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In re Appraisal of Petsmart, Inc.

Court of Chancery of Delaware

May 26, 2017


          Date Submitted: February 27, 2017

          Stuart M. Grant, Esquire, Nathan A. Cook, Esquire, Kimberly A. Evans, Esquire, and Joseph L. Christensen, Esquire of Grant & Eisenhofer P.A., Wilmington, Delaware, Attorneys for Petitioners.

          Gregory P. Williams, Esquire, Brock E. Czeschin, Esquire, John D. Hendershot, Esquire, Robert L. Burns, Esquire, Sarah A. Clark, Esquire, and Matthew D. Perri, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, and Theodore N. Mirvis, Esquire, Rachelle Silverberg, Esquire, Adam M. Gogolak, Esquire, Adam D. Gold, Esquire, and Joshua J. Card, Esquire of Wachtell, Lipton, Rosen & Katz, New York, New York, Attorneys for Respondent PetSmart, Inc.


          SLIGHTS, Vice Chancellor.

         I would not be the first to observe that the trial of an appraisal case under the Delaware General Corporation Law presents unique challenges to the judicial factfinder.[1] The petitioner bears a burden of proving the "fair value" of his shares; the respondent bears a burden of proving the "fair value" of the petitioner's shares; and then the judge, as factfinder, assumes, in effect, a third burden to assign a particular value "as the most reasonable [] in light of all of the relevant evidence and based on considerations of fairness."[2] The role assigned to the trial judge in this process independently to review "all relevant factors" that may inform the determination of fair value, if not unique, is certainly unusual.[3] It is unusual in the sense that the judge is not bound by the positions on fair value espoused by either of the parties. Indeed, the trial court commits error if it simply chooses one party's position over the other without first assessing the relevant factors on its own.[4]

         Yet it cannot be overlooked that the judge's decision in an appraisal case follows a trial--an honest-to-goodness, adversarial trial--where the parties are incented to present their best case, grounded in competent evidence, and to subject their adversary's evidence to the discerning filter of cross-examination. The trial court then reviews the evidence the parties have placed in the trial record and does its best to "distill the truth."[5] In this regard, at least, the appraisal trial is no different from any other trial. The court's determination of "fair value, " while based on "all relevant factors, " must still be tethered to the evidence presented at trial. The appraisal statute is not a license for judicial freestyling beyond the trial record.

         This appraisal action follows a going-private merger in which the public stockholders of PetSmart, Inc. ("PetSmart, " the "Company" or the "Respondent") received $83 per share in cash from a private equity acquiror, BC Partners, Inc. (the "Merger"). The Merger closed on March 11, 2015. Petitioners declined the Merger consideration and demanded appraisal.

         The battle lines staked here rest on positions that are well-known to Delaware courts, the academy and those who otherwise follow the evolving state of Delaware appraisal litigation. The Respondent would have me determine fair value by deferring to the price paid by a third-party purchaser in an arm's-length transaction after an allegedly robust pre-signing auction process. The Petitioners insist that "deal price" is unreliable in this case for a variety of reasons and urge me to determine fair value by employing a tried and true valuation methodology, discounted cash flow ("DCF"). The experts engaged by the parties, both well credentialed, sponsor these differing views with unwavering commitment. Indeed, the parties are so certain of their respective positions on the fair value of PetSmart at the time of the Merger that they insist I disregard the other's proffered methodology entirely. The result: Respondent values PetSmart at $83 per share; Petitioners value the same firm at $128.78 per share.

         In this post-trial opinion, I conclude that the evidence presented during trial points in only one direction--Petitioners have failed to carry their burden of persuasion that a DCF analysis provides a reliable measure of fair value in this case. The management projections upon which Petitioners rely as the bedrock for their DCF analysis are, at best, fanciful and I find no basis in the evidence to conclude that a DCF analysis based on other projections of expected cash flows would yield a result more reliable than the Merger consideration. Nor is there a foundation in the evidence for concluding that some other valuation methodology might lead to a reliable determination of fair value. On the other hand, I am satisfied Respondent has carried its burden of demonstrating that the process leading to the Merger was reasonably designed and properly implemented to attain the fair value of the Company. Moreover, the evidence does not reveal any confounding factors that would have caused the massive market failure, to the tune of $4.5 billion (a 45% discrepancy), that Petitioners allege occurred here. Based on my review of all relevant factors, as found in the evidence, I am satisfied that the deal price of $83 per share, "forged in the crucible of objective market reality, "[6] is the best indicator of the fair value of PetSmart as of the closing of the Merger.[7]

         I. BACKGROUND

         I recite the facts as I find them by a preponderance of the evidence after a four-day trial beginning in October 2016. That evidence consisted of testimony from seventeen witnesses (thirteen fact witnesses, some presented live and some by deposition, and four live expert witnesses) along with over 2300 exhibits. To the extent I have relied upon evidence to which an objection was raised but not resolved at trial, I will explain the bases for my decision to admit the evidence at the time I first discuss it.

         A. Parties and Relevant Non-Parties

         Respondent, PetSmart, Inc., is a Delaware corporation with headquarters in Phoenix, Arizona.[8] It is one of the largest retailers of pet products and services in North America.[9] Prior to the Merger, PetSmart's stock traded on NASDAQ.[10] On March 11, 2015, PetSmart was acquired by a consortium of funds advised by BC Partners, Inc. and certain other investment firms for $83.00 cash per share (the "Merger Price") in a merger.[11] In connection with this transaction, PetSmart merged into Argos Merger Sub Inc., with PetSmart surviving as a wholly owned subsidiary of Argos Holdings Inc.[12]

         Petitioners are CF Skylos I LLC, CF Skylos II LLC, Third Point Reinsurance (USA) Ltd., Third Point Reinsurance Company Ltd., Third Point Partners Qualified L.P., Third Point Offshore Master Fund L.P., Third Point Partners L.P., Third Point Ultra Master Fund L.P., Farallon Capital Partners, L.P., Farallon Capital AA Investors, L.P., Farallon Capital (AM) Investors, L.P., Farallon Capital Institutional Partners, L.P., Farallon Capital Institutional Partners II, L.P., Farallon Capital Institutional Partners III, L.P., Farallon Capital Offshore Investors II, L.P., Noonday Offshore, Inc., Muirfield Value Partners LP, HCN L.P., CAZ Halcyon Strategic Opportunities Fund L.P., Halcyon Mount Bonnell Fund L.P., Merlin Partners, LP, and AAMAF, LP (collectively, "Petitioners").[13] Petitioners were stockholders of PetSmart as of the Merger date and collectively held 10, 713, 225 shares of PetSmart common stock.[14]

         B. The Company

         Founded in 1987, PetSmart is a pet specialty retailer.[15] Its business consists of providing pet products, including consumables and hardgoods, [16] as well as pet services such as pet grooming and boarding.[17] At the time of the Merger, PetSmart operated 1, 404 stores in the United States, Canada, and Puerto Rico and had annual revenues of approximately $7 billion.[18] The only other company in North America that does what PetSmart does on the same scale is Petco Animal Supplies, Inc. ("Petco").[19] PetSmart also faces competition from big box stores like Target and WalMart, grocery stores like Kroger, smaller chain and independent pet stores and online retailers like Amazon.[20]

         C. PetSmart Experiences Strong Growth from 2000-2012

         PetSmart experienced significant positive growth each year from 2000 to 2012.[21] From 2000 to the onset of the financial crisis in 2007, PetSmart achieved annual revenue growth of 8-13%, significantly outperforming the retail industry as a whole.[22] PetSmart's annual revenue growth rate declined in 2008 and 2009 (falling to 5% in 2009) during the peak of the financial crisis but soon rebounded, reaching 11% in 2012.[23]

         PetSmart's growth was driven in significant part by favorable dynamics in the pet industry from 2000 to 2008 coupled with PetSmart's rapid increase in new store openings.[24] From 2000 to 2008, the pet industry benefitted from the convergence of two industry-favorable trends: an increasing pet population in North America and increasing spending per pet by North American pet owners due to the trend described as pet "humanization."[25] The period from 2000 to 2008 also saw PetSmart more than double the number of its stores, from 484 stores in 2000 to 1, 004 stores at the start of 2008.[26] PetSmart's store expansion was particularly rapid from 2004 to 2008, when PetSmart opened 518 new stores.[27] As these new stores grew to their full sales potential, PetSmart experienced a strong increase in its comparable store sales growth from 2009 to 2012.[28]

         D. PetSmart's Performance Declines

         PetSmart's growth began to stall in 2012.[29] Between Q1 2012 and Q4 2013, PetSmart's comparable store sales growth declined from 7.4% (in Q1 2012) to 1.4% (in Q4 2013), and PetSmart's overall sales growth exhibited a general downward trend.[30] During this same period, PetSmart found itself facing increasing competition and other headwinds on multiple fronts.[31] Along with this decline, PetSmart struggled accurately to project its future performance, even quarter-by-quarter. Indeed, management's forecasts were often off by large margins.[32]

         PetSmart also experienced substantial management turnover in 2013 and early 2014. In June 2013, PetSmart's CEO and CFO both resigned.[33] David Lenhardt, who had previously served as PetSmart's President and COO, became PetSmart's new CEO, and Carrie Teffner joined PetSmart as its new CFO.[34] PetSmart's then-President and COO, Joseph O'Leary, left the Company in April 2014.[35]

         New management pushed initiatives that precipitated additional difficulties for PetSmart. In particular, under Lenhardt's direction, PetSmart implemented a major "consumables reset" in early 2014 through which it increased store space for exclusively distributed premium pet foods while reducing space for widely distributed value pet foods.[36] This consumables reset was intended to drive growth in PetSmart's sales and margins.[37] As reflected in PetSmart's disappointing Q1 2014 results, announced on May 21, 2014, the consumables reset failed.[38] PetSmart's comparable store sales growth for Q1 2014 had declined to -0.6%, and its Q1 2014 net sales growth was only 1.1%.[39]

         Following PetSmart's announcement of its Q1 2014 results, PetSmart's stock price dropped 8% to $57.02.[40] PetSmart's Q1 2014 results, combined with the sharp decline in its stock price, drew the ire of shareholders, including Longview Asset Management LLC ("Longview"), then PetSmart's largest stockholder. Longview was not bashful in communicating its frustration with PetSmart's lackluster performance to both members of management and PetSmart's board of directors (the "Board").[41]

         E. PetSmart's Board Begins to Explore Strategic Alternatives

         At a meeting on June 18, 2014, the Board received reports on Longview's most recent communications and PetSmart's poor results in Q1 2014.[42] Morgan Stanley had been engaged to advise the Board regarding its options in the wake of recent events and, at the June 18 meeting, it gave a presentation on PetSmart's valuation, capital structure and potential strategic alternatives.[43]

         In anticipation of the June 2014 meeting, PetSmart had provided Morgan Stanley with PetSmart's strategic plan and a set of financial projections prepared by PetSmart's management (the "June 2014 Projections"). The June 2014 Projections were "very high level, "[44] created "specifically for Morgan Stanley, "[45] and prepared in "[r]elatively short order, in a matter of maybe not even a week"[46] using management's general financial planning framework (the "fishbone" or "financial framework").[47] These projections had not been approved by PetSmart's Board and were not intended to inform PetSmart's business operations going forward.[48] Rather, the June 2014 Projections were prepared "to be in line with what the board would have expected from the financial framework, but [also] to give them directional guidance in terms of what the impact of leveraging up to do a significant share buyback would do."[49]

         Having reviewed PetSmart's strategic plan and the June 2014 Projections, Morgan Stanley presented the following "preliminary conclusions" to PetSmart's Board at the June 2014 meeting: (1) "Based on management's forecasts and [PetSmart's] recent share price decline, [PetSmart's] stock appeared to be undervalued";[50] (2) "PetSmart could optimize its capital structure and lower its cost of capital by raising debt to accelerate its return of capital while still maintaining strategic flexibility";[51] and (3) "Given [PetSmart's] compelling cash flow and return characteristics . . ., Morgan Stanley expected financial sponsors to be interested in a take-private transaction [i.e., a leveraged buyout ("LBO")]."[52] Morgan Stanley's presentation to the Board also included a preliminary assessment of PetSmart's value based on a DCF analysis, which yielded a range of valuations for PetSmart of $100 per share (upside), $88 per share (base), and $77 per share (downside).[53]

         Following Morgan Stanley's presentation, the Board discussed a range of possible strategic options, including: (1) adhering to management's current strategic and operating plans; (2) engaging in a significant leveraged recapitalization (as described by Morgan Stanley); (3) pursuing an acquisition of Pet360, Inc. ("Pet360"), an online pet business; (4) pursuing a strategic combination with Petco; or (5) pursuing a sale of the Company to a financial buyer.[54] At the end of the June 2014 meeting, the Board established an Ad Hoc Advisory Committee of nonexecutive, independent directors: Gregory Josefowicz, Rakesh Gangwal, and Thomas Stemberg.[55] The Board established the Ad Hoc Committee to work with management and PetSmart's advisors to evaluate options that would increase shareholder value (including a leveraged recapitalization) and to develop one or more related proposals for consideration by the Board.[56] One of the goals in forming the Ad Hoc Committee was to relieve some of the pressure from PetSmart's "young management team" during the Company's exploration of strategic alternatives since management "was already under a lot of pressure to perform."[57]

         F. Activist Investor JANA Partners Discloses Stake in the Company and Urges Sale

         On July 3, 2014, JANA Partners LLC ("JANA"), an activist hedge fund, disclosed in a Schedule 13D filing that it had acquired a 9.9% stake in PetSmart.[58] JANA stated its view that PetSmart's stock was undervalued and disclosed its intention to push PetSmart to pursue strategic alternatives including a possible sale.[59] Four days later, on July 7, 2014, Longview publicly disclosed a letter it had sent to the Board in response to JANA's filing that also encouraged the Board to pursue a possible sale of the Company in addition to examining other strategic alternatives.[60]

         On July 10, 2014, JANA representatives met in person with Lenhardt, Teffner, and Josefowicz.[61] At that meeting, JANA's representatives criticized PetSmart's Board and management for pricing missteps, ineffective cost management, failure to capitalize on growth opportunities and failure to respond adequately to competitors.[62] In light of these failures, JANA's view was that PetSmart's only solution was to sell the Company.[63] That same day, Longview reiterated to PetSmart its support for a possible sale of the Company.[64]

         On July 11, 2014, the Board held a special meeting via telephone.[65] During the meeting, the Board received a report on recent shareholder communications from JANA and Longview and, with management's recommendation, authorized the retention of J.P. Morgan Securities LLC ("JPM") as PetSmart's new financial advisor.[66] A team from JPM led by Anu Aiyengar presented JPM's preliminary analysis of PetSmart's current situation and possible strategic alternatives.[67] This presentation included an overview of preliminary valuation perspectives, selected capital alternatives and selected strategic alternatives such as a possible going- private transaction or the acquisition of Petco.[68] JPM also discussed certain steps that it would undertake to assist the Board in evaluating alternatives and making a decision, which included: (1) reviewing and performing due diligence on PetSmart's business plan, which management had provided to JPM; (2) assessing trends in the pet sector; (3) asking strategic questions about possible changes to PetSmart's business plan; (4) evaluating capital and structural changes that could be considered in connection with that plan, as alternatives to a sale of the business; (5) considering acquisition scenarios; (6) comparing the potential value to shareholders of executing PetSmart's business plan (including recommending possible modifications and capital and structural changes) with the potential value to stockholders of a sale of PetSmart, and (7) assessing which of these or other alternatives was more likely to maximize shareholder value.[69] While JANA had threatened a proxy fight if PetSmart decided not to sell, the Board indicated to JPM that it was prepared to take on that fight if it decided that a sale was not in the best interests of the Company.[70]

         G. PetSmart's Management Prepares Long-Term Projections

         Following the July 11 meeting, PetSmart's management began to prepare a set of long-term projections at the direction of the Board (the "Base Case").[71] This project was led principally by PetSmart CFO Carrie Teffner, Christina Vance, PetSmart's director of financial planning, and Kim Smith, PetSmart's director of treasury operations-with input from Lenhardt and several other executives.[72]

         PetSmart did not prepare long-term projections in the ordinary course to operate its business.[73] Instead, PetSmart's management would create a one-year budget (or operating plan) which forecasted PetSmart's quarterly performance for the upcoming year.[74] The budget formulation process began each summer with a series of meetings over several days referred to within the Company as "Summer Strategy."[75] During these meetings, PetSmart's management discussed financial and strategic priorities for the next fiscal year.[76] Prior to each Summer Strategy, the leaders of PetSmart's different business segments would identify potential initiatives for the upcoming fiscal year and, working with members of PetSmart's finance department, develop "business cases" around those initiatives.[77] Each business case for a proposed initiative would include certain financial forecasts.[78] The business segment leaders would then present their proposed business initiatives (and business cases) to the Company's senior management during the Summer Strategy meetings.[79] Management, in turn, would select (and approve) specific initiatives for advancement in the upcoming fiscal year.[80]

         Following Summer Strategy, PetSmart's management would continue to evaluate the approved initiatives through the fall and early winter to determine their expected impact on PetSmart's revenue and expenses.[81] Typically, management would then complete the one-year budget in February of the following calendar year, present it to the Board in March of that year and the Board would approve it that same month.[82] Thereafter, before Q2, Q3 and Q4 of the fiscal year, management would prepare reforecasts of PetSmart's projected performance for the remaining quarters.[83] PetSmart used the one-year budgets and reforecasts "to run the business and incentivize management."[84]

         Over time, Vance had developed a model to extrapolate the business cases presented at Summer Strategy.[85] She used her model to evaluate whether PetSmart "would stay within [its] financial framework."[86] The model was not, however, "presented to the board for approval . . . [and was not] considered a multiyear projection that the business relied upon."[87] Rather, it "was more of an inherent working tool for the planning department . . . ."[88]

         PetSmart management confronted several challenges when the Board tasked them with developing the long-term projections to be used by JPM and the Board in their evaluation of strategic alternatives. First and foremost, they had never prepared long-term projections and the process of doing so was vastly different than the process employed to prepare budgets for Summer Strategy.[89] The business units were unable to provide much input because they had never prepared and had never been accountable for long-term projections.[90] And then there was the time pressure. The Board rushed management to prepare the Base Case "in the span of a few days" after the Board meeting on July 11, 2014, so that the results could be presented at the next Board meeting in August.[91]

         During PetSmart's 2014 Summer Strategy, management had "identified a variety of initiatives that [management] thought would be go-forward initiatives to help drive growth going forward."[92] Thus, in creating the Base Case, management first sought "to build a base of what [they] believe[d] the comp would be for the existing business before layering in [those] initiatives."[93] The finance team then "layered onto [the "base" comp projections] what it thought the value of each of the[] initiatives would be."[94] As part of this "layering" process, the finance team sent its value assumptions to the relevant business segment leaders "to get an affirmation that yes, that looks right . . . ."[95] And, as Teffner explained, "that's essentially what drove the top line."[96]

         The Base Case forecast estimated revenues using three primary yardsticks: (1) new store openings; (2) comparable stores sales growth; and (3) four initiatives selected from the Summer Strategy.[97] The Base Case is summarized below:[98]

         (Image Omitted)

         The comparable store sales forecasts were ambitious and well above the performance management had projected at Summer Strategy, including comparable store sales growth.[99] Specifically, the Base Case assumed the success of each of the new revenue initiatives developed at Summer Strategy and projected comparable store sales growth of 1.3% in 2015, 3.2% in 2016 and 3.3% increases each year thereafter.[100]

         The Base Case was not well received by the Board. Specifically, "when [management] reviewed the base case comp assumptions with the ad hoc committee of the board, [the committee], specifically . . . Stemberg, indicated that the comp assumptions that [management] had put in the plan were not aggressive enough and [management] needed to be far more aggressive, recognizing that potential buyers looking at [PetSmart would] discount [management's] plans themselves."[101]Accordingly, management went back to the drawing board and prepared the Base-Plus Case, which is summarized below:[102]

         (Image Omitted)

         The Base-Plus Case "assumed more aggressive delivery of performance against the exact same initiatives that [management] had looked at in the Base Case."[103] These projections also assumed comparable store sales growth that exceeded similar projections in the Base Case.[104] The take away from the Base-Plus Case was that it depicted an even sharper turnaround of PetSmart's recent downward-trends than had been forecast previously.[105]

         As with the Base Case, management prepared the Base-Plus Case "extremely quickly."[106] During this same time frame, PetSmart's management also prepared a third set of projections-the "Growth Case."[107] The Growth Case started with the Base-Plus Case projections and "assumed yet even [better] performance of the exact same initiatives."[108] Unlike the Base Case and Base Plus Case, however, the Growth Case was not prepared at the request of the Ad Hoc Committee.[109] Rather, PetSmart management prepared the Growth Case on its own initiative because it was not "sure how far the ad hoc committee wanted [them] to go in terms of comp assumptions."[110]Management kept the Growth Case in their "back pocket" in case the Ad Hoc Committee once again was displeased with their work on the Base Plus Case.[111]

         H. The PetSmart Board Decides to Commence a Public Sale Process

         PetSmart's Board next met on August 13, 2014.[112] At this meeting, JPM presented a preliminary valuation summary for PetSmart and reviewed several strategic alternatives for the Company, including (1) continuing on a standalone basis while engaging in a significant leveraged recapitalization; (2) exploring a sale of the Company; and (3) exploring a strategic merger with another industry participant.[113] In connection with the third alternative, the Board focused on the potential benefits and risks associated with inviting Petco to participate in an exploratory sales process.[114] The Board identified two "overwhelming, overriding"[115] risks associated with such an overture: (1) that Petco would not be serious about acquiring PetSmart, but would feign interest in order to gain access to confidential information about PetSmart's business model, strengths and weaknesses;[116] and (2) that a Petco-PetSmart merger "would face pretty strong [antitrust] headwinds . . . [so that] approval of th[e] transaction would be quite difficult."[117] Given these concerns, the Board "was not very keen on engaging with Petco" at that time.[118]

         During the August 2014 meeting, PetSmart management and JPM provided the Board with an overview of management's standalone plan and the Base Case and Base-Plus Case financial projections.[119] The Board admonished management that that Base Case and the Base-Plus Case were not aggressive enough because PetSmart "needed to put [its] best foot forward in terms of the projections [it was] putting forward to . . . potential buyers."[120] Teffner's "take-away from the [August 2014 Meeting] was very much one that [management] needed to put [their] best foot forward because potential buyers were going to discount [management's] assumptions and assume that [the Company was] putting more aggressive assumptions forward."[121]

         At the conclusion of the August meeting, the Board determined that it would publicly announce that PetSmart was exploring strategic alternatives including a possible sale of the Company.[122] Accordingly, on August 19, 2014, PetSmart issued a press release to that effect, announcing that, based on a thorough, year-long business review, the Board had determined to explore strategic alternatives for the Company to maximize value for shareholders, including a possible sale of the Company.[123]

         Also on August 19, 2014, PetSmart issued a second press release announcing PetSmart's Q2 2014 results.[124] Here, PetSmart announced that its comparable store sales for Q2 2014 had declined to -0.5%, with comparable transactions declining to 2.6%.[125] This press release also announced that the Company had entered into a definitive merger agreement to acquire online retailer Pet360 for $130 million and that the Company would be launching a broad cost reduction program and certain other growth initiatives.[126]

         I. PetSmart Management Formulates the Profit Improvement Plan and Finalizes its Projections

         Prior to the August 13, 2014 Board meeting, PetSmart had engaged two consulting firms to analyze certain aspects of PetSmart's business and identify cost-savings opportunities.[127] In May 2014, PetSmart engaged The Hackett Group to identify cost cutting initiatives with respect to PetSmart's Selling, General, and Administrative expenses (specifically, a headcount reduction).[128] And in May/June 2014, PetSmart engaged A.T. Kearny, Inc. to focus on cost cutting initiatives with respect to certain of PetSmart's indirect expenses.[129]

         Shortly after the August 2014 Board meeting, with the assistance of its consultants, PetSmart's management undertook to formulate a large-scale cost-savings plan at the Board's direction.[130] This plan came to be known as the "Profit Improvement Plan" (or "PIP").[131] The PIP consisted of: (1) implementing a headcount reduction;[132] (2) engaging A.T. Kearny to develop a cost-savings plan with respect to PetSmart's cost of goods sold ("COGS") expenses and certain of PetSmart's other indirect expenses such as spending on transportation, marketing, supplies, real estate, packaging, and real estate services;[133] and (3) engaging the Peppers & Rogers Group to develop a cost-savings plan with respect to PetSmart's enterprise costs.[134] Two weeks after the August 2014 Board meeting, Teffner sent an email to the Board stating that management's target for PIP cost savings was "[approximately] $160M-$200M EBITDA improvement."[135] The final PIP savings developed by the consultants, together with management, and presented to the Board showed an expected range of $183-$283 million in EBITDA savings annually.[136]

         While management worked on developing the PIP, they also worked to prepare an updated set of financial projections that would integrate the PIP savings.[137] Specifically, between August and October 2014, PetSmart management prepared what would be their final revised set of financial projections for presentation to the Board (the "Management Projections").[138] The Management Projections started with the Base-Plus Case projections and layered on (1) greater sales growth assumptions for the same proposed business initiatives, (2) new sales growth expected from the Pet360 acquisition, and (3) cost savings associated with the PIP.[139] The forecasts for comparable store sales growth were significantly higher than those set forth in both the Base and Base-Plus Cases. These new projections also included more aggressive Net Sales, EBITDA, Earnings Per Share and Capex numbers.[140] They estimated that, through the PIP, PetSmart would achieve cost savings totaling $120 million in 2015 and then $200 million for each of the subsequent years laid out in the forecast.[141] The Management Projections are summarized below:[142]

Management Projections (FY2014-2019)

($ in millions) 2014E Jan-15 2015E Jan-16 2016E Jan-17 2017E Jan-18 2018E Jan-19 2019E Jan-20
Revenue $7,088 $7,456 $7,869 $8,331 $8,822 $9,329
EBITDA $958 $1,060 $1,223 $1,326 $1,422 $1,515
Net Income $432 $490 $588 $646 $700 $748
Capital Expenditure $152 $150 $157 $167 $176 $187
FCF Before Distributions $465 $571 $667 $684 $736 $786

         Once again, management designed its latest projections to be aggressive- "bordering on being too aggressive."[143] Indeed, Vance went so far as to characterize the Management Projections as approaching "insan[ity]."[144] With that said, these projections reflected an inexperienced management team's best effort at estimating how PetSmart would perform in the future if all of its performance and cost initiatives paid off.[145] And management made a point of "being very clear with respect to the assumptions that they were making."[146]

         The record is clear that the Board exerted substantial pressure upon management to prepare increasingly more aggressive and ultimately unrealistic long-term projections. In this regard, Lenhardt and Teffner were told that their jobs "depended" on it.[147] And management heard the Board "loud and clear."[148] For its part, JPM told PetSmart management that prospective buyers would likely view the overly aggressive Management Projections skeptically, [149] and that management best be prepared to defend them when the sales process got underway.[150]

         J. The Auction for PetSmart

         While PetSmart management continued the back-and-forth with the Board over its projections, JPM opened the auction process for PetSmart in earnest. JPM spoke with 27 potential bidders following the announcement that PetSmart was exploring a sale in August through early October.[151] As among the potential bidders, three were potential strategic partners that had been targeted by JPM and the Board-Wal-Mart, Target, and Tractor Supply--and the rest were financial sponsors.[152] Ultimately, none of the strategics elected to participate in the process.[153]Of the 24 private equity funds with whom JPM spoke, 15 signed nondisclosure agreements and moved forward with the bidding process.[154]

         The Board held additional meetings with JPM on October 2 and 3, 2014, to discuss, among other things, the risks and benefits of formally inviting Petco to bid for the Company.[155] Citing the risks it and JPM had previously identified, the Board again decided that it was not in the Company's best interests to pursue a transaction with Petco.[156] Of course, the Board was open to engaging with Petco if Petco expressed a serious indication of interest.[157]

         During the Board meetings on October 2 and 3, PetSmart's management updated the Board on their progress with the PIP, including their expectation that the Company would achieve cost savings of $120 million in 2015 and $200 million in 2016.[158] Management also presented the Management Projections to the Board.[159]JPM's reaction to this presentation was to reiterate that buyers would likely be skeptical of PetSmart's ability to achieve those results as potential bidders had expressed concerns to JPM that well-documented trends in PetSmart's performance did not bode well for the future.[160] Even so, the Board decided to use the Management Projections for the auction process, [161] with the expectation that bidders would give a "haircut" to the projections in any event.[162]

         PetSmart's electronic data room was opened to bidders after the October 3 Board meeting. It was well-stocked with comprehensive, nonpublic information about PetSmart, including information about PetSmart's financials, performance and the PIP.[163] PetSmart's management also made presentations to the various potential bidders who had signed nondisclosure agreements.[164] Around this time, JPM informed potential bidders that Longview would consider rolling over up to 7.5 million of its approximately 9 million shares in a sale of the Company.[165]

         PetSmart received five preliminary bids by October 31, 2014: (1) $80-$85 per share from Clayton, Dubilier & Rice ("CD&R"); (2) $81-$84 per share from Apollo Global Management L.P. ("Apollo"); (3) $81-$83 per share from BC Partners; (4) $70-$75 per share from KKR & Co. L.P. ("KKR"); and (5) $65 per share from Ares Management, L.P. and Canada Pension Plan Investment Board.[166] The stock price as of October 31 was $72.35, while the unaffected price, which JPM set as of July 2, 2014, was $59.81.[167] Some members of the Board were "surprised that the numbers had come in that high."[168]

         As the auction progressed, the Board continued to consider alternatives to a sale.[169] In this regard, the Board pressed management to create a stronger standalone plan for the Company.[170] And the Ad Hoc Committee asked JPM to report on the financing that would be available for a leveraged recapitalization of the Company should the Board decide against a sale.[171]

         The Board next reviewed the progress of the auction for PetSmart with its advisors at a meeting on November 3.[172] JPM reported on the initial indications of interest it had received as well as feedback from parties who chose not bid. This feedback largely reflected a view that PetSmart's business had "significant execution risk" and that there was inadequate potential for upside growth.[173] The Board decided to allow the four bidders who bid $80 per share or higher (CD&R, Apollo, BC Partners and KKR) to continue in the process.[174] These remaining bidders performed further due diligence, which included access to more detailed information about PetSmart's financials, the Management Projections and the PIP, and additional meetings with management.[175]

         PetSmart released its Q3 results on November 18, 2014.[176] Comparable store sales growth was stagnant and comparable transactions were down 2.4%.[177]PetSmart also announced its progress on the PIP and its expectation that the plan would be fully implemented by the end of fiscal year 2015, and reiterated its expectation that the plan would result in a pre-tax cost savings of $120 million in 2015 and $200 million per year starting in 2016.[178]

         The Board met again on December 2 and 3 to consider whether to sell the Company, remain independent or pursue a leveraged recapitalization.[179] The Board also reexamined the Management Projections, noting that it believed the PIP savings were achievable but that it was skeptical about the Company's ability to achieve the projected top-line revenue and comparable store sales growth.[180] The feedback delivered to management was that the Board had a low level of confidence in PetSmart's ability to achieve the results forecasted in the Management Projections.[181]

         The Board's skepticism centered largely around the projections of comparable stores sales growth; "many in the board really did not believe" that these projections were realistic.[182] To understand PetSmart's standalone value better, the Board determined that it needed to "see additional sensitivity analyses, particularly around top-line and same-store sales growth."[183] Accordingly, the Board directed JPM to prepare sensitivities assuming a 2% comparable store sales growth.[184] The requested sensitivities were set at 2% because the Board had "a great amount of discomfort . . . [about whether the 4% comparable store sales used in the Management Projections] would be achievable, attainable or not."[185] Instead, the Board believed that "2 percent looked more reasonable, and something that the management team more than likely should be able to get to, if they executed a plan."[186]

         In the weeks leading up to the final bids, questions arose about whether the financial sponsors would be able to obtain deal financing based on reports that the Office of the Comptroller of the Currency ("OCC") and Federal Reserve would engage in "increased scrutiny . . . over LBO loans."[187] The OCC and Federal Reserve had implemented restrictions on the amount of leverage that would be allowed in deal financing and, in the days leading up to Thanksgiving 2014 (in the midst of the PetSmart auction), regulators indicated they would begin to enforce these regulations more strictly than before.[188] This led bidders to perceive that the quantum of debt available to finance an acquisition of PetSmart had tightened.[189]While there were initial concerns that this increased regulatory scrutiny may affect the bids for PetSmart, the evidence reveals that those concerns abated after Thanksgiving when it became clear that all of the bidders would have no difficulty securing debt financing at the levels necessary to fund their bids for PetSmart at the values they deemed appropriate.[190]

         On December 10, PetSmart received new offers from the remaining bidders.[191] BC Partners made a binding offer of $80.70 per share.[192] Apollo made a binding offer of $80.35 per share.[193] KKR and CD&R, working together, verbally indicated they would not offer more than PetSmart's current stock price, which was approximately $78 per share.[194] When JPM presented these offers to the Ad Hoc Committee, the committee directed JPM to engage further with Apollo and BC Partners to see if they would increase their bids.[195] The Ad Hoc Committee also decided on December 12 that it would allow Longview to join with BC Partners after BC Partners "indicated that they may be able to offer [] a higher price with Longview."[196]

         JPM returned to the bidders and directed them to submit their best and final offers because the Board would soon be meeting to make a final decision whether to sell the Company or go in a different direction. Specifically, JPM told bidders "if [they] had anything more in [their] pocket, now [was] the time to put it [in]."[197] Apollo responded with an offer of $81.50 per share; BC Partners, with its commitment from Longview in hand, offered $82.50 per share.[198] With some prodding, JPM was able to get BC Partners to increase its offer to $83 per share.[199] Both parties made clear that these were their best and final offers.[200]

         K. The Auction Concludes and the Board Recommends the BC Partners Offer to Shareholders

         The PetSmart Board met on December 13 to discuss the final offers from BC Partners and Apollo and to consider strategic alternatives to a sale of the Company.[201] JPM made presentations to the Board on each of these alternatives, including the possibility that the Board may have to engage in a proxy contest with JANA.[202] JPM also presented its valuation analysis under various scenarios including a standalone valuation of PetSmart if the Board determined to terminate the auction.[203] This standalone valuation focused on a DCF analysis based on the Management Projections that resulted in a valuation for the Company of $78.25- $106.25 per share.[204] Understanding that the Board had little faith in the Management Projections, JPM also presented the Board with the results of the sensitivity analyses the Board had requested which resulted in a valuation range of $65-$95.25 per share.[205]

         As a part of its presentation, JPM delivered its fairness opinion with respect to the BC Partners offer concluding that, as of that date, the Merger Price of $83 per share in cash was fair from a financial point of view to the stockholders of the Company.[206] Petitioners point to several aspects of JPM's fairness opinion they contend reveal that JPM "manipulated [its] financial analysis" in order to get to a place where it could recommend the BC Partners proposal.[207] At the core of the criticism is the contention that JPM "stretched" to reach a high weighted average cost of capital ("WACC") for PetSmart in order to deflate the DCF results.[208] In this regard, Petitioners select certain of JPM's internal communications they contend demonstrate that Aiyengar pushed her team to inflate PetSmart's WACC into double digits even though her team had determined that a much lower WACC was appropriate.[209]

         To be sure, there were discussions among the JPM deal team regarding whether a double digit WACC could be defended.[210] But the evidence also demonstrates that JPM approached its work without preconceptions or designs to reach a desired result.[211] JPM made no secret of its approach to calculating WACC and walked the Board through that analysis in detail.[212] Petitioners may not agree with that approach but there is simply no credible evidence that JPM set out to manipulate its analysis to support a fairness opinion.[213]

         Petitioners also criticize JPM for utilizing the so-called "Barra beta, " which Petitioners (and others) describe as a "'black box' form of forward-looking beta" that is difficult, if not impossible, to verify.[214] Contrary to Petitioners' characterization of JPM's process, however, the evidence reveals that, in addition to considering Barra's forward-looking beta, JPM considered "Barra predicted, Barra historical, as well as relevered beta."[215]

         Petitioners next criticize JPM for "artificially inflat[ing]" the betas it applied by "arbitrarily" selecting PetSmart's peer group and then selecting the betas of companies in the lowest quartile of that group even though PetSmart had historically traded at a premium to its peers.[216] Here again, Petitioners' criticism recounts only a portion of the evidence. First, the criticism glosses over the fact that PetSmart was a niche retailer with only one true peer (Petco). Moreover, the complete evidentiary picture reveals that, after conducting a "very detailed benchmarking analysis, " JPM looked to the betas of companies that had "operating and financial statistics" that it could meaningfully correlate with PetSmart's operations, "numbers and projections."[217]

         While one can debate the results JPM reached, and can speculate whether JPM would have arrived at the same place had it utilized different inputs in its valuation analysis, [218] there is no credible basis to debate whether JPM skewed its analysis to push the Board to accept the BC Partners offer. The JPM analysis was thorough and the results were objectively rendered.[219]

         Aiyengar shared her view during the December 13 Board meeting that the PetSmart auction had been "a robust auction process, where anybody who had an interest in this company had the opportunity to engage with the company and see whether they wanted to buy the company."[220] The Board then weighed the $83 per share offered by BC Partners generated by this process against the Company's prospects if it remained standalone.[221] In its deliberations, the Board considered the aggressiveness of the Management Projections, which it felt were heavily dependent on a number of factors breaking the Company's way all of which were subject to much speculation and volatility.[222] After weighing all options, the Board decided to take the $83 per share offered by BC Partners, as this was a "certainty, " rather than confront the "risk of trying to get something more than $83 if [PetSmart] were a stand-alone."[223] This decision reflected the Board's pessimism that management would be able to deliver on their plans and its view that such efforts likely would not yield more than the $83 per share that had been achieved through the sales process.[224]The Board unanimously voted to approve and recommend the Merger with BC Partners at the conclusion of the December 13 meeting.[225] It announced the transaction and signed the Merger Agreement the following day.[226]

         The $83 per share was $1.50 higher than what the next highest bidder, Apollo, had offered. Indeed, Apollo told JPM after the process concluded that it "never would have paid that price" for PetSmart.[227] Several financial analysts also were surprised and impressed by the price achieved in the auction.[228] While PetSmart was covered by more than a dozen securities analysts, the consensus price target for PetSmart in the year preceding the Merger, even after the PIP was disclosed, never exceeded $75 per share.[229]

         PetSmart's definitive proxy statement, filed with the SEC on February 2, 2015 (the "Proxy"), disclosed the Management Projections as well as the JPM sensitivities.[230] When introducing the projections, the Proxy disclosed that the Company had not historically prepared long-term projections in the ordinary course of its business and that it was "wary" of doing so.[231] The Board wanted stockholders to have the Management Projections because they had been utilized by the Board, JPM, and the bidders.[232] But the Proxy made clear that the Board was cautioning stockholders not to place undue reliance on the projections.[233] With regard to the JPM sensitivities, the Proxy disclosed that these had been prepared by JPM "to assist the board in assessing the potential downside risks that could arise from reasonable deviations in the assumptions underlying the [Management] Projections."[234]

         After the announcement of the transaction, and the disclosure of the Management Projections in the Proxy, no topping bids emerged and no further inquiries about PetSmart surfaced before the Merger closed.[235] The stockholder vote on March 6, 2015, overwhelmingly favored the Merger; 99.3% of voting shares of PetSmart voted in favor of the transaction, representing 77.4% of the 99, 455, 151 outstanding common shares.[236] The Merger closed on March 11, 2015.[237]

         L. BC Partners Creates its Plan for PetSmart

         As one would expect, BC Partners formulated a plan to turnaround PetSmart throughout the auction process so it could hit the ground running should it win the bid. It engaged Michael Massey, the former CEO of Collective Brands, former President of Payless, Inc. and current director of Office Depot, to provide counsel as it pursued its goal (as reported to investors) of making a significant retail acquisition.[238] When looking at PetSmart, Massey believed the Company lacked a clear strategy or understanding of its customers, meaning it was ripe for a turnaround.[239] BC Partners also believed that PetSmart had been "undermanaged, " but that these management problems had been masked historically by "the strength of underlying market growth" in the pet specialty industry.[240] BC Partners' strategic hypothesis was that PetSmart's performance slowed when the underlying growth trends in the pet specialty industry slowed. It posited that PetSmart could be revived with a new management team, headed by Massey, who would implement a series of new revenue and cost initiatives.[241]

         In performing its due diligence, BC Partners engaged Boston Consulting Group to speak to PetSmart's vendors on its behalf.[242] It also spoke directly to several former PetSmart executives and consultants.[243] With this information in hand, BC Partners was confident that the Management Projections were not achievable, at least not with PetSmart's current management in place.[244] Therefore, when evaluating PetSmart, BC Partners developed its own "BCP Case."[245] The BCP Case projected lower total revenues, year-over-year total sales growth and fewer new store openings from 2014 to 2019.[246] These projections were included in the equity syndication memo that BC Partners sent to potential investors.[247] BC Partners told its potential investors that its case was conservative, with room for significant upside.[248]

         Massey also created his own set of projections based on his plans for running PetSmart (the "Massey Case"), which included the implementation of his proposed cost and revenue initiatives which he hoped would help drive up EBITDA.[249]Massey told BC Partners' equity investors that these projections were conservative and that he was very confident they could be achieved.[250] The projected cash flows from the Massey Case were higher than those in the Management Projections by $192 million.[251]

         BC Partners also prepared the "Bank Case" with the help of PetSmart's management after the signing of the Merger Agreement[252] in order to solicit debt financing for the transaction[253] and present to ratings agencies so they could rate the bonds BC Partners would issue in connection with the transaction.[254] The Bank Case was designed to be conservative; it assumed, for instance, that PetSmart would have no new store openings in later years.[255]

         M. PetSmart's Performance in the Period Leading Up To The Stockholder Vote and Post-Closing

         Beginning in December of 2014, preliminary estimates suggested that PetSmart was outperforming the forecasts in the Management Projections for items such as comparable store sales, comparable transactions and earnings per share.[256] When PetSmart released its Q4 2014 results on March 4, 2015--seven days before the close of the transaction--it revealed that its operating income EBIT beat its projections by 5.4%.[257] PetSmart also adjusted its non-GAAP adjusted diluted earnings per share estimate up to $1.43, exceeding its guidance and the $1.28 per share achieved for the prior year period.[258] PetSmart's comparable store sales grew from -.05% in Q2 2014, to flat in Q3 2014, to .6% in Q4 2014.[259] Revenue similarly grew from 1.4% in Q2 2014, to 2.6% in Q3 2014, to 6% in Q4 2014.[260]

         The Merger Agreement was signed in the middle of Q4 2014, and Lenhardt, Teffner and Gangwal all testified that PetSmart's favorable Q4 performance did not change their views about the long-term prospects of the Company.[261] Indeed, in Q1 2015 (the quarter in which the Merger closed), PetSmart's comparable store sales growth dropped to 1.7%, [262] and remained below 2% throughout 2015.[263]

         After the closing of the Merger, Lenhardt resigned and Massey became PetSmart's new President and CEO.[264] Massey quickly installed a new management team, changed PetSmart's organizational structure and created a new strategy for PetSmart based on his own revenue and cost initiatives.[265] While Massey used the Management Projections solely for purposes of management compensation, [266] his team created a new set of multi-year projections in July 2015.[267]

         In 2015, PetSmart achieved $7.2 billion in total sales and $982.1 million in EBITDA.[268] PetSmart's comparable store sales growth, however, came in at 0.9%, missing the projected 1.5% growth forecast in the Management Projections by 40%.[269] According to Massey, in 2016 year-to-date, the comparable store sales growth was -0.2%, in comparison to the projected growth in the Management Projections.[270] The Company's EBITDA, however, exceeded the 2015 Management Projections by $200 million by the end of FY 2015.[271] In February 2016, PetSmart was able to issue a dividend of $800 million which constituted a 38% return on invested capital.[272]

         N. Procedural Posture

         Petitioners seek appraisal for 10, 713, 225 shares of common stock of PetSmart, 9, 541, 372 of which were acquired after the record date of the Merger.[273]Six appraisal petitions were filed on March 12 and 13, 2015, and all were consolidated by order dated April 30, 2015.[274] A trial was held October 31 to November 3, 2016. I heard post-trial oral argument on February 28, 2017, following post-trial briefing.

         Petitioners and Respondent both presented two experts at trial: one to address the reliability of the Management Projections and the other to address the fair value of PetSmart at the time of the Merger. I summarize their opinions briefly below.

         1. The "Projections" Experts

         Mark A. Cohen served as Petitioners' retail expert.[275] He focused on the credibility of the Management Projections and the outlook of PetSmart's business going forward.[276] Based on his analysis of the pet retail industry and PetSmart's prior performance, Cohen believes that PetSmart hit a "speed bump" just prior to the initiation of the sales process from which the Company would have rebounded. According to Cohen, PetSmart was not facing long-term growth issues.[277] He also opined that the Management Projections were created in line with industry standards and were reliable estimates of the Company's future cash flows.[278]

         Mark Weinsten was retained by Respondent to provide an expert opinion on the Management Projections and related business plans created by the PetSmart management during the sales process.[279] Weinstein opined that the Management Projections were overly aggressive, overly optimistic and wholly unreliable.[280] In support of this opinion, he pointed to the facts that PetSmart's management was newly installed when they were directed to create the projections, they had no experience in creating long-term projections of future cash flows and they could not look to past examples of projections within PetSmart for guidance since PetSmart historically did not create long-term projections.[281] In those instances where management attempted to forecast future performance, even for quarterly forecasts, the Company regularly would underperform.[282]

         According to Weinsten, the Management Projections were all the more sketchy given that they were prepared largely as top down forecasts, an approach not consistent with industry best practices, and were prepared specifically for a sales process with Board pressure to be more and more aggressive.[283] He also found specific areas of concern regarding the achievability of the forecasts, which included the comparable store sales growth projections and the ability of management successfully to execute on its overall business plans.[284]

         2. The Valuation Experts

         Petitioners' valuation expert was Kevin Dages.[285] Dages determined that a DCF analysis based on the Management Projections is the most reliable indicator of the fair value of the Company. Based on his DCF analysis, Dages concluded that the fair value of PetSmart's common stock as of the date of the Merger was $128.78 per share.[286] Dages relied upon the Management Projections in all respects for his DCF analysis based upon Cohen's opinion that the projections "were reasonably and reliably prepared in a manner consistent with industry standards, " as well as his own opinion that the Management Projections "represent the most reasonable set of projections [available] as to PetSmart's future performance."[287] Dages also acknowledged, however, that "once [he] signed onto the opinion of where the fair value is . . . based on these projections, " he was, "at the end of the day, " tied to the projections.[288] On the other hand, Dages recognized that if the Court finds that the Management Projections are not reliable, then it should not rely on his DCF valuation because that analysis assumed the accuracy of those projections.[289] Stated differently, "[g]arbage in, garbage out."[290]

         Dages performed a WACC-based DCF analysis in which he discounted the Company's free cash flows back to present value using the Company's weighted average cost of capital and then subtracted the value of the Company's debt to determine the value of its equity.[291] He also ran the BCP Case, Massey Case and Bank Case through his DCF model-which, notably, all produced higher values than the DCF based on the Management Projections.[292] In Petitioners' rebuttal case at trial, Dages presented a new DCF analysis he ran during trial based on the JPM sensitivities.[293] This exercise yielded a value ranging from $102.82 to $112.90 per share.[294]

         Dages rejected the $83 per share deal price as a reliable indicator of fair value for three main reasons.[295] First, he believed the Merger Price was stale due to the three-month lag between the signing and closing of the deal.[296] Second, he believed "the Board did not receive accurate or reliable valuation advice from J.P. Morgan" because JPM's DCF analysis was "results-driven" and biased.[297] Finally, he found that the Merger Price was depressed due to the exclusion of Petco, the most logical strategic buyer, from the PetSmart auction, resulting in the participation of only financial bidders.[298]

         Respondent's valuation expert was Andrew Metrick.[299] According to Metrick, the Merger Price of $83 per share, achieved after a well-run active auction, is the most reliable indicator of PetSmart's fair value at the time of the Merger.[300]While he acknowledged that DCF is considered by many to be the "gold standard" of valuation tools, Metrick found that DCF was misleading here since the primary data input, the Management Projections, were entirely unreliable.[301] He explained that, for the purposes of a DCF analysis, "one must use the 'expected' (as opposed to 'hoped for') future cash flows of the business."[302] Based on his review of the evidence, Metrick opined that the Management Projections were unreliable because they were prepared specifically for the sale process (not in the ordinary course of business) by inexperienced management who were pushed to be overly optimistic.[303]

         Nevertheless, for the sake of completeness, Metrick did perform a DCF analysis, but not with the Management Projections. Instead, he utilized his own adjustments to the revenue forecasts, starting with the JPM sensitivities.[304] He did not believe that PetSmart could achieve the $200 million in cost savings from the PIP indefinitely into the future, as projected by management, so he adjusted the projected PIP savings to decline linearly beginning three years after the savings are assumed to be fully realized, with only $59 million remaining in the terminal period.[305]

         After adjusting the Management Projections, Metrick created an APV-based DCF model that discounts the Company's free cash flows by the Company's unlevered cost of equity, adds the benefits of a tax shield obtained from the Company's debt, and then subtracts the value of the debt to determine the Company's equity value.[306] Metrick's DCF analysis resulted in a fair value of $81.44 per share. According to Metrick, his DCF valuation simply corroborates the most reliable indicator of PetSmart's fair value-the $83 per share Merger Price that followed a "deal process where (1) the sale [was] well publicized, (2) there [were] multiple bidders and a large number of interested parties, and (3) the incentives of the Board and management [were] aligned with those of the stockholders."[307]

         Metrick asserts that his opinion regarding the fair value of PetSmart at the Merger Price is bolstered by the following confirmatory analyses: (1) his DCF analysis resulting in a value of $81.44 per share; (2) the fact that "[a]t no point prior to PetSmart's acquisition did its shares trade at or above $83 per share"; (3) the fact that "[a]t no point prior to the consummation of the transaction did analysts' average price target of PetSmart exceed $83 per share"; (4) a "valuation of PetSmart based on the trading multiples of comparable companies ranges from $70 to $112, with a value below $91 (the median) [being] more appropriate based on PetSmart's operating metrics relative to the peers"; (5) a "valuation of PetSmart based on the recent acquisition of Petco is $69"; and (6) a "valuation of PetSmart based on prior transactions involving retailers ranges from $59 to $74."[308]

         After trial, Metrick submitted a supplemental report to respond to Dages's DCF analysis based on the JPM sensitivities.[309] He determined that Dages's valuations corresponding to the sensitivities "are inflated significantly due to (i) an assumption that PetSmart has no fixed costs, meaning margins are unchanged as revenue declines in moving from the [Management Projections] to [the JPM sensitivities], and (ii) [the] failure to adjust the discount rate to reflect the lease treatment embedded in the cash flows."[310] Correcting for these errors, Metrick derived valuations from the JPM sensitivities ranging from $82.79 to $86.96.[311]

         The driving difference in the valuations produced by Dages and Metrick can be traced most directly to the different projections of expected cash flows on which they rely.[312] Unlike many appraisal cases litigated in this court, the inputs utilized by the valuation experts involved here are relatively close. But there are differences. Metrick capitalized all of PetSmart's current leases, [313] while Dages maintained the characterization of the leases from PetSmart's financial statements.[314] The experts agreed, however, that as long as the leases are treated consistently throughout the valuation analysis, the manner in which the leases are characterized should not affect the valuation substantially.[315] The other large difference between the two models is the terminal investment required.[316] Metrick used a model out of a McKinsey & Co. textbook to calculate the amount of investment necessary at the terminal period to support the projected growth during the terminal period, arriving at an investment rate of 28.6% in the terminal period.[317] This results in a required investment of $222 million.[318] Dages adopted the required terminal investment found in the Management Projections of $47 million.[319]

         II. ANALYSIS

         Petitioners and Respondent present two vastly different valuations of PetSmart as of the date of the Merger based on two binary views of the most reliable means by which to determine fair value--deal price versus a discounted cash flow analysis. The vast delta between the valuations generated by the parties' proffered methodologies raises red flags and suggests, perhaps, that neither is truly reflective of PetSmart's fair value. As the Court undertakes to discharge its duty (or burden) independently to determine fair value, therefore, the temptation to strike a balance between the competing positions is undeniable. The $4.5 billion that separates the parties certainly leaves much room for compromise. But the unique structure of the appraisal proceeding should not obscure the reality that the process is adversarial; the parties have presented evidence; and the Court's fact-finding and decision-making must be evidence based. Nor should the Court jump to the conclusion that both parties' valuations are off the mark simply because their positions on fair value are so incredibly divergent. Rather, the Court's first task, as I see it, is to drill down on the parties' positions to see if they are grounded in the evidence and in sound methodology. That assessment will take the Court a long way down the road of fulfilling its function to appraise the fair value of the shares of PetSmart. Only then can the Court discern the extent to which further valuation analyses may be required.

         A proper examination of the parties' competing positions reduces to the following questions: (1) was the transactional process leading to the Merger fair, well-functioning and free of structural impediments to achieving fair value for the Company; (2) are the requisite foundations for the proper performance of a DCF analysis sufficiently reliable to produce a trustworthy indicator of fair value; and (3) is there an evidentiary basis in the trial record for the Court to depart from the two proffered methodologies for determining fair value by constructing its own valuation structure? I take up these questions below. But first I address the statutory framework within which the Court must operate.

         A. The Legal Standard for Appraisal

         This action for appraisal is governed by the Delaware appraisal statute, which directs that the Court

Appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors.[320]

         The purpose of an appraisal action is to "provide equitable relief for shareholders dissenting from a merger on grounds of inadequacy of the offering price."[321] The court's prescribed task is to determine the fair value of the dissenters' shareholdings as of the date of the merger.[322]

         Appraisal is not subject to "structured and mechanistic procedure."[323] It is "by design, a flexible process."[324] Accordingly, there are no presumptions in Delaware appraisal law that favor one valuation approach over another.[325] Instead, the fair value determination, by statutory design and mandate, must take into account "all relevant factors."[326] Every company is different; every merger is different.[327]These differences are enriched with "relevant factors" that must be accounted for in the search for fair value.

         In the unique design of statutory appraisal, "[b]oth parties 'have the burden of proving their respective valuation positions by a preponderance of the evidence.'"[328] If neither party carries this burden, however, "the court must then use its own independent judgment to determine fair value."[329]

         B. Did the Auction for PetSmart Yield Fair Value?

         "The concept of fair value under Delaware law is not equivalent to the economic concept of fair market value."[330] It is, rather, "a jurisprudential concept that draws more from judicial writings than from the appraisal statute itself."[331] The focus of the fair value calculation is on "the value of the company as a going concern, rather than its value to a third party as an acquisition."[332] Even so, in certain cases, based on the evidence presented, the fair market value for a company may be the best and most reliable indicator of fair value.[333] But this will only be so where the evidence reveals a market value "forged in the crucible of objective market reality, "[334] meaning that it was the "the product of not only a fair sales process, but also of a well-functioning market."[335]

         After years of striving for it, Vince Lombardi finally arrived at the understanding that perfection in human endeavors is not attainable.[336] Even in the best case, a process to facilitate the sale of a company, constructed as it must be by the humans that manage the company and their human advisors, will not be perfect.[337] For the reasons I explain below, I am satisfied that the process employed to facilitate the sale of PetSmart, while not perfect, came close enough to perfection to produce a reliable indicator of PetSmart's fair value.[338]

         With guidance from Morgan Stanley, PetSmart's Board began the process of exploring strategic alternatives because the Company's "stock had taken [a] very significant decline from historical levels, " the Company "was unhappy, " and "[s]hareholders were speaking up. . . ."[339] When the Board ultimately decided to pursue a sale, it engaged another reputable investment bank, JPM, and created an Ad Hoc Committee of experienced independent directors to oversee the process. From the outset, the Board's orientation was to view a sale of the Company not as an inevitable outcome, but rather as one of several strategic alternatives that also included remaining standalone while pursuing new revenue and cost saving initiatives or pursuing a significant leveraged recapitalization.[340] If the price achieved in the auction was unsatisfactory, the Board was prepared to walk away from that process and pursue other alternatives.[341] And if the more active among the Company's stockholders were unhappy with the decision the Board ultimately made, the Board was ready to deal with the consequences of that reaction, including to take on a proxy fight if necessary.[342] It was in this environment that the auction for PetSmart was conducted.

         In August of 2014, PetSmart announced to the world that it was pursuing strategic alternatives including a sale, so the whole universe of potential bidders was put on notice.[343] The Board did not rush the sale; it did not receive final bids and make its final decision to sell the Company until December 2014. By the time the gavel fell, JPM had contacted 27 potential bidders, including the three potential strategic partners it considered most likely to be interested in acquiring PetSmart's niche business. In this regard, I note that the Board considered inviting the most likely strategic partner, Petco, into the process, but made the reasoned decision that, without a firm indication of interest from Petco, the risks of providing PetSmart's most direct competitor with unfettered access to PetSmart's well-stocked data room outweighed any potential reward. Nevertheless, the evidence revealed that the Board held the door open for Petco to join the auction if it expressed serious interest in making a bid. It never did.

         Fifteen parties signed nondisclosure agreements and engaged in due diligence. PetSmart management made in-person presentations to thirteen suitors. Thereafter, JPM received indications of interest from five bid groups. Two of those bidders joined forces so that three bid groups proceeded into the next round of bidding. Those three bid groups then engaged in further due diligence, receiving constant updates regarding PetSmart's financials and operations (including the progress of the PIP) and further presentations from PetSmart management.[344] There was no credible evidence presented that management, the Ad Hoc Committee, the Board or JPM colluded with or otherwise favored any bidder during the entirety of the process.[345]

         When JPM directed the final-round bidders to submit "their best and final" offers, KKR/CD&R advised JPM they could not offer more than PetSmart's then-current trading price of approximately $78 per share.[346] Apollo then submitted a final bid of $81.50 per share. BC Partners submitted a bid of $83 per share, after JPM prodded it to bid against its own initial final bid of $82.50 per share. BC Partners' offer of $83 per share was higher than PetSmart stock had ever traded and reflected a premium of 39% over its unaffected stock price. With this bid in hand, the Board met on December 13, 2014, and carefully considered its strategic options with the assistance of its financial and legal advisors. Only after engaging in an analysis of all options did the Board conclude that accepting the $83 per share offer provided the best opportunity to maximize value for PetSmart stockholders.[347]

         The Proxy issued by PetSmart in advance of the stockholder vote on the Merger included the Management Projections. Even though the Board cautioned stockholders against relying too heavily upon these projections, [348] they were there nonetheless for any stockholder to run its own DCF analysis, just as Petitioners have done.[349] PetSmart also announced its Q4 2014 results which revealed at least some positive recent trends in PetSmart's performance. Despite these disclosures, between the announcement that BC Partners would acquire PetSmart and the closing, no topping bidder stepped forward. When the time came to vote, PetSmart's fully-informed stockholders overwhelmingly approved the Merger.

         In the wake of this well-constructed and fairly implemented auction process, Petitioners are left to nitpick at the details and to invent certain prevailing market dynamics that they now claim acted as impediments to PetSmart realizing fair value in the Merger. Specifically, Petitioners point to the following confounders that render deal price unreliable in this case: (1) restrictions on financing impeded the ability of bidders to bid as much as they might have otherwise been willing to pay; (2) the lack of strategic bidders left PetSmart at the mercy of financial sponsors and their "LBO models"; (3) PetSmart was forced into the sales process at a low point in its performance by the agitations of JANA; (4) the Board was ill-informed, (5) JPM was conflicted; and (6) the transaction price was stale by the valuation date. I address each in turn.

         First, as for the contention that a seized credit market restricted the bids, the credible evidence says otherwise. While JPM had concerns in the late fall of 2014 that the credit markets may not allow the private equity bidders to attain the financing necessary to fully fund their bids, these concerns abated soon after Thanksgiving and prior to the submission of final bids. The record is devoid of any evidence that unavailable credit actually affected the amount any bidder was willing to offer for PetSmart. Both Aiyengar and Svider confirmed that in their testimony and I believe them.[350]

         Second, while it is true that only financial sponsors submitted bids for the Company, the evidence is clear that JPM made every effort to entice potential strategic bidders and none were interested. Indeed, the Board would have been receptive to a deal with Petco if only it would have expressed a serious indication of interest. Importantly, the evidence reveals that the private equity bidders did not know who they were bidding against and whether or not they were competing with strategic bidders.[351] They had every incentive to put their best offer on the table.

         Petitioners advance the argument that the "LBO model" will rarely if ever produce fair value because the model is built to allow the funds to realize a certain internal rate of return that will always leave some portion of the company's going concern value unrealized. Taken to its logical conclusion, of course, Petitioners' position would suggest that all private equity bidders employing the same model (assuming they strive for the same IRR as Petitioners contend they do) should have bid the same amount for PetSmart. This, of course, did not happen--as shown by the spread between KKR and CD&R's final verbal bid at $78 per share and BC Partners' winning bid at $83 per share. And while it is true that private equity firms construct their bids with desired returns in mind, it does not follow that a private equity firm's final offer at the end of a robust and competitive auction cannot ultimately be the best indicator of fair value for the company.[352]

         Third, the notion that the Board was forced to sell after the emergence of an activist shareholder finds no credible support in the evidence. By the time JANA arrived on the scene in July 2014, PetSmart's Board had already begun the process of reviewing strategic alternatives with Morgan Stanley. Thereafter, PetSmart took its time with the sales process, not signing the Merger Agreement with BC Partners until December 2014. Indeed, the evidence reveals that all strategic alternatives were on the table in December 2014 and that the Board did not decide to sell until JPM was able to coax the final offer of $83 per share from BC Partners (actually causing it to bid against itself). Had the auction not generated an offer that the Board deemed too good to pass up, I am satisfied that the Board was ready to pursue other initiatives as a standalone company and to defend itself in a proxy contest against JANA and others if necessary.[353]

         Fourth, Petitioners' argument that the Board was ill-informed is premised largely on the exploitation of director Gangwal's inability to recall at trial (nearly three years after the fact) certain details regarding PetSmart's PIP initiative. It is a stretch to point to a witnesses' lack of recall at trial regarding the details of a cost-savings initiative as evidence that the entire PetSmart Board was ill-informed regarding the sales process. This is especially so given that Gangwal was able to testify extensively regarding the Board's consideration of strategic alternatives, the sales process and the Board's deliberations during this period.[354] Petitioners also argue that the Board was ill-informed because it did not receive advice regarding the valuation of the Company if it remained standalone, but this is contradicted by the evidence adduced at trial, including (but not limited to) JPM's presentation at the December 13 Board meeting.[355]

         Fifth, as previously noted, the "conflicts" Petitioners rely upon to impugn the results of the sales process are hardly striking and, in any event, were fully disclosed to the Board and the Ad Hoc Committee. For example, Petitioners argue that JPM did not adequately disclose its previous relationships with potential private equity bidders. As Gangwal testified, however, as a large institutional bank, the Board knew and was not at all surprised that JPM naturally had ties to the large private equity funds interested in bidding on the Company.[356] While Petitioners contend that JPM did not disclose, and was hindered by, conflicts due to its involvement with the initial public offering that Petco pursued in the fall of 2015, the only record evidence on this conflict shows that JPM did not pitch this project, much less get retained to work on it, until months after the PetSmart Merger closed.[357] Petitioners also point to JPM's prior relationship with Gangwal due to its involvement in taking his airline public, but I can discern no basis to characterize this relationship as a conflict or to conclude that it would have affected the advice JPM rendered to the PetSmart Board or its work in running the PetSmart auction.

         Finally, the argument that the Merger Price was stale by the time of closing is at best speculative. Mergers are consummated after the consideration is set. That temporal separation, however, does not in and of itself suggest that the merger consideration does not accurately reflect the company's going concern value as of the closing date.[358] Here, Petitioners would have me conclude that the Merger Price was stale because, in the gap between signing and closing, PetSmart's fortunes took a miraculous turn for the better. While the record indicates that the Company did enjoy some favorable results in Q4 2014, such as an uptick in comparable store sales growth, I am not convinced that these short-term improvements were indicative of a long-term trend. In fact, all testimony at trial was to the contrary-the Board, as well as Teffner, believed that the Q4 results were temporary and provided no basis to alter their view of the Company's long-term prospects.[359] These perceptions were born out in Q1 2015 (when the Merger closed) during which PetSmart's comparable store sales dropped to 1.7%.[360] At year end, PetSmart reported comparable store sales growth of 0.9%, a 40% miss from the Management Projections in just the first projection year.[361]

         Respondent has carried its burden of demonstrating that the Merger Price of $83 per share was the result of a "proper transactional process"[362] comprised of a robust pre-signing auction in which adequately informed bidders were given every incentive to make their best offer in the midst of a "well-functioning market."[363] Under these circumstances, I am satisfied that the deal price is a reliable indicator of fair value.[364]

         C. Can a DCF Analysis that Relies Upon the Any of the Projections In the Record Produce a Reliable Indicator of Fair Value?

         My determination that the $83 per share Merger Price is a reliable indicator of fair value does not end the inquiry. To discharge my statutory obligation to consider "all relevant factors, " it is necessary that I consider the reliability of the other valuations of PetSmart in the trial record.[365]

         Petitioners peg DCF as the "gold standard" of valuation tools.[366] To be sure, that is precisely how Metrick has described it.[367] This court, likewise, has turned to a DCF analysis in the appraisal context to determine fair value and, in certain circumstances, has deemed the results of a DCF analysis to be the only reliable indicator of fair value.[368] Even though I am confident that the deal price in this case is a reliable indicator of fair value, I have approached the DCF valuations performed by the parties' experts with an open mind.[369]

         A proper DCF analysis follows a well-defined sequence:

First, one estimates the values of future cash flows for a discrete period, based, where possible, on contemporaneous management projections. Then, the value of the entity attributable to cash flows expected after the end of the discrete period must be estimated to produce a so-called terminal value, preferably [by] using a perpetual growth model. Finally, the value of the cash flows for the discrete period and the terminal value must be discounted back using the capital asset pricing model or 'CAPM.'[370]

         The first key to a reliable DCF analysis is the availability of reliable projections of future expected cash flows, preferably derived from contemporaneous management projections prepared in the ordinary course of business.[371] As this court has determined time and again, if the "data inputs used in the model are not reliable, " then the results of the analysis likewise will lack reliability.[372] And, as the experts in this case both agree, to be reliable, management's projections should reflect the "expected cash flows" of the company, not merely results that are "hoped for."[373]

         1. The Projections

         Petitioners like the Management Projections and maintain they are reliable indicators of PetSmart's future performance. Respondent, on the other hand, finds itself in the presumably uncomfortable position of having to argue that its own projections cannot be trusted as a basis for predicting expected cash flows and, therefore, cannot provide a sound foundation for a DCF analysis. While I appreciate that the parties' disagreement with respect to the reliability of the Management Projections presents a question of fact that must be answered by the evidence in this case, I take guidance from other instances where this court has examined the reliability of projections used for the purposes of appraisal. Specifically, this court has deemed projections unreliable where "the company's use of such projections was unprecedented, where the projections were created in anticipation of litigation, where the projections were created for the purpose of obtaining benefits outside the company's ordinary course of business, "[374] where the projections were inconsistent with a corporation's recent performance, [375] or where the company had a poor history of meeting its projections.[376]

         The Management Projections upon which Petitioners rely are saddled with nearly all of these telltale indicators of unreliability: (1) PetSmart management did not have a history of creating and, therefore, had virtually no experience with, long-term projections; (2) even management's short term projections frequently missed the mark; (3) the Management Projections were not created in the ordinary course of business but rather for use in the auction process; and (4) management engaged in the process of creating all of the auction-related projections in the midst of intense pressure from the Board to be aggressive, with the expectation that the projections would be discounted by potential bidders. As explained below, each of these factors undermine the credibility of Dages's DCF results.

         First, PetSmart had not historically created five-year projections prior to the creation of the auction-related projections (including the Management Projections). PetSmart's forecasting practice was limited to the creation of annual budgets in connection with the Summer Strategy meetings. These budgets were nothing like the five-year projections management was directed to prepare when the Board decided to explore a sale of the Company. The Summer Strategy budgets were one-year forecasts prepared to support particular proposed initiatives with the anticipation that they would be revised throughout the year as events unfolded.[377]While Vance made her own long-term projections based on the annual budgets created as a part of Summer Strategy, her model was never presented to or relied upon by PetSmart's management or Board.[378]

         The Board's request that management shift from preparing one-year budgets to five-year cash flow projections was made all the more difficult by the fact that PetSmart's senior management were new to their jobs. Teffner, who was leading the effort, had only been in her job for about a year; Lenhardt had only taken on the role of CEO in June 2013. And, of course, the projections were rush jobs; the Board wanted the work product in a matter of weeks to ready the Company for the sales process.[379]

         Second, while management had no history of preparing long-term projections, it did have a history of preparing short-term forecasts that did not accurately predict Company performance.[380] As demonstrated in the following chart produced in Metrick's opening expert report, even PetSmart's reforecasts were often off by large margins:[381]

         (Image Omitted)

         Third, the evidence reveals that management did not believe that the projections they were preparing actually offered reliable predictions of future performance. They were told to "put their best foot forward" and that is precisely what they did.[382] This, of course, is no surprise since they were told by the Board that their jobs depended on it.[383]

         Finally, the evidence makes clear that the Management Projections were created specifically to aid PetSmart in its pursuit of strategic alternatives, including a sale of the Company. To fulfill this purpose, the projections were created to be aggressive and extra-optimistic about the future of the Company.[384] In fact, the Management Projections projected a reversal of several downward trends, including with regard to the important metric of comparable store sales growth estimates.[385]As Teffner, Gangwal and Aiyengar testified at trial, the projections were designed to be aggressive because the Board (and JPM) were convinced that potential bidders would discount whatever projections were put in front of them. This makes perfect sense when projections are being prepared not in the ordinary course but to facilitate a sale of the Company.[386]

         Petitioners argue that management knew where to draw the line between reliable and unreliable projections as evidenced by management's decision not to share the super-aggressive "Growth Case" with the Board. According to Petitioners, the fact that management was willing to provide the Management Projections to the Board reveals that management stood behind them and that they can trusted as a reliable input for a DCF analysis. I disagree. The Management Projections were the product of aggressive prodding by the Board for more optimistic forecasts and everyone involved in their creation knew that. Indeed, when the time came for the Board to look to JPM for valuation guidance, the Board directed JPM to run only downside sensitivities on the Management Projections.[387]

         Petitioners next argue that the reliability of the Management Projections is bolstered by the Company's performance after the Merger Agreement was signed and post-closing. Here again, I disagree. To hear Petitioners tell it, PetSmart's post-signing performance was nothing short of a turnaround miracle.[388] The trial record says otherwise. PetSmart's success, both post-signing and post-closing was and has been mixed. It is true that PetSmart's EBITDA exceeded the Management Projections for 2015 and that PetSmart was able to issue a $800 million dividend by year end. It is also true, however, that in both 2015 and 2016 (as of the date of trial), PetSmart's comparable store sales growth was massively underperforming the numbers forecast in the Management Projections.[389] Hardly a turnaround miracle.

         Petitioners point to the PIP and argue that no matter the "aggressiveness" of the Management Projections, they must be considered in the context of the "cushion" provided by the substantial estimated cost savings PetSmart would realize from this initiative. In this regard, Petitioners point out that while PetSmart repeatedly reported that it would achieve $200 million in cost savings annually from the PIP, various internal documents set the actual estimates between $183-$283 million.[390] The suggestion is that the extra $83 million was a cushion to offset any undue optimism in the Management Projections. Petitioners make too much of the range of PIP savings identified at various times by management. When the rubber hit the road, and management was pressed to provide optimistic but arguably achievable forecasts of PIP savings, management determined that, in their best estimate, $200 million was what was actually achievable.[391] The PIP was layered into the Management Projections and I see no basis in the evidence to conclude that some additional phantom savings were ready to be mined out of PetSmart beyond those already accounted for.[392]

         For all of these reasons, I find that the Management Projections are not reliable statements of PetSmart's expected cash flows. Any DCF analysis that relies upon the Management Projections, therefore, would produce "meaningless" results.[393]

         Even though I have determined that the Management Projections cannot support a meaningful DCF analysis, I must consider the possibility that a reliable valuation of PetSmart nevertheless can be constructed from other evidence in the record. In addition to the Management Projections, Dages has looked to other projections-namely the BCP Case, the Massey Case, and the Bank Case-as foundations for alternative DCF analyses.[394] And on the final day of trial, Dages presented rebuttal testimony regarding a new DCF analysis he had performed based on the JPM sensitivities.

         Metrick initially declined to run of any these projections through his DCF model. Instead, he created his own forecasts for PetSmart by adjusting the Management Projections, based on the 2% comparable store sales growth assumption adopted in the JPM sensitivities, and then further adjusting to account for the eventual decline of the PIP savings he believed would be realized further into the forecast. As the last word from the valuation experts, however, Metrick responded post-trial to Dages' last-minute DCF analysis by pointing out its shortcomings and running his own analysis on the unadjusted JPM sensitivities. The questions remain whether any of these projections represent the expected future cash flows of the Company and whether any DCF based on these projections can be trusted as a reliable indicator of PetSmart's fair value at the time of the Merger.

         When faced with unreliable contemporaneous management projections, this court has adopted other contemporaneous projections as a basis for a DCF analysis where it is satisfied that those projections provide a reliable estimate of the company's future cash flows.[395] But the projections must be contemporaneous, meaning they must reflect the "operative reality" of the Company at the time of the Merger.[396] A DCF analysis does not work in the appraisal context when the projections reflect the "operative reality" of the company in the hands of the acquirer.[397] With this in mind, it is easy to see why none of the projections prepared outside of PetSmart can produce a reliable DCF result. Each reflect various scenarios of how PetSmart would be run under BC Partners' management with a variety of different assumptions. The BCP Case and the Massey Case both were designed with the idea that PetSmart would be run as a private, rather than a public company, with new management, new initiatives and Massey at the helm.[398] While BC Partners believed that Massey might be able to turn PetSmart around, it had no such confidence in PetSmart's current management.[399] Given BC Partners' plan to overhaul PetSmart management and its lack of faith in the current management, it strains credulity to argue that the cases BC Partners created showed expected cash flows if PetSmart were to continue operating as a going concern sans Merger.

         The Bank Case prepared by BC Partners fares no better. The assumptions upon which those projections are based resemble nothing of PetSmart's operative reality. To reiterate, the Bank Case was created for BC Partners to present to potential lenders, not in the ordinary course of business, with the purpose of showing that "if things get tough . . . you can run the business for cash."[400] It assumed that the Company would cut capital expenditures in its efforts to preserve cash with the implicit understanding that this approach would stymie long-term growth.[401] Simply stated, the Bank Case did not reliably state expected cash flows because that was not its purpose.

         Having determined that the Management Projections, the BCP Case, the Massey Case and the Bank Case are not reliable statements of PetSmart's expected future cash flows, it should come as no surprise that I reject outright the DCF analyses Dages performed using those projections as foundation.[402] They are patently not reliable indicators of fair value.

         That leaves the possibility of undertaking some adjustments to the Management Projections to bring them in line with the Company's expected cash flows as a means to supply reliable data for a DCF analysis. Both parties have submitted a DCF analysis based on the JPM sensitivities.[403] Metrick has gone a step further by making further adjustments to the JPM sensitivities to account for his view that the PIP savings will not be sustainable indefinitely.[404] Even though Dages appears to have referred to the JPM sensitivities as an afterthought, his DCF based on those projections is in the record and must be addressed.

         The Board requested that JPM run sensitivities based on 2% comparable store sales growth because it had "a great amount of discomfort" with the 4% comparable store sales growth utilized in the Management Projections, and thought that "2 percent looked more achievable." [405] Given the pressure the Board had placed upon management to prepare increasingly aggressive projections, it is reasonable that the Board would seek to gain a more realistic understanding of PetSmart's expected cash flows and its going concern value as the hour approached for the Board to make impactful decisions about PetSmart's future. While the evidence is a bit light with respect to the bases for the 2% adjustment in comparable store sales growth selected by the Board, I take comfort that the adjustment was conceived by an informed, experienced Board and then analyzed carefully by an informed, experienced banker. It is also not lost on me that the JPM sensitivities are the only projections utilized, in some form at least, by both of the valuation experts engaged by the parties. They bear sufficient indicia of reliability to justify further consideration of the valuations based on the data contained therein.

         2. The Expert Valuations Based on the JPM Sensitivities

         Dages performed his rebuttal DCF on the JPM sensitivities to respond to testimony from Aiyengar and Gangwal to the effect that the Board directed JPM to make adjustments to the Management Projections that would cause them to reflect more accurately PetSmart's future performance.[406] For this analysis, Dages took the cash flows from the JPM sensitivities and ran them through a DCF analysis applying the inputs derived from both his and Metrick's prior DCF analyses--the discount rate (or WACC), the perpetual growth rate and the terminal investment.[407] First, he applied his perpetual growth rate of 2.25%, WACC of 7.75% and terminal investment of $41 million.[408] Across the three JPM sensitivities, this resulted in a value ranging from $102.82 to $112.90 per share.[409]

         Dages then ran a DCF analysis using the inputs he attributed to Metrick "based on [the] exhibits" Metrick utilized during his trial testimony--a perpetual growth rate of 2.0% and WACC of 6.35%.[410] Dages calculated the terminal investment for each of the sensitivities using the same formula that Metrick had used for each sensitivity during his testimony.[411] Across the JPM sensitivities, this resulted in a value ranging from $108.13 to $118.88 per share.[412]

         Metrick had already seized on the import of the JPM sensitivities in his initial report.[413] He adjusted the Management Projections to reflect the 2% comparable store sales growth estimate for years after FY15.[414] He further adjusted the Management Projections, which assumed that PetSmart would achieve the cost savings envisioned by the PIP infinitely, to account for his view "that the cost savings EBITDA improvements will decline beginning in FY19, three years after the savings are assumed to be fully realized in FY16."[415] He then incorporated his assumption that "the annual savings will decline linearly to the Base Case Amount ($59 million) by the terminal period, which begins in FY25."[416]

         The projected decreases in PIP savings represented Metrick's best attempts to estimate how long and to what extent PetSmart would retain the projected benefits.[417] He based his opinion that PetSmart would not realize the PIP savings infinitely on "economic theory, market response to the PIP, and industry experience related to cost reduction programs."[418] Of particular relevance was a McKinsey & Co. study that found 90% of 230 S&P 500 firms that had engaged in cost-savings strategies between 1999 and 2003 had failed to sustain the lower cost savings beyond three years.[419] Additionally, Metrick believed that increasingly strong competition from other pet retailers--i.e., Petco--would cause the cost savings to erode over time.[420]

         Metrick returned to the JPM sensitivities when he responded to Dages's rebuttal DCF valuations.[421] He ran his own DCF analysis on the JPM sensitivities (without adjustments) to reveal the errors in Dages's DCF on those same projections.[422] Metrick found two principal faults with Dages's rebuttal DCF. First, he took Dages to task for using the improper discount rates. In this regard, he began with the premise that "[t]o value the cash flows properly, the discount rate must reflect the assumed capital structure, which in turn depends on how leases are treated in the cash flows."[423] According to Metrick, the discount rates Dages utilized are not consistent with the capital structure assumed in his analysis. Specifically, Dages treated the leases as operating leases (as reflected in the JPM sensitivities), which results in a capital structure with no debt (and 100% equity).[424] And yet the WACC utilized by Dages, pulled from his initial report, is based on a capital structure of 8% debt and 92% equity.[425] Similarly, the WACC Dages attributed to Metrick in his rebuttal DCF was based on Metrick's assumption of a capital structure of 31% debt and 69% equity.[426] Given the very different capital structure assumed in the JPM sensitivities, Metrick opines that Dages should have used a WACC of 8.17% based on his own beta and equity risk premium, not 7.75%.[427] The proper WACC based on Metrick's assumptions should have been 7.7%, not 6.35%.[428]

         Metrick's second criticism of Dages focuses on his use of income projections that "assume that all of PetSmart's costs are completely variable, rising or falling in proportion to sales, so profit margins do not change" even though the JPM sensitivities (based on the Management Projections) include specific fixed expense line items that will not vary with declining sales.[429] To adjust for this, Metrick took the fixed costs he found in the Management Projections and treated "all other costs as variable in implementing the 2% comparable store sales growth assumption."[430]

         Metrick then ran a DCF based upon JPM Sensitivity #2, which assumes that PetSmart will open new stores according to current management plans through 2019 and will have no new store growth thereafter.[431] In this DCF model, he used his terminal investment formula to calculate the required investment in the terminal period using a 2.0% perpetual growth rate.[432] Applying his adjusted Dages WACC of 8.17% (as adjusted to reflect the capital structure assumed by the cash flows), Metrick then performed a DCF using the cash flows found in Sensitivity #2 resulting in a valuation of $82.79 per share.[433] Using his own adjusted WACC of 7.77%, Metrick's DCF analysis using Sensitivity #2 results in a valuation of $86.96 per share.[434]

         As explained above, I have found the JPM sensitivities to be the most reliable projections in the record before me - the question now is what to do with the various DCF analyses constructed by the experts based upon these projections. While I agree with Metrick's criticism of any projection that extends the PIP cost savings out indefinitely into the future, I find no support in the evidence for the specific adjustments that he makes to the PIP cost savings in his initial report. The theory is sound, and I agree that it is not reasonable to assume that the PIP savings will continue at $200 million annually through the terminal period, but there is insufficient evidence in the record to allow me to assess when the PIP cost savings will begin to fade and at what levels. Therefore, I am not persuaded that Metrick's initial DCF valuation, based on his adjustments to the Management Projections, offers a reliable indicator of fair value.[435]

         This leads me to the experts' competing analyses based on the JPM sensitivities. I agree with Metrick's criticism of the rebuttal DCF analysis Dages presented at trial-the WACC must accurately reflect the capital structure indicated by the cash flows, and the costs should accurately reflect the fixed costs. I am also convinced that Metrick's formula for calculating the required amount of investment to support the terminal growth rate is proper, as it is supported by economic theory, finance literature and even testimony that Dages offered to this court in a prior case.[436] Metrick's formula demonstrates that PetSmart's return on invested capital will converge towards its cost of capital, a theory this court has repeatedly cited with approval.[437] In contrast, and in contrast to his past practice, Dages merely adopted the terminal investment from the Management Projections, which would imply that PetSmart would permanently see returns on capital far above its cost of capital.[438]That premise is not credible, at least not to me.

         I also find Sensitivity #2 to be the most reliable of the three JPM sensitivities, as this reflects the current management plan for new store sales growth. Accordingly, I am satisfied that the DCF analysis performed by Metrick in his supplemental report is the most reliable DCF that can be performed with the data available. As noted, this analysis reveals a valuation of PetSmart ranging from $82.79 to $86.96 per share (depending upon whether one applies the adjusted Dages WACC or the adjusted Metrick WACC). Given my lack of confidence in the Management Projections underlying the JPM sensitivities, however, I am not inclined to adjust my view that the fair value of PetSmart at the time of the Merger is best reflected in the $83 per share Merger Price. The DCF analyses performed by Metrick on the JPM Sensitivity #2 are, however, confirmatory.

         D. Does the Evidence Provide a Basis for Alternative DCF Analyses?

         As a final step in discharging my duty to consider "all relevant factors, " I have looked to the record to determine if there is any basis to make further adjustments to the projections or to alter the inputs used by the experts to arrive at a more reliable DCF analysis. I am satisfied that no such basis exists. The JPM sensitivities provided the most reliable evidence in the record of the actual, expected future cash flows of the Company. And while they are not perfect, I find nothing in the evidence that would allow me credibly to adjust these projections further. Nor do I find a basis to alter the experts' inputs. The DCF models they constructed were not that dissimilar. Where they differed, I found Metrick's explanations for his approach, in this case, to be credible. I see no reason to alter the work he performed.

         I have considered all relevant factors. I state my final decision below.


         Accepting Petitioners' contention that the fair value of PetSmart was $128.78 per share would be tantamount to declaring that a massive market failure occurred here that caused PetSmart to leave nearly $4.5 billion on the table. In the wake of a robust pre-signing auction among informed, motivated bidders, and in the absence of any evidence that market conditions impeded the auction, I can find no basis to accept Petitioners' flawed, post-hoc valuation and ignore the deal price. Nor can I find a path in the evidence to reach a fair value somewhere between the values proffered by the parties. And so I "defer" to deal price, not to restore balance after some perceived disruption in the doctrinal Force, but because that is what the evidence presented in this case requires.[439]

         For the foregoing reasons, I have found the fair value of PetSmart shares at the date of the closing of the Merger to be $83 per share. The legal rate of interest, compounded quarterly, shall accrue from the date of closing to the date of payment. The parties should confer and submit an implementing order within ten days.



[1] See In re Appraisal of, Inc., 2015 WL 399726, at *2 (Del. Ch. Jan. 30, 2015); Albert H. Choi & Eric L. Talley, Appraising the "Merger Price" Appraisal Rule (Virginia Law and Economics, Working Paper No. 2017-01, Jan. 18, 2017).

[2] Cede & Co. v. Technicolor, Inc., 2003 WL 23700218, at *2 (Del. Ch. July 9, 2004), aff'd in part, rev'd on other grounds, 884 A.2d 26 (Del. 2005).

[3] 8 Del. C. § 262(h). See, 2015 WL 399726, at *1 (noting that the burdens of proof imposed by Section 262 makes the job of the judge "particularly difficult" and that the litigation structure imposed by the statute is "unusual"); Choi & Eric Talley, supra, at 2 (noting that the appraisal statute presents a "particularly vexing challenge" for the trial judge, inter alia, because it "allocates no explicit burden of proof and requires the court to deliver a single number at the end of the process") (emphasis in original).

[4] See Gonsalves v. Straight Arrow Publ'rs, Inc., 701 A.2d 357, 362 (Del. 1997) (holding that the trial court's decision to adopt one of the parties' valuations of the company "hook-line-and-sinker" without considering all relevant factors was "fatally flawed").

[5] See Finkelstein v. Liberty Digital, Inc., 2005 WL 1074364, at *24 n.56 (Del. Ch. Apr. 25, ...

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