP above $25 per share. An outcome along these lines would have
resulted in HP sharing a greater portion of the anticipated synergies with Aruba’s
stockholders. It would not have changed Aruba’s standalone value. Hence, it would not
have affected Aruba’s fair value for purposes of an appraisal.
3. Deducting Synergies
Under Dell and DFC, the deal price in this case has substantial probative value. But
the evidence shows that the deal generated significant synergies. Under the DFC decision,
it is to be assumed that HP shared some of those with Aruba’s stockholders.398 To derive
398
DFC, 172 A.3d at 372; see also Dunmire v. Farmers & Merchs. Bancorp of W.
Penn., Inc., 2016 WL 6651411, at *8 n.95 (Del. Ch. Nov. 10, 2016) (surveying academic
literature); EV3, 2011 WL 704409, at *10 (“In an arm’s-length, synergistic transaction, the
deal price generally will exceed fair value because target fiduciaries bargain for a premium
that includes . . . a share of the anticipated synergies . . . .”).
101
an estimate of fair value, the court must exclude “any synergies or other value expected
from the merger giving rise to the appraisal proceeding itself.”399
The parties agree that it is not possible to determine with precision what portion of
the final deal price reflects synergy value. The respondent’s expert conceded that “[t]he
percentage of synergies actually paid by HP to Aruba cannot be accurately measured.” 400
Delaware decisions have recognized the difficulties inherent in quantifying
synergies.401 Despite these difficulties, this court has used a deal-price-less-synergies
metric. In Union Illinois, Chief Justice Strine, then a Vice Chancellor, started with the deal
consideration of $10.20 per share.402 He then discounted that figure by 13% to reflect the
synergies captured by the seller, basing that figure on the opinion of the respondent’s
valuation expert, and also citing the fairness opinion of the seller’s financial advisor, which
399
Golden Telecom Trial, 993 A.2d at 507.
400
Dages Opening Report ¶ 68.
401
See, e.g., Montgomery Cellular Hldg. Co., Inc. v. Dobler, 880 A.2d 206, 221
(Del. 2005) (“The Court of Chancery was unable precisely to quantify those ‘deal-making’
synergies, because [the respondent] did not present any reliable evidence at trial of what
those synergies were worth.”); ACP Master, Ltd. v. Sprint Corp., 2017 WL 3421142, at
*31 (Del. Ch. July 21, 2017) (recounting respondent synergy estimates, noting that “[o]ther
synergy estimates were higher still,” and concluding that, “[i]f the court relied on
Clearwire’s deal price, it would have to determine the value of those synergies and back
them out”); Ramtron, 2015 WL 4540443, at *26 (acknowledging that the “[p]etitioner’s
approach may understate the net synergies” but nonetheless adopting it because “it better
conforms to the evidence adduced at trial than [the respondent’s] position”).
402
Union Ill., 847 A.2d at 353 n.27, 364.
102
“had mid-range synergy assumptions of 15%-20% for the synergy value that would be
shared” with the seller.403
In the Highfields case, Vice Chancellor Lamb gave 75% weight to a deal-price-less-
synergies metric.404 The transaction price was $31 per share. The respondent’s expert
opined that the deal price incorporated shared synergies equal to 25% of the deal price, or
$7.75 per share. The court rejected this estimate because it relied, in part, on a discounted
cash flow analysis that the expert had declined to rely on when rendering his other valuation
opinions. The court found more credible an analysis prepared by the acquirer, which
estimated the lower end of shared synergies at $9.54 per share. Vice Chancellor Lamb
regarded this estimate as too high, because it undervalued the acquired company in certain
respects. After correcting the acquirer’s estimate to account for the undervaluation, Vice
Chancellor Lamb concluded that the deal price incorporated synergies of $4.12 per share.405
That figure worked out to a deduction of 13%, the same number used in Union Illinois.
In this case, the HP deal team anticipated $1.41 billion of synergies. McKinsey
projected $1.555 billion in synergies. Barclays’ figure was $1.5 billion.406 McKinsey was
an outside consulting firm hired to vet the HP deal team’s calculation, adding some
403
Id. at 353 n.26.
404
Highfields, 939 A.2d at 61.
405
Id. at 60-62.
406
See Dages Opening Report ¶¶ 64-67.
103
credence to its view. This decision therefore uses McKinsey’s figure.407 Aruba’s expert
drew on a March 2013 study by the Boston Consulting Group which suggested that, on
average, sellers collect 31% of the capitalized value of synergies, with the seller’s share
varying widely from 6% to 51%.408 Using these figures, the range of synergy value shared
in the deal could run from $93 million at the low end to $793 million at the high end. The
deal price implied a value for Aruba of $2.651 billion.409 Using the low-end synergy
deduction of $93 million implies a standalone value of $2.558 billion, or $21.08 per share.
Using the high-end synergy deduction of $793 million implies a standalone value of $1.858
billion, or $15.32 per share. The midpoint is a standalone value of $2.208 billion or $18.20
per share. Recognizing that it would be arbitrary to import the 13% synergy figure used in
both Union Illinois and Highfields, that percentage nevertheless implies a standalone value
of $2.306 billion or $19.06 per share.
Because I am inclined to think that Aruba’s representatives bargained less
effectively than they might have, I tend to think that they obtained a relatively low share
of the synergies from HP. This would indicate that they obtained fewer synergies than the
407
See Highfields, 939 A.2d at 61 & n.87 (crediting synergy estimations included in
a study that “was not of the typically skewed, buy-side variety: rather, it was an objective
study created by a team of actuaries whose professional standards require neutrality” and
noting the study “stands in contrast to the often biased valuation work presented to
opposing boards by investment bankers representing a particular company”).
408
Dages Opening Report ¶ 68.
409
Id. ¶ 67.
104
midpoint range and imply a standalone value north of $18.20 per share. Having no way to
gauge the marginal impact of their ineffectiveness, this decision uses $18.20 per share as
the valuation indication for the deal price less synergies.
C. The Experts’ Analyses
Both sides submitted opinions from valuation experts. Both experts used the
discounted cash flow methodology to value Aruba. Both experts believed that the
discounted cash flow methodology provided the best approach for determining the fair
value of the Company. The respondent’s expert, Kevin Dages, said so explicitly: “It is my
opinion that Aruba’s standalone fair value is most accurately measured using a [discounted
cash flow] analysis based on the Management Projections.”410 The petitioners’ expert, Paul
Marcus, expressed his view implicitly by relying exclusively on the discounted cash flow
approach.411
The discounted cash flow methodology is a valuation technique that the financial
community generally accepts and that this court frequently uses in appraisal
proceedings.412 “While the particular assumptions underlying its application may always
410
Dages Opening Report ¶ 129; accord Dages Tr. 782 (“Q. You are all in on a
DCF. Right? A. I think that’s fair.”); id. (“I looked at other values, but the opinion was
always stated, and has always been stated, at the beginning as being based on DCF.”).
411
Marcus Opening Report ¶ 9 (“I determined the fair value of Aruba’s stock as of
May 18, 2015 (the ‘valuation date’) by performing a discounted cash flow (‘DCF’)
valuation.”).
412
See generally Jesse A. Finkelstein & John D. Hendershot, Appraisal Rights in
Mergers & Consolidations, 38–5th C.P.S. §§ IV(H)(3), V.E. (BNA) [hereinafter Appraisal
Rights].
105
be challenged in any particular case, the validity of [the discounted cash flow] technique
qua valuation methodology is no longer open to question.”413 It is a “standard” method that
“gives life to the finance principle that firms should be valued based on the expected value
of their future cash flows, discounted to present value in a manner that accounts for risk.”414
The DCF model entails three basic components: an estimation of net cash
flows that the firm will generate and when, over some period; a terminal or
residual value equal to the future value, as of the end of the projection period,
of the firm’s cash flows beyond the projection period; and finally a cost of
capital with which to discount to a present value both the projected net cash
flows and the estimated terminal or residual value.415
The Delaware Supreme Court has recently cautioned that “[a]lthough widely considered
the best tool for valuing companies when there is no credible market information and no
market check, [discounted cash flow] valuations involve many inputs—all subject to
disagreement by well-compensated and highly credentialed experts—and even slight
differences in these inputs can produce large valuation gaps.”416
1. Marcus’s Valuation Opinion
Marcus used a discounted cash flow analysis to opine that the Company’s fair value
at closing was $32.57 per share. His model generally adhered to the valuation literature
413
Pinson v. Campbell-Taggart, Inc., 1989 WL 17438, at *8 n.11 (Del. Ch. Feb. 28,
1989).
414
Andaloro v. PFPC Worldwide, Inc., 2005 WL 2045640, at *9 (Del. Ch. Aug. 19,
2005) (Strine, V.C.).
415
In re Radiology Assocs., Inc. Litig., 611 A.2d 485, 490 (Del. Ch. 1991) (quoting
Technicolor, 1990 WL 161084, at *7).
416
Dell, 2017 WL 6375829, at *28
106
and the teachings of the Delaware courts. From a methodological perspective, his model
appears sound.
As a source of estimated future cash flows, “Delaware law clearly prefers valuations
based on contemporaneously prepared management projections because management
ordinarily has the best first-hand knowledge of a company’s operations.”417 Marcus used
the February Projections, which covered the fiscal years 2015-2017. The February
Projections had their roots in management’s three-year plan, prepared in the ordinary
course of business and with input from the Aruba Board.418 Management completed an
iteration of its three-year plan in summer 2014.419 Management updated the plan in October
417
Doft & Co. v. Travelocity.com Inc., 2004 WL 1152338, at *5 (Del. Ch. May 20,
2004); see also Cede & Co. v. Technicolor, Inc., 2003 WL 23700218, at *7 (Del. Ch. Dec.
31, 2003) (“When management projections are made in the ordinary course of business,
they are generally deemed reliable. Experts who then vary from management forecasts
should proffer legitimate reasons for such variance.”) (footnote omitted)), rev’d in part,
aff’d in part, 884 A.2d 26 (Del. 2005); Gray v. Cytokine Pharmasciences, Inc., 2002 WL
853549, at *8 (Del. Ch. Apr. 25, 2002) (finding “litigation-driven projections to be
unreliable” because “[a]ny other result would condone allowing a company’s management
or board of directors to disavow their own data in order to justify a lower valuation in an
appraisal proceeding”).
418
JX 233 at 1 (minutes from meeting where projections presented showing finance
team accompanied presentation with “third party analyst data regarding the enterprise
wireless LAN market growth rates for the last three years,” “compared the Company’s
revenue growth rates to the market growth rate,” and “presented financial scenarios and
explained the assumptions underlying each scenario” during which “Board members asked
questions, provided feedback and discussion ensued”); see also Warmenhoven Tr. 223-24
(discussing process by which Aruba Board reviewed and “chose to accept” the February
Projections).
419
See Warmenhoven Tr. 219-20; id. at 313-14 (confirming Galvin prepared the
June Plan “in the spring of 2014, as part of the normal operations” of the Company); Galvin
107
2014.420 In February 2015, management revised the plan to reflect intervening results and
to adopt more conservative assumptions.421 To cover the final two years of his projection
period, Marcus used an extension of the February Projections that Qatalyst prepared
working in conjunction with Aruba management.422 Qatalyst used the same projections as
the basis for the fairness opinion that it delivered to the Aruba Board.423 Aruba also used
Tr. 553-54 (discussing development of “top-down” projections incorporating “broader
strategic assumptions” discussed by the Aruba Board regularly at the “June meeting”).
420
See JX 297 at 2 (email from Galvin to member of the finance team); JX 315 at 1
(email from Galvin to Qatalyst banker conveying early draft of the October Projections);
see also Warmenhoven Tr. 314-15 (discussing Aruba’s ordinary process of preparing a
yearly operating plan in September); Galvin Tr. 586 (acknowledging the September figures
adjusted margins, reflecting “[t]he overall impacts” of Project Greyhound).
421
See Marcus Opening Report ¶¶ 209-217 (explaining reliance on February
Projections); see also Warmenhoven Tr. 220-22 (discussing how and why the finance team
made the projections more conservative); Galvin Tr. 558-563 (discussing process of
extending ordinary course, six-month budgeting projections out to three years to create
February Projections).
422
See Marcus Opening Report ¶ 217; Warmenhoven Tr. 358 (referring to the added
two years as “a linear extrapolation”); Galvin Tr. 558-59 (testifying the February
Projections initially went out three years “[a]nd then ultimately until 2020, yes”); Dages
Tr. 734 (discussing “the extensions that were done with Qatalyst to take it out to 2020”).
423
See Marcus Opening Report ¶ 221; Galvin Tr. 560 (confirming February
Projections used by bankers).
108
the same projections in the proxy statement for the deal.424 Marcus adopted management’s
estimates for the cost of stock-based compensation425 and Aruba’s tax rates.426
The projections resulted in Aruba having a high compound annual growth rate
(“CAGR”) of 10% at the end of the projection period. To normalize Aruba’s high growth
and transition the Company into a steady state, Marcus added a second, five-year stage to
create a three-step discounted cash flow model. During the added second stage, he stepped
down the growth rate to reach his terminal, third-stage growth rate of 3.5% per year.427
424
Proxy at 63-64; Orr Tr. 529 (confirming approved projections to be included in
the proxy and shared with Qatalyst).
425
See Marcus Opening Report ¶¶ 218-220.
426
The Company had projected a tax rate of 4% for 2015 and 2016 and 25%
thereafter. See JX 475 at 1 (email from Galvin to Qatalyst suggesting “I would do 4%
thr[ough] 17; then do 25% thereafter”). Management attributed the rate to the Company’s
stockpile of valuable net-operating loss credits or “NOLs” from its early, pre-profit days.
Due to those credits, the Company had a cash tax rate of only 3.2% and 3.1% in 2013 and
2014, respectively. The Company anticipated it had enough credits remaining to continue
paying low taxes through at least 2016. JX 506 at 1 (internal email summarizing available
net-operating loss credits and approximate use rates as of February 2015); see also JX 895
at 93 (2014 10-K: “As of July 1, 2014, the Company’s federal loss carryforwards for
income tax purposes were approximately $131 million with expiration dates starting in
2028.”). Based on this evidence, Marcus adopted the Company’s estimates. See Marcus
Opening Report Ex. 7-1.
Aruba instructed Qatalyst to use the same tax figures that Marcus ultimately
adopted. See JX 654 (Qatalyst working spreadsheet indicating Galvin provided tax rates);
Marcus Tr. 46-47; Galvin Tr. 622.
427
Marcus Opening Report ¶ 222.
109
Delaware decisions and the valuation literature support this approach.428 Like Marcus, HP
used a three-stage discounted cash flow method when valuing Aruba.429
Marcus calculated Aruba’s weighted average cost of capital (“WACC”) using the
capital asset pricing model (“CAPM”).430 “Under CAPM, the cost of equity capital is the
428
See, e.g., DFC, 172 A.3d at 380 (“Indeed, if the record unambiguously supported
the proposition that DFC was to continue a new spurt of growth past 2018, it would have
been more appropriate to project out to a point where steady-state growth began. By doing
that, the appraiser would have to assess with discipline the next period after the projections
end and also the potential that the period might be negative, as well as that another period
of above-market growth might be followed by a terminal growth rate more like inflation
than the risk-free rate.” (footnote omitted)); Prescott Gp. Small Cap, L.P. v. Coleman Co.,
Inc., 2004 WL 2059515, at *29 (Del. Ch. Sept. 8, 2004) (Jacobs, J.) (“At the time of the
merger, Coleman was projecting a 16% growth in sales for year 2002, which represented
a return to Coleman’s prior operating levels. Dr. Kursh utilized a three stage model because
he did not believe a 16% growth rate was sustainable long-term.” (footnote omitted));
Robert W. Holthausen & Mark E. Zmijewski, Corporate Valuation Theory, Evidence &
Practice 216 (2014) (“We would prepare detailed year-by-year forecasts for the company
until the company reaches steady state. You may need to value a company’s cash flows for
five years, ten years, or longer if the company is far from becoming a stable mature
company as of the valuation date.”); Shannon P. Pratt & Alina V. Niculita, Valuing a
Business 219 (5th ed. 2008) (“The appropriate length of the forecast period should be until
that variability stops; at the point in time that the company expects normalized or level
growth, the terminal value is calculated.”).
429
See Johansson Dep. 40 (testifying that, in valuing a company, HP “want[s] to
create a model that gets you to like a steady state . . . . [T]ypically, the companies we look
at, ten years is kind of appropriate . . . . So we tend to do a ten-year DCF just to get to that
steady state.”).
430
In calculating his WACC, Marcus used an all-equity capital structure. He noted,
however, that evidence in the record suggested that Aruba would have issued $300 million
in convertible debt if HP had not made its approach. See, e.g., PTO ¶ 51, JX 224 (Aruba
Board subcommittee minutes); JX 325 (email from Galvin relaying conversation with
Barclays banker wherein banker suggested executing the convertible offering). The debt
would have reduced Aruba’s WACC and been a positive signal to the equity markets.
Marcus Opening Report ¶ 223. The decision to maintain Aruba’s all-equity capital structure
could be seen as a valuation consequence that resulted from the expectation of the merger,
110
risk-free rate of return plus the subject company’s risk. The subject company’s risk is
determined by multiplying the equity risk premium for the market by the company’s
beta.”431 Marcus used a risk-free rate of 2.75%, based on the twenty-year U.S. Treasury
maturity rate, and a supply-side equity risk premium of 6.19%.432 Marcus drew these
figures from reliable sources, and Dages used the same risk-free rate and a virtually
identical supply-side equity risk premium.433 Marcus calculated a beta for Aruba of 0.91,
which he derived by giving one-third weight to Aruba’s two-year, weekly, raw beta (0.81)
and two-thirds weight to the two-year, weekly, raw, unlevered betas of a group of peer
companies (1.11).434 Court of Chancery precedent supports the blended approach,435 and
although one that had a negative effect on Aruba’s stockholders by depriving them of the
value generated by a lower-cost capital structure. Cf. 8 Del. C. § 262(h) (instructing Court
of Chancery to exclude “any element of value arising from the accomplishment or
expectation of the merger”). The petitioners have not made this argument, so this decision
does not consider it.
In re Emerging Commc’ns, Inc. S’holders Litig., 2004 WL 1305745, at *16 (Del.
431
Ch. May 3, 2004) (Jacobs, J.).
432
Marcus Opening Report ¶ 225.
433
See Dages Opening Report ¶¶ 117, 124.
434
Marcus Opening Report ¶¶ 226-231.
435
See Merion Capital, L.P. v. 3M Cogent, Inc., 2013 WL 3793896, at *18 (Del.
Ch. July 8, 2013) (“[O]ne can ‘smooth’ beta by adjusting historical beta by a market beta
of 1, using a 1/3 weighting factor for the market and a 2/3 weighting for the subject
company’s beta . . . .”); Golden Telecom Trial, 993 A.2d at 524 (“I find that a beta that
gives 2/3 weight to the Bloomberg historic raw beta of 1.32 and 1/3 weight to the 1.24
industry beta is the best approach to this DCF analysis.”).
111
the valuation literature supports the selection of a two-year period for Aruba.436 He then
added the fifth-decline size premium.437 These calculations resulted in a 10% WACC.438
To calculate value for the terminal period, Marcus used the Gordon Growth
Model.439 “To calculate terminal value using the Gordon Growth Model, the Court must
436
Holthausen & Zmijewski, supra, at 300 (“Using more recent data might better
reflect a company’s current (and more forward-looking) systematic risk.”); Tim Koller,
Marc Goedhart & David Wessels, Valuation: Measuring and Managing the Value of
Companies 247 (5th ed. 2010) (noting that “changes in corporate strategy or capital
structure often lead to changes in risk for stockholders” and that, where that occurs, “a long
estimation period would place too much weight on irrelevant data”); Shannon P. Pratt &
Roger J. Grabowski, Cost of Capital: Applications and Examples 208 (5th ed. 2014)
(noting that five-years is more common but where “business characteristics change during
the sampling period . . . it may be more appropriate to use a shorter sampling period.
However, as the sampling period used is reduced, the accuracy of the estimate is generally
reduced.”); id. at 224 (recommending that “[i]f the underlying fundamentals of the business
have changed, a more recent period should be used in developing a beta estimate”). Aruba
had grown significantly during the years preceding the merger. See PTO ¶ 77. Aruba’s
expert agreed that he typically uses a two-year weakly raw beta when calculating WACC.
Dages Tr. 793; Dages Dep. 432.
437
Marcus Opening Report ¶ 230. “In addition to the equity risk premium, an equity
size premium generally is added to the company’s cost of equity in the valuation of smaller
companies to account for the higher rate of return demanded by investors to compensate
for the greater risk associated with small company equity.” Gearreald v. Just Care, Inc.,
2012 WL 1569818, at *10 (Del. Ch. Apr. 30, 2012). Dages disputed the applicability of a
size premium at all because, “in [his] experience, a size premium is rarely applied to mid-
or larger-cap companies” and “Aruba did not share the characteristics that researchers have
hypothesized for returns in excess of what is predicted by the CAPM.” Dages Rebuttal
Report ¶ 32. He further argued that Aruba properly belonged in the sixth rather than fifth
decile. Id.
438
Dages used a WACC of 11%. Dages observed that all three deal advisors and
two research analysts used higher WACCs. Dages Opening Report Ex. 18; Dages Rebuttal
Report ¶ 31.
439
Marcus Opening Report ¶ 235.
112
select a long-term growth rate, i.e., the expected growth rate of free cash flows into
perpetuity.”440 As noted, Marcus selected a perpetuity growth rate of 3.5%. He believed it
was reasonable to assume that Aruba would grow at the rate of the overall economy, but to
be conservative he selected a growth rate approximately at the midpoint of the risk-free
rate (2.75%) and nominal GDP growth rate, as predicted by reliable, oft-cited studies
(4.3%).441
Marcus sensitized his valuation for discount rates of 9.5% to 10.5% and terminal
growth rates of 3.0% to 4.0%, generating a valuation range for $29.16 to $36.93. The
midpoint, based on a discount rate of 10% and a terminal growth rate of 3.5%, was
$32.57.442
My primary concerns with Marcus’s opinion are his beta and the contrast between
his valuation and market indicators. Marcus’s raw and blended betas were both lower than
440
3M, 2013 WL 3793896, at *21.
441
Marcus Opening Report ¶¶ 232-235. Marcus did not clarify why he adopted the
risk-free rate rather than the projected rate of inflation as the floor for his terminal growth
rate. As discussed in addressing Dages’s report below, some of this court’s precedent
suggests adopting the risk-free rate as a ceiling for a company’s long-term sustainable
growth rate. This court’s precedents support adopting the rate of inflation as a floor for a
company’s long-term growth rate. See Golden Telecom Trial, 993 A.2d at 511-12 (“A
viable company should grow at least at the rate of inflation and . . . the rate of inflation is
the floor for a terminal value estimate for a solidly profitable company that does not have
an identifiable risk of insolvency.”); see also Owen v. Cannon, 2015 WL 3819204, at *25
(Del. Ch. June 17, 2015) (“I find that it is appropriate under Golden Telecom to calculate
the terminal growth rate as a premium to inflation.”). The distinction does not alter the
outcome in this case, and this decision expresses no view on the issue.
442
Marcus Opening Report ¶ 236.
113
one, indicating that Aruba, a relatively young and growing technology company, exhibited
less volatility than the market as a whole.443 Although the data supported the low beta, no
one could offer a good explanation as to why the number was so low.444 Marcus’s beta of
0.91 also fell roughly 20% below the median two-year adjusted beta of companies in
Aruba’s peer group and approximately 35% below Aruba’s five-year adjusted weekly
beta.445 That said, Aruba’s low beta was not unique. The bankers’ fairness presentations
identified other networking and WiFi companies that had betas of less than 1.446
Marcus’s valuation outcome diverged significantly from market indications. His
valuation of $32.57 is
 approximately 32% higher than the deal price of $24.67;
 approximately 39% higher than the mean of the last batch of unaffected
analyst price targets at $23.4;447
443
Dages Tr. 747; see also Pratt & Grabowski, supra, at 194 (“Many high-tech
companies are good examples of stocks with high betas. . . . The classic example of a low-
beta stock would be a utility that has not diversified into riskier activities.”).
444
See, e.g., Dages Tr. 790-91 (“I don’t see a basis for getting comfortable with a
beta that is that low given this company, its position in the industry, and what I’ve heard
about the challenges it’s facing. Especially when I look at the peers and they are all up over
1. And I look at them, and they are well over 1 in a longer time period.”).
445
See Dages Opening Report ¶¶ 118-19. See generally Dages Rebuttal Report ¶¶
26-31 (criticizing Marcus’s beta).
446
See JX 802 at 25; JX 809 at 31.
447
Marcus Opening Report Ex. 3-1.
114
 approximately 21% above the mean of the midpoints of the final valuations
prepared by all three advisors at $26.57;448 and
 nearly double Aruba’s thirty-day average unaffected market price of $17.13
per share.
Despite its seemingly sound methodology, these market indicators combine to create
significant doubt regarding the reliability of the Marcus discounted cash flow analysis and
its resulting valuation.
2. Dages’s Valuation Opinion
Dages rendered several different valuation opinions. They produced relatively
stable outputs but changed substantially in their inputs. Dages also made a significant
judgment call by selecting a WACC from a menu of possibilities, rather than calculating a
beta to generate a WACC as contemplated by CAPM.
In his opening report, Dages opined that the standalone fair value of Aruba was
$19.85 per share, which he derived using a discounted cash flow methodology.449 Like
Marcus, Dages used the February Projections with the two-year extension prepared by
Qatalyst with management’s input.450 Unlike Marcus, who used management estimates for
stock-based compensation and tax rates, Dages used a stock-based compensation figure
448
See JX 806 at 14 (final Barclays valuation); JX 811 at 19 (final Qatalyst
valuation); JX 812 at 14 (final Evercore valuation).
449
Dages Opening Report ¶¶ 7, 56.
450
See id. ¶¶ 89-96; Dages Rebuttal Report ¶ 4; see also Dages Dep. 311 (describing
the February projections with the two-year extension as the “best projections” for Aruba);
accord Dages Tr. 733.
115
from Barclays,451 and his own estimate of Aruba’s effective tax rate.452 Despite recognizing
the issue raised by Aruba’s high growth rate at the end of the projection period, 453 Dages
used a traditional two-stage model rather than a three-stage model. For his terminal value,
Dages explained the principles used when selecting a long-term growth rate in much the
same terms as Marcus,454 but then chose the risk-free rate (2.75%) because “some financial
economists caution that the risk-free rate . . . should serve as the ceiling for a stable, long-
term growth rate” and this court had used that rate in “a recent opinion.”455
451
See Dages Opening Report ¶¶ 98-106 (describing the stock-based compensation
figures he generated).
452
See id. ¶ 115 (using tax rate of 30%). Dages stated in his report that “[t]he 30.0
percent tax rate is based on the effective tax rate used by Aruba in the Management
Projections.” Id. At trial, he admitted that this was an error. See Dages Tr. 732-33; 812-15.
453
Dages Tr. 802-05.
454
See Dages Opening Report ¶¶ 108-109.
455
See id. ¶ 110. Dages’s report did not cite the financial economists or the opinion.
Presumably, he was referring to the DFC trial-level opinion, where he also served as an
expert. There, Chancellor Bouchard adopted the risk-free rate as a ceiling in reliance on
Dages’s identical suggestion “that some financial economists view the risk-free rate as the
ceiling for a stable, longterm growth rate.” DFC Trial, 2016 WL 3753123, at *17. In that
case, Dages had also acknowledged that “one suggested ceiling for a company’s perpetuity
growth rate is nominal GDP.” Id. at *18; see also Golden Telecom Trial, 993 A.2d at 511
(“Generally, once an industry has matured, a company will grow at a steady rate that is
roughly equal to the rate of nominal GDP growth.”). Dages conceded that a 4.5% perpetuity
growth rate, substantially above the 3.14% risk-free rate calculated in that case, was “at the
high end of the reasonable range of long-term growth rates.” DFC Trial, 2016 WL
3753123, at *18. On appeal, the Delaware Supreme Court stated that the risk-free rate “is
viewed to be the ceiling for a stable, long-term growth rate.” DFC, 172 A.3d at 383. The
idea that a company in a steady state will grow more or less in line with the average rate of
the broader economy has intuitive appeal. See 3M, 2013 WL 3793896, at *21 (quoting
Golden Telecom for the proposition that “the rate of inflation is the floor for a terminal
value” and noting that “a terminal growth rate should not be greater than the nominal
116
For his discount rate, Dages started out using CAPM to develop a WACC. He used
the same risk-free rate as Marcus (2.75%)456 and a supply-side equity risk premium that
was substantially similar to Marcus’s (6.21%).457 On the issues of a beta and size premium,
however, Dages punted. He described a variety of possible betas, including (i) raw and
adjusted betas for Aruba derived using two years of weekly measurements, five years of
weekly measurements, and five years of monthly measurements, and (ii) raw and adjusted
betas for peer companies derived using the same measuring periods.458 Rather than
selecting a beta, Dages used the various candidates to generate nine possible WACCs. He
then added into the mix the WACCs used by the three financial advisors and WACCs from
two analysts, for a total of fourteen possibilities.459 After surveying these, he chose a
WACC of 11%.460 His WAAC implied a beta of 1.33.461 This court has criticized similarly
unstructured approaches to valuation inputs.462
growth rate for the United States economy”). Because the experts did not develop the issue
further, and because resolving it is not necessary to decide this case, this decision expresses
no opinion on the matter.
456
See Dages Opening Report ¶ 117.
457
See id. ¶ 124.
458
See id. ¶¶ 118-122.
459
Id. Ex. 18.
460
Id. ¶ 127.
461
Dages Rebuttal Report ¶ 4.
462
See In re Orchard Enters., Inc., 2012 WL 2923305, at *17 (Del. Ch. July 18,
2012) (Strine, C.) (expressing the court’s preference for “the more academically and
117
After I issued an evidentiary ruling precluding Dages from rendering an opinion on
stock-based compensation, Dages changed course and relied at trial on a set of projections
that he had created himself using industry growth rates and referenced in a footnote in his
opening report.463 When he ran his discounted cash flow model with those projections and
management’s figures for stock-based compensation expense, his model generated a value
of $19.45 per share, forty cents below his original opinion. At trial, Dages revised his view
on Aruba’s tax expenses and agreed with management’s use of a 4% tax rate for 2015 and
2016, although he continued to endorse the use of a 30% tax rate for subsequent years
empirically-driven CAPM model when that can be applied responsibly” and noting that it
involves “less (but still more than comfortable) amounts of subjectivity”); Del. Open MRI,
898 A.2d at 338 (questioning the use of the build-up method with its concept of “company-
specific risk” and observing “[t]he calculation of a company specific risk is highly
subjective and often is justified as a way of taking into account competitive and other
factors that endanger the subject company’s ability to achieve its projected cash flows. In
other words, it is often a back-door method of reducing estimated cash flows rather than
adjusting them directly. To judges, the company specific risk premium often seems like
the device experts employ to bring their final results into line with their clients’ objectives,
when other valuation inputs fail to do the trick.”); Andaloro, 2005 WL 2045640, at *12
n.49 (criticizing expert who “spiraled” into a terminal growth rate “through an
incomprehensible ‘iterative process’” and finding that “[r]ather than a reasoned exercise in
applied social science, [the expert] appears to have channeled inspiration, more like a great
songwriter than a valuation expert”).
463
Dages Tr. 760-61 (“Q. So to be clear, your opinion, when you originally opined,
was the February revenue projections; right? A. Correct.”); id. at 767 (“Q. So you didn’t
just swap out the Dell’Oro projected growth rates for the industry for management’s. You
created your own industry projections. A. Correct.”); id. at 772 (“Q. Now, in fact, you don’t
have any expertise that would allow you to determine whether Dell’Oro’s industrywide
growth rates are a reasonable proxy for Aruba’s expected future performance, do you? A.
No. No independent expertise, no.”).
118
rather than management’s rate of 25%.464 This modification added thirty cents per share to
his valuation, resulting in a figure of $19.75 per share. Serendipitously, that result fell just
ten cents below the valuation in his opening report, although reached using substantially
different inputs. This is the fair value figure that Aruba endorsed at post-trial argument.
Dages’s final opinion of $19.75 per share comported with market evidence by
falling between the unaffected market price and the deal price. Its methodological
underpinnings, however, provided cause for concern, as did the meandering route by which
Dages arrived at this figure.
D. Weighing the Valuation Methodologies
This decision has discussed each of the relevant methods of valuation that the parties
presented. Under the statute, the court must make a point estimate of fair value measured
in dollars and cents. When determining fair value, “[t]he Court of Chancery must exercise
its considerable discretion while also explaining, with reference to the economic facts
before it and corporate finance principles, why it is according a certain weight to a certain
indicator of value.”465
464
Dages Tr. 751, 813. In light of other evidence in the record, the cash tax rate is
more persuasive. See Galvin Dep. 296 (stating that management provided the cash tax rate);
JX 548 (Qatalyst spreadsheet showing management’s cash tax rates); JX 654 (Qatalyst
projections using management’s cash tax rate); see also Dages Tr. 815 (testifying that cash
tax rate is typically more accurate than effective tax rate).
465
DFC, 172 A.3d at 388.
119
The forceful discussion of the efficient capital markets hypothesis in Dell and DFC
indicates that Aruba’s unaffected market price is entitled to substantial weight.
[C]orporate finance theory reflects a belief that if an asset—such as the value
of a company as reflected in the trading value of its stock—can be subject to
close examination and bidding by many humans with an incentive to estimate
its future cash flows value, the resulting collective judgment as to value is
likely to be highly informative . . . .466
“Market prices are typically viewed superior to other valuation techniques because, unlike,
e.g., a single person’s discounted cash flow model, the market price should distill the
collective judgment of the many based on all the publicly available information about a
given company and the value of its shares.”467 “[I]n many circumstances a property interest
is best valued by the amount a buyer will pay for it” and “a well-informed, liquid trading
market will provide a measure of fair value superior to any estimate the court could
impose.”468
466
DFC, 172 A.3d at 370; accord Dell, 2017 WL 6375829, at *17 (explaining that,
when a market is efficient, “a company’s stock price reflects the judgments of many
stockholders about the company’s future prospects, based on public filings, industry
information, and research conducted by equity analysts. In these circumstances, a mass of
investors quickly digests all publicly available information about a company, and in trading
the company’s stock, recalibrates its price to reflect the market’s adjusted, consensus
valuation of the company” (internal quotation marks and footnotes omitted)).
467
DFC, 172 A.3d at 369-70; see also Dell, 2017 WL 6375829, at *17 (“[T]he price
produced by an efficient market is generally a more reliable assessment of fair value than
the view of a single analyst, especially an expert witness who caters her valuation to the
litigation imperatives of a well-heeled client.”).
468
Applebaum, 812 A.2d at 890 (Del. 2002); see also Dell, 2017 WL 6375829, at
*15 n.108 (citing Applebaum); DFC, 172 A.3d at 369 & n.116 (quoting Applebaum).
120
In this case, because Aruba’s shares “were widely traded on a public market based
upon a rich information basis,” the fair value of the petitioners’ shares “would, to an
economist, likely be best reflected by the prices at which their shares were trading as of the
merger.”469 Aruba had “a deep base of public shareholders” and “highly active trading,” so
“the price at which its shares trade is informative of fair value.”470 The unaffected thirty-
day average market price of Aruba’s stock was $17.13 per share.
Dell and DFC teach that the deal price is also entitled to substantial weight. “In
economics, the value of something is what it will fetch in the market. That is true of
corporations, just as it is true of gold.”471 For a court to give weight to the deal price, it
need not be the most reliable evidence of the Company’s value as a going concern.472 This
court has authority “to determine, in its discretion, that the deal price is the most reliable
evidence of fair value . . . , and that’s especially so in cases . . . where things like synergy
gains or minority stockholder discounts are not contested.”473
The deal price in this case resulted from an arm’s-length transaction involving a
publicly traded company without a controlling stockholder. The deal price in this case
469
DFC, 172 A.3d at 367.
470
Id. at 373.
471
Id. at 368-69 (footnote omitted).
472
Id. at 364.
473
Id. at 367; see also Dell, 2017 WL 6375829, at *16 (“In fact, the record as
distilled by the trial court suggests that the deal price deserved heavy, if not dispositive,
weight.”).
121
contained synergies, so it logically exceeded fair value. There is also the fact that the
petitioners failed to identify a bidder who would pay more than HP. “Fair value entails at
minimum a price some buyer is willing to pay . . . .”474 Taken together, these propositions
indicate that the deal price in this case operates as a ceiling for fair value.
The Dell and DFC decisions recognize that a deal price may include synergies and
endorse deriving an indication of fair value from the deal price by deducting synergies.475
In this case, the evidence shows that the deal generated significant synergies. Using the
low-end synergy range implies a standalone value of $21.08 per share. Using the high-end
synergy range implies a standalone value of $15.32 per share. This decision has adopted
the midpoint of $18.20 per share as its deal-price-less-synergies value.
This decision does not give any weight to the discounted cash flow analyses. As in
Dell, “this appraisal case does not present the classic scenario in which there is reason to
suspect that market forces cannot be relied upon to ensure fair treatment of the minority.”476
Discounted cash flow models are “often used in appraisal proceedings when the respondent
company was not public or was not sold in an open market check.”477
The reason for that is not that an economist wouldn’t consider the best
estimate of a private company’s value to be the price it sold at in an open sale
process of which all logical buyers were given full information and an equal
opportunity to compete. Rather, the reason is that if such a process did not
474
Dell, 2017 WL 6375829, at *21.
475
Dell, 2017 WL 6375829, at *13; DFC, 172 A.3d at 371.
476
Dell, 2017 WL 6375829, at *26.
477
DFC, 172 A.3d at 369 n.118.
122
occur, corporate finance instructs that the value of the company to potential
buyers should be reflected in its ability to generate future cash flows.478
“But, a single person’s own estimate of the cash flows are just that, a good faith estimate
by a single, reasonably informed person to predict the future. Thus, a singular discounted
cash flow model is often most helpful when there isn’t an observable market price.”479
When market evidence is available, “the Court of Chancery should be chary about
imposing the hazards that always come when a law-trained judge is forced to make a point
estimate of fair value based on widely divergent partisan expert testimony.”480
Marcus’s discounted cash flow valuation of $32.57 per share diverged substantially
from market indications. His figure is nearly double Aruba’s thirty-day average unaffected
market price of $17.13. It is approximately 32% higher than the deal price of $24.67 per
share. In a transaction involving a financial buyer that could be expected to generate few
if any combinatorial synergies, the Delaware Supreme Court recently emphasized the lack
of reliability of a discounted cash flow analysis that yielded a result that was 40% over the
deal price.481 The transaction in this case generated substantial synergies.
478
Id.
479
Id. at 370.
480
Dell, 2017 WL 6375829, at *26.
481
DFC, 172 A.3d at 362; cf. Lender Processing, 2016 WL 7324170, at *33 (“The
proximity between [the discounted cash flow] outcome and the result of the sale process is
comforting.”); Ancestry.com, 2015 WL 399726, at *23 (“The DCF valuation I have
described is close to the market, and gives me comfort that no undetected factor skewed
the sales process.”).
123
Dages’s initial discounted cash flow valuation of $19.85 and revised discounted
cash flow valuation of $19.75 fell nicely between the unaffected market price and the deal
price. His figures also landed close to HP’s standalone discounted cash flow valuation of
$18.98 and Barclay’s standalone discounted cash flow valuation of $19.93. The relative
lack of methodological rigor in the analysis, however, creates cause for concern about the
strategic selection of inputs to channel the result into this range.
The two probative indications of value in this case are the unaffected market price
of $17.13 and the deal-price-less-synergies value of approximately $18.20 per share. Using
these indicators nevertheless carries conceptual difficulties because “[t]he time for
determining the value of a dissenter’s shares is the point just before the merger transaction
‘on the date of the merger.’”482 If the value of the corporation changes between the signing
of the merger and the closing, the fair value determination must be measured by the
“operative reality” of the corporation at the effective time of the merger.483
The unaffected market price provides direct evidence of the collective view of
market participants as to Aruba’s fair value as a going concern during the period before the
announcement of the transaction, which could be different than Aruba’s fair value as of
closing. The same disconnect exists for the deal price, which provides evidence of how the
parties to the merger agreement valued Aruba during the price negotiations, which could
482
Appraisal Rights, supra, at A-33 (quoting Technicolor I, 542 A.2d at 1187).
483
Technicolor II, 684 A.2d at 298.
124
be different than Aruba’s fair value as of closing. Addressing a similar issue in the Union
Illinois case, Chief Justice Strine described the temporal gap as a “quibble” and “not a
forceful objection,” noting that “[t]he negotiation of merger terms always and necessarily
precedes consummation.”484 Observing that “[n]othing in the record persuades me that [the
company] was more valuable by [closing] than it was when the Merger terms were set,” he
continued to use the deal price as an indicator of value.485 Similarly in this case, neither
side proved that Aruba’s value had changed materially by closing, so this decision sticks
with the unaffected market price and the deal price less synergies.
The difficult question is how to choose between, weigh, or otherwise exercise my
discretion non-abusively when evaluating the two probative valuation indications. The
unaffected market price provides a direct measure of the collective judgment of numerous
market participants about Aruba’s value as a going concern. The deal price less synergies
provides an indirect measure with two significant sources of uncertainty.
One is the problem of measurement error. Under the traditional view of the efficient
capital markets hypothesis, errors are randomly distributed and cancel out.486 My deal-
484
Union Ill., 847 A.2d at 358.
485
Id.
486
See Ronald J. Gilson & Reinier H. Kraakman, The Mechanisms of Market
Efficiency, 70 Va. L. Rev. 549, 581 (1984). Behavioral economics, noise theory, and chaos
theory may provide reasons to question this assumption, but for the reasons already stated,
I do not believe that a trial court has the flexibility to disregard the Delaware Supreme
Court’s framing of the efficient capital markets hypothesis.
125
price-less-synergies figure could have errors at multiple levels. To cite just a few, I may
have erred when making my case-specific allocation of synergies to the sell-side. I might
have misinterpreted the information that Aruba’s expert cited, or that data itself could
contain sampling and measurement errors. The size of the original synergy estimates might
also be off, as could any number of individual estimates that added up to the overarching
estimates. After all, they were necessarily predictions about complex matters. Perhaps
errors at one level might counterbalance errors at another, but there is no way to know, and
the smaller number of judgments involved (compared to the number of trades generating
the market price) makes it more likely that the errors could skew the figure, just like a small
and undiversified portfolio can produce extreme results. The Delaware Supreme Court’s
expressed preference in Dell and DFC for market indicators over discounted cash flow
valuations counsels in favor of preferring market indicators over the output of a similarly
judgment-laden exercise of backing out synergies.487
The other difficulty is that my deal-price-less-synergies figure continues to
incorporate an element of value resulting from the merger. When an acquirer purchases a
widely traded firm, the premium that an acquirer is willing to pay for the entire firm
anticipates incremental value both from synergies and from the reduced agency costs that
result from unitary (or controlling) ownership.488 Like synergies, the value created by
487
Cf. Dell, 2017 WL 6375829, at *26; DFC, 172 A.3d at 388.
488
See Rationalizing Appraisal, supra, at 1038, 1049.
126
reduced agency costs results from the transaction and is not part of the going concern value
of the firm.489 The value belongs to the buyer, although the seller may extract a portion of
it through negotiations.490 Eliminating shared synergies therefore only goes part of the way
towards eliminating “any element of value arising from the accomplishment or expectation
of the merger.”491 A court also must eliminate the share of value that accrues from the
reduced agency costs.492
For Aruba, using its unaffected market price provides the more straightforward and
reliable method for estimating the value of the entity as a going concern. I could strive to
reach the same endpoint by backing out shared synergies and a share of value for reduced
agency costs, but both steps are messy and provide ample opportunities for error. For
489
See Rationalizing Appraisal, supra, at 1023-24, 1038, 1046-54, 1067; Implicit
Minority Discount, supra, at 30-36, 52; Fair Value of Cornfields, supra, at 139-41.
490
See Control Premiums, supra, at 866-71; Rationalizing Appraisal, supra, at
1052-53; Implicit Minority Discount, supra, at 35, 52.
491
8 Del. C. § 262(h).
492
See Rationalizing Appraisal, supra, at 1055 (explaining that, for an acquisition
of a widely held firm, “the firm’s going concern value can be estimated . . . as the actual
purchase price minus synergies minus control value”). Failing to make this adjustment
would treat the value of the firm as greater than the aggregated value of individual shares,
which is the same analytical misstep reflected in the concept of the implicit minority
discount. See Control Premiums, supra, 854-59 (explaining conflict between efficient
capital markets hypothesis and implicit minority discount); Implicit Minority Discount,
supra, 53 (explaining logical equivalence between correcting for a non-existent implicit
minority discount and introducing a “‘third-party sale value lite’ standard in lieu of the
traditional ‘proportionate share of going concern value’ standard”).
127
Aruba, the unaffected market price provides a direct estimate of the same endpoint.493
Rather than representing my own fallible determination, it distills “the collective judgment
of the many based on all the publicly available information about a given company and the
value of its shares.”494 “[T]he price produced by an efficient market is generally a more
reliable assessment of fair value than the view of a single analyst,” particularly when a trial
judge is playing the analyst’s role.495
This approach does not elevate “market value” to the governing standard under the
appraisal statute. The governing standard for fair value under the appraisal statute remains
the entity’s value as a going concern. For Aruba, the unaffected public market price
provides the best evidence of its value as a going concern.
In this case, the best evidence of Aruba’s fair value as a going concern, exclusive of
any value derived from the merger, is its thirty-day average unaffected market price of
$17.13 per share. I recognize that no one argued for this result. I also recognize that the
493
See Control Premiums, supra, at 858-59 (“The basic conclusion of the Efficient
Capital Markets Hypothesis (ECMH) is that market values of companies’ shares traded in
competitive and open markets are unbiased estimates of the value of the equity of such
firms.”); Implicit Minority Discount, supra, at 52 (“Take the case of a publicly traded
company that has no controller. Efficient market theory states that the shares of this
company trade at the pro rata value of the corporation as a going concern.”); id. at 60 (“As
a matter of generally accepted financial theory . . . , share prices in liquid and informed
markets do generally represent that going concern value . . . .”); see also Rationalizing
Appraisal, supra, at 1033-34.
494
DFC, 172 A.3d at 369-70.
495
Dell, 2017 WL 6375829, at *17
128
resulting award is lower than Aruba’s proposed figure of $19.75 per share. That figure
relied on its expert’s discounted cash flow analysis, which this decision has found
unpersuasive.
“When . . . none of the parties establishes a value that is persuasive, the Court must
make a determination based on its own analysis.”496 The appraisal statute requires that “the
Court shall determine the fair value of the shares.”497 This means that I must reach my own,
independent determination of fair value.498 That determination is $17.13 per share.
III. CONCLUSION
The petitioners are awarded $17.13 per share. The legal rate of interest, compounded
quarterly, shall accrue on this amount from the date of closing until the date of payment.
The parties shall cooperate in preparing a final order. If the parties identify additional issues
that need to be resolved, they shall submit a joint letter within two weeks that explains the
issues and recommends a schedule for bringing this case to conclusion, at least at the trial
court level.
496
Cooper v. Pabst Brewing Co., 1993 WL 208763, at *8 (Del. Ch. June 8, 1993)
(citing In re Shell Oil Co., 607 A.2d 1213 (Del. 1992)); accord Del. Open MRI Radiology
Assocs. P.A. v. Kessler, 898 A.2d 290, 310-11 (Del. Ch. 2006). See generally Appraisal
Rights, supra, at A-89 to A-90 (“If both parties fail to meet the preponderance standard on
the ultimate question of fair value, the Court is required under the statute to make its own
determination.”).
497
8 Del. C. § 262(h).
498
Dell, 2017 WL 6375829, at *13 (“In reality, the burden falls on the trial judge to
determine fair value, using all relevant factors.” (internal quotation marks and alterations
omitted)).
129