Written by Chris Walton, JDDelaware’s PetSmart appraisal ruling shows that unreliable projections don’t just weaken a DCF — they eliminate it as a primary valuation tool and leave boards dependent on whatever the market gave them.
When the Delaware Court of Chancery decided In re Appraisal of PetSmart, Inc., Consol. C.A. No. 10782-VCS (Del. Ch. May 26, 2017), Vice Chancellor Slights set the fair value of PetSmart’s common stock at the merger price of $83 per share, rejecting the petitioners’ expert DCF of $128.78. He relied on the deal price as the best evidence of fair value — not because Delaware disfavors discounted cash flow, but because the projections in the record could not sustain a reliable DCF.
That result erased nearly $500 million in value the petitioners had sought. It reads as a win for deal-price deference. But for boards, general counsel, and valuation professionals, the harder lesson lies in why the court got there: PetSmart’s projection process had broken down so badly that the most powerful tool in the Delaware toolkit was unusable. A board that cannot produce credible projections does not merely risk losing a DCF argument. It loses the ability to make one at all.
In late 2014, PetSmart agreed to a leveraged buyout led by a BC Partners consortium at $83 per share in cash. The sale followed a broad auction: multiple financial sponsors bid, strategic interest was canvassed, the price carried a meaningful premium to unaffected trading value, and no topping bid emerged. J.P. Morgan advised the board.
After the deal closed in March 2015, dissenting stockholders sought statutory appraisal under Section 262 of the Delaware General Corporation Law, arguing fair value far exceeded the deal price. At trial their expert leaned on a DCF anchored in management’s long-term projections, reaching roughly $128.78 per share. The company’s expert advanced a lower DCF near the merger price and defended the deal price itself as the best evidence of value.
Vice Chancellor Slights faced the familiar modern choice: adopt one expert’s DCF, blend the two, or defer to the deal price on the strength of the process. What makes PetSmart notable is the path he chose, and why.
Delaware courts have long called DCF the “gold standard” when reliable projections exist. PetSmart did not retreat from that. It simply enforced the other half of the sentence: without reliable projections, DCF stops being trustworthy.
The court found several problems with the forecasts. They were not prepared in the ordinary course; they were generated for the sale process, by a management team with no strong track record of multi-year projection accuracy. They embedded optimistic revenue and margin assumptions unsupported by actual performance or the competitive environment. And the two DCF models — both built on versions of these projections — produced what the court called a “vast delta” in value, which further undermined confidence in the method.
When small changes in contested inputs — growth, margins, capital expenditure, working capital — swing the answer by billions, the projections demand rigorous scrutiny. Here, that scrutiny led to one conclusion: the forecasts were not reliable enough to support a meaningful DCF. Once that threshold failed, the method was off the table as an independent basis for fair value.
With DCF sidelined, the court turned to the indicator it did trust: the deal price from a robust, market-tested process. PetSmart sits within the Delaware line that treats the merger price as the best evidence of fair value when three conditions hold: multiple motivated bidders; an informed board negotiating at arm’s length; and an efficient market that has digested the public information and reacted to the deal. The Delaware Supreme Court would cement that approach later in 2017 in DFC Global and Dell; the Court of Chancery’s contemporaneous ruling in SWS Group marked its boundary, finding the deal price unreliable — distorted by buyer synergies — and relying on a DCF to set fair value below the merger price.
Those conditions were met. The auction drew multiple sponsors, strategic buyers were contacted, and the final price carried a substantial premium to unaffected value. No topping bid surfaced, even though sophisticated private equity firms and lenders had full diligence access. Against that backdrop, with DCF neutralized by weak projections, the court held that $83 per share was the best — and only — reliable indicator of fair value. The petitioners’ $128.78 DCF was rejected, and the appraisal arbitrageurs who had bought in betting on a judicial uplift left empty-handed.
PetSmart imposed no judicial premium; no billions changed hands on a court-driven DCF. That is exactly why it should not comfort boards. The case shows how easily projections — the single most important input to a DCF — become a liability when produced for a transaction without governance. The six disciplines below separate a defensible forecast from an untethered one.
1. Develop projections in the ordinary course — and segregate deal overlays
Delaware gives more weight to projections prepared in the ordinary course, by managers with real operating responsibility, used internally for budgeting, capital allocation, and strategy. Forecasts generated or heavily revised “for the deal” are inherently suspect; they may be shaped, consciously or not, by the incentives of executives, advisers, or buyers. In PetSmart, the long-term forecasts were prepared for the sale process — a fact that strongly influenced the court to sideline DCF.
Keep the operating forecast separate from deal economics. Transaction-driven adjustments — synergies, standalone versus sponsor cost of capital, capital-structure changes — should be layered on separately, clearly labeled, and never rebranded after the fact as “management projections.” The more the operating forecast entangles with the deal, the harder it is for a court to trust it.
2. Clarify who owns the projections
Part of the court’s discomfort was uncertainty over whose projections were being relied upon. Where “management projections,” adviser-modified versions, and the numbers plugged into expert models diverge, Delaware judges grow skeptical. Management should own the operating forecast. Advisers may test and sensitize assumptions, but the final numbers should be either clearly adopted by management, with a documented rationale, or clearly rejected, with reasons. When provenance is unclear, any DCF built on those numbers is exposed.
3. Document every material adjustment
Courts are not moved by after-the-fact explanation; what matters is the contemporaneous record. Who proposed each material change? What data supported it? Were the operating managers who own the business involved and in agreement? Without a paper trail, a court may infer the changes lacked rigorous support — and the absence of documentation makes that inference hard to rebut, fair or not. Every material adjustment, especially in a deal, should carry a short written explanation tying it to data, market developments, or revised strategy.
4. Present multiple scenarios and sensitivities
Modern appraisal turns on how sensitive DCF outputs are to inputs that are hard to verify after the fact. PetSmart is the textbook case: small moves in long-term growth or margins shifted value by billions. When a single-point forecast drives a multi-billion-dollar conclusion, the obvious question is — what if you are wrong? Yet boards routinely receive one management case, lightly sensitized but rarely stress-tested with the rigor the numbers demand. The result looks precise and is in fact brittle.
Standard practice — reflected in guidance from the AICPA, the ASA, and the CFA Institute — calls for multiple scenarios when future cash flows are uncertain, which in a contested valuation they always are. A probability-weighted expected value model (PWERM), or a base-downside-upside framework with transparent drivers, gives courts and counterparties a far more defensible footing than any single case. Treat it as a governance requirement: require base, downside, and upside cases with identified drivers; review sensitivities around the discount rate, terminal growth, and key metrics; and have the minutes record the trade-offs weighed.
5. Establish a track record before you need one
This may be PetSmart’s most underappreciated lesson. The court’s concern was not only that the projections were prepared for a sale; it was that management had no established history of reliable long-range forecasting. Without a track record that can be backtested against actuals, a court has no baseline for judging whether today’s projections are credible. This cannot be fixed mid-transaction. Build the forecasting culture in advance: produce multi-year projections annually, compare them to actuals, document the variance. When a deal arrives, the board can point to a record showing management’s forecasts have been reasonable — or that misses were identified, analyzed, and fed back in. That evidence turns projections from assertion into foundation.
6. Record genuine board engagement
The contemporaneous record must show the board did more than receive an adviser’s presentation. Directors — or a special committee, where one exists — should interrogate the projections, challenge key assumptions, and create a record, through minutes, memoranda, or adviser materials, that reflects real deliberation. Delaware courts are increasingly adept at telling boards that genuinely tested the numbers from those that rubber-stamped the work product.
PetSmart is not an anti-DCF case. Delaware still relies on discounted cash flow when management’s projections are robust, ordinary-course, and credible. The decision is a warning about what happens when that foundation is missing — and the consequences run deeper than most boards expect. A well-run sale process can still carry the day: here the court validated the deal price because the auction was competitive and the process sound. But a sloppy projection process narrows the board’s options in ways that may not surface until litigation. If the projections are unreliable, the board may lose the rigorous DCF that could rebut a claim the price was too low — or too high — and be left arguing that the deal price speaks for itself, with no analytical backstop. For valuation professionals and litigation experts, the bar rises accordingly: anyone who uncritically accepts sale-context projections, or relies on heavily modified banker forecasts without a clear chain of custody, should expect searching judicial skepticism.
“The PetSmart opinion is a reminder that projection governance is not a compliance exercise — it is the foundation on which the defensibility of a transaction rests. Delaware courts do not demand perfect foresight. But they do expect that when billions of dollars turn on a set of projections, those numbers are the product of a transparent, disciplined process owned by the people who actually run the business. When that process fails, the court doesn’t adjust your DCF. It throws it out.”
In PetSmart the petitioners bore the cost of the projection failure: they sought $128.78 per share and received $83. Boards should take no comfort from that. The next case may lack a robust auction; the next projections may not be the only thing under scrutiny — the board’s own process may be; and the next court may have no clean deal price to fall back on. PetSmart’s deepest lesson is not who won the appraisal. It is what it means to lose your most powerful valuation tool at the moment you need it most. For anyone who treats discounted cash flow as a central methodology, that is the risk that should keep them up at night.
Chris Walton, JD, is the President & CEO of Eton Venture Services. He can be reach at [email protected].
Eton Venture Services provides independent business and securities valuations — including discounted cash flow, fairness, and solvency analyses — and expert testimony for boards, counsel, and litigants navigating contested transactions.
In re Appraisal of PetSmart, Inc., Consol. C.A. No. 10782-VCS (Del. Ch. May 26, 2017) (Slights, V.C.)
DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017)
Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017)
In re Appraisal of SWS Group, Inc., C.A. No. 10554-VCG (Del. Ch. May 30, 2017) (Glasscock, V.C.)
Del. Code Ann. tit. 8, § 262 — Delaware General Corporation Law, Appraisal Rights
American Institute of Certified Public Accountants (AICPA)
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