The Supreme Court vs. Wall Street

In May 2015, Hewlett Packard purchased a wireless networking supplier named Aruba for an incredible sum of $2.8 billion, this was equal to $24.67 per share of Aruba’s stock. For reference, Aruba IPO’d at $11 a share eight years earlier.

Before the ink was even dry, some of Aruba’s investors were crying fowl that the price was not high enough. They wanted $32.57 per share, or 32% more.

Please keep in mind there wasn’t another bidder anywhere insight. It was just HP wanting to buy one of its supplier.

So guess what happened (hint: think like an American Greedy Hedge Fund)?

Two hedge funds that had invested in Aruba, sued Aruba for accepting such a horribly low price. These hedge funds wanted their $32.57 price and were willing to sue for it.

So they sued Aruba.

Why?

Because they believed based on Discounted Cash Flow, that Aruba was worth 1/3rd more than HP paid. And so they went to the highest court in Delaware to plead their case.

And then everything went sideways for the Hedge Fund A-holes (too harsh?).

And I quote from TheRegister.co.uk:

A judge in the Delaware Chancery court* has held in a 129-page opinion (PDF) that the hedge funds should receive just $17.13/share for their Aruba holdings [or 31% less and not 32% more!, emphasis mine].

This price is based on Aruba’s fair value as a going concern, not the deal price, he maintained. The judge, Vice Chancellor J Travis Laster, said in his ruling that this is best found by using the 30-day average market price (my emphasis), based on the collective view of investors, and not calculated using Discounted Cash Flow (DCF) analyses, which are loaded with individual human error.

BAM!

Price vs. easily manipulated fundamentals wins.

People please say the following outloud…

Price cannot be restated. Price holds all the secrets. Price is not perfect but is still better than all other forms of “valuation.”

Even the biggest court in the Nation, the United States Supreme Court was brought in on this ruling. As Judge J. Travis Laster sited the Supreme Court case Dell vs. Magnetar.

The point…

Now the highest Court in the United States is referencing price as the fairest way to value a company.

From Judge J. Travis, pulled from the bottom of the first page of his 129-page opinion:

“[T]he price produced by an efficient market is generally a more reliable assessment of fair value than the view of a single analyst, especially an expert witness who caters her valuation to the litigation imperatives of a well-heeled client.”; DFC, 172 A.3d at 369-70 (“Market prices are typically viewed superior to other valuation techniques …)

And although the market is filled with a lot of inefficiencies, I think the judge got this one right.

Isn’t it time the Big-Box Advisor World catch up to the Supreme Court? A court that sometimes seems to be running about twenty years behind current thinking.

So please if you own a company that is falling in price but has great Discounted Cash Flow, it’s time perhaps you think about price direction.  
There’s a better way. A way where price and the weight of evidence prevails over Discounted Cash Flow and other easier manipulated valuations.

In Your Corner,

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RC Peck, CFP

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