Cede & Co. (full case)

OPINION:

MEMORANDUM OPINION

JUDICIAL APPRAISAL OF THE FAIR VALUE, AS DEFINED IN 8 DEL. C. § 262 OF THE SHARES OF TECHNICOLOR, INC. COMMON STOCK HELD AS OF JUNE 24, 1983 BY CEDE & CO. FOR CINERAMA, INC.: $ 21.60 WITH INTEREST AS PROVIDED BELOW.

On January 24, 1983, MacAndrews and Forbes Group Incorporated ("MAF") (acting through a wholly owned subsidiary) completed the second step in its acquisition of Technicolor, Inc., a Delaware corporation. The transaction that occurred that day was a cash-out merger in which the 17.81% of the Technicolor common stock not owned by MAF was converted into a right to receive $ 23 in cash. The first step in this acquisition had been completed several weeks earlier by December 31, 1982, when MAF closed a public cash tender offer for up to [*2] all of the Technicolor common stock at $ 23.00. Both the merger and the predicate tender offer had been negotiated with and agreed to by the Technicolor board of directors, which was (with two arguable exceptions) free of any pre-existing entanglement or involvement with MAF or its principal stockholder, Ronald O. Perelman.

Pending in this court are two actions that arise out of that second-step merger. Plaintiff in each is Cinerama, Inc., the beneficial owner of some 201,200 shares of Technicolor common stock (4.4% of the outstanding stock). Cinerama elected to dissent from the merger and promptly filed the first of these actions which seeks a judicial appraisal of the fair value of its stock pursuant to Section 262 of the Delaware General Corporation Law. n1 The second action was filed on January 22, 1986. It is directed against individuals who comprised the Technicolor board of directors and against MAF and Mr. Perelman. This second action, in brief, claims that the directors have the burden to establish the entire fairness of the MAF acquisition and that they cannot do so because neither the process they followed nor the $ 23 price they endorsed was fair to Cinerama as a [*3] Technicolor shareholder. Specifically, it alleges that the Technicolor board was negligent in its dealing with Mr. Perelman, acted without proper inquiry or information and in some respects had conflicting interests that allegedly affected its actions. It is also alleged that disclosures made in connection with the tender offer and the merger were inadequate or misleading and that Mr. Perelman had complicity for these alleged lapses and independently violated a duty he owed to the plaintiff at the time of the merger. Finally, it is claimed that the merger was not properly authorized by the board and that that fact was covered up. This second action (the personal liability action) seeks rescissory damages in the amount of $ 162 per share.

n1 Cinerama's stock was held in street name through the nominee Cede & Co., which is therefore a nominal but necessary party to the appraisal action.

The two cases were consolidated for trial. Evidence was taken from 21 witnesses over the course of 47 extended days of trial. [*4] This opinion reflects the decision of the court on the issues raised in the first of these cases, which requires an appraisal of the "fair value" of petitioner's Technicolor stock "exclusive of any element of value arising from accomplishment or expectation of the merger." 8 Del. C. § 262(h).

The evidence in the appraisal case was structured around the elaborate testimony of dueling experts. Each expert employed a discounted cash flow analysis of Technicolor as of January 24, 1983, but significant methodological and input differences yielded radically different estimates of value. Petitioner's expert was Mr. John Torkelsen, a financial analyst in his own firm, Princeton Venture Research ("PVR"). He opined, for reasons in part described below, that his best estimation of the statutory fair value of Technicolor on a per share basis as of January 24, 1983 was $ 62.75. Respondent's principle expert was Professor Alfred Rappaport of Northwestern University Graduate Business School who also functions in a consulting firm, Alcar. Professor Rappaport stated his opinion that the statutory fair value of Technicolor on a per share basis as a going concern at the time of the merger [*5] was $ 13.14. The dynamics of litigation no doubt contribute to this distressingly wide difference (see n. 17, infra).

For the reasons set forth below I conclude, attempting to consider all pertinent factors as of the date of the merger, exclusive of elements of value arising from the expectation or accomplishment of the merger, and acting within the confines of the record created by the parties at trial, that the fair value of a share of Technicolor stock for purposes of appraisal was $ 21.60. A fair rate of annual interest on this appraised value is fixed at 10.72%.

Ronald Perelman's leveraged acquisition of Technicolor in the two-step transaction agreed upon on October 29, 1982, by the Technicolor board must rank as one of the most successful change of corporate control transactions in a decade that was to become first crowded and later littered with such transactions. MAF's $ 23 cash price represented a large (more than 100%) premium over the September 1982 market prices of Technicolor's stock. The $ 105 million stock acquisition cost was funded almost entirely with bank credit and other borrowings. Upon acquiring control of the company Mr. Perelman and his associates, [*6] Bruce Slovin and Robert Carlton began to dismember what they saw as a badly conceived melange of businesses. Within one year these entrepreneurs had sold several of those businesses for approximately $ 55.7 million in cash ($ 11 per share) and paid about half of the bank debt used to acquire the company. Remarkably, the sale of these businesses did not significantly alter Technicolor's positive cash flow. The remaining businesses (including importantly Technicolor's traditional business of theatrical film processing and a new business of producing videocassette under contract with copyright owners) were apparently thereafter managed with skill and good luck. As modified during the course of MAF's ownership, Technicolor was later sold in an arm's length transaction to Carlton, PLC in 1988 for some $ 738 million in cash. n2 In the annals of the effective uses of leverage, the account of MAF's original minimal cash contribution to the acquisition of Technicolor certainly deserves a place. n3

n2 In addition, in the transaction the MacAndrews entities retained $ 7.48 million in accounts receivable due Technicolor from New World Entertainment. [*7]

n3 The information relating to the later history of Technicolor came into the record in the personal liability action because it relates to plaintiffs principal theory of damages in that case. It is strictly irrelevant to the issues in the appraisal case but adds context without affecting the analysis.

A. Background of The Transaction

In the fall of 1982 Technicolor did represent a melange of businesses, but over the years of its long history, it was best known for its core business of processing film in connection with the making and showing of Hollywood movies.

Early on Technicolor dominated the theatrical film processing industry by virtue of its proprietary control over a state of the art reproduction process. During the 1950's, however, Eastman Kodak invented a new process that provided movie prints of quality similar to Technicolor's at a significantly lower cost. This new technology sharply reduced Technicolor's competitive advantage. While Technicolor remained a leader in the industry, it was no longer able to dominate its rivals. n4

n4 By the early 1970's, prompted by intense price competition in the film processing industry, Technicolor began to use the Kodak process in Technicolor's laboratories. Tr. XVII (Kamerman).

[*8]

In 1969, Harry Salzman, a large shareholder of Technicolor, planned a proxy contest for control of the company. Among those whom Mr. Salzman approached for support in the contest was Morton Kamerman, a businessman who had recently negotiated the sale of a cosmetics company of which he had been CEO. Mr. Salzman suggested that Mr. Kamerman invest in Technicolor and support Salzman's efforts to obtain control. Kamerman did purchase a small block of Technicolor stock and when Salzman's slate of directors was elected in 1970, n5 Kamerman became vice president and a director of the company. By 1976, Mr. Salzman had exited the scene and Mr. Kamerman became Chairman of the Board and Chief Executive Officer. He continued in that position through the date of the merger in question.

n5 Guy Bjorkman who had had business relations with Mr. Kamerman, invested in the company at that time more substantially then Kamerman (Bjorkman with his wife acquired about 9% of the stock) and was elected to its board.

In 1976 Technicolor's [*9] major business was concentrated in film processing. It was the most prominent of a handful of companies that comprised the theatrical film processing industry. n6 These companies serviced the film distribution industry which also consisted of a small number of firms. Despite Technicolor's status as a prominent film processing firm, the company was at that time managed inefficiently and its major processing laboratory was operating "totally out of control and was taking losses that could not be controlled." n7 The theatrical film processing industry was, and is, intensely price competitive, and price, not service or quality, was the determining factor in attracting customers. In 1976, Mr. Kamerman set about eliminating the inefficiencies that plagued the company.

n6 Px 221 at 2.

n7 Tr. XVIII Kamerman at 103.

He succeeded in significantly reducing costs at Technicolor's film laboratories, enabling the company to implement a new, advantageous pricing structure. n8 Technicolor's market share and earnings improved [*10] through the late 1970's. Eventually, the benefits of the cost reduction leveled off, and the company's film processing earnings stagnated in fiscal years n9 1981 and 1982. n10

n8 Much of the company's increased efficiency resulted from an improvement to the company's processing equipment, developed by a Technicolor engineer and completed in 1980, which doubled the speed at which release prints could be processed.

n9 Technicolor's fiscal years ran from July to June. The 1981 fiscal year ended June 27, 1981.

n10 Alcar Rpt. at 3.12.

Film processing represented more than 50% of Technicolor's net income in those years. Kamerman believed that the theatrical film processing business did not offer any sufficient prospect for long-term growth for Technicolor. He based this belief on the structure of the industry. Film processing companies could not control their destinies; they were at the mercy of their customers, a small number of movie distributors. Demand for Technicolor's services was derivative of consumers' [*11] demand for the product supplied by distributors -- movies. Thus, Technicolor could not undertake marketing efforts to increase demand for film processing. Kamerman thought that Technicolor ought to expand into a new business that would provide opportunities for long-term growth and would enable the company to market its services directly to the consumer.

In January 1981, Technicolor embarked on an effort (one of several it had tried over the years) to find new profit centers. At that time it signed a contract with Warner Brothers to duplicate movies owned by Warner on videocassette for distribution by Warner. The Videocassette duplicating business required little or no technical expertise and little capital. It was a new business arising from a new technology.

Also in 1981, Mr. Kamerman approached the Technicolor board with a much more ambitious idea to free Technicolor from the passive role dictated by its place in the film industry. He proposed that the company invest in an innovative area of the consumer film industry -- rapid processing of consumer film. Under Kamerman's plan for "One-Hour-Photo," Technicolor would establish and operate a large network of local stores [*12] which would offer consumers rapid (one hour) development of film and quality service at competitive prices. Kamerman believed that the Technicolor name was recognizable to consumers and that that recognition, along with the company's knowledge of film processing technology, would enable Technicolor to dominate the One Hour Photo industry. n11

n11 The One Hour Photo venture was not the first attempt by Technicolor to enter a new business that would enable the company to take advantage of the Technicolor name to sell products directly to the consumer. In the 1960's, Technicolor sold cameras and equipment bags in the retail market. In the early 1970's, Technicolor sold film under the Technicolor name, in direct competition with Kodak. Both of those businesses had been discontinued by the late 1970's. In the early 1980's Technicolor, through its Audio-Visual division, attempted unsuccessfully to market video equipment at retail. See infra p. 14.

Kamerman's plan called for Technicolor to open 35 One Hour Photo [*13] stores by June 30, 1982, 135 by June 1983, and to own and operate one thousand stores by June 1986. By expanding rapidly into the market, Technicolor would lock up key locations for One Hour Photo stores and gain a foothold in what was perceived by management to be a growing industry. This undertaking would require an enormous outlay of capital. Indeed Kamerman's proposal called for an investment of $ 150 million by June 30, 1983. As of June 26, 1982 Technicolor's stockholders equity was recorded as $ 78.74 million.

In Mr. Kamerman's opinion, the investment in One Hour Photo would enable Technicolor to achieve long-term earnings growth. The company could control its destiny because it would be marketing its product directly to consumers.

Technicolor's board approved Kamerman's proposal in May 1981. Although the company initially planned to open about 50 One Hour Photo stores by August 1982, it had by that date opened only 21 stores. Management anticipated a $ 5.2 million ($ 1 a share) operating loss for One Hour Photo for fiscal year 1983. While investor reaction to the One Hour Photo decision was strongly negative and the company was falling behind in its plan, Mr. Kamerman [*14] remained committed to the project.

B. The Company in Fall 1982

Fiscal year 1982 (6/81 - 6/82) was gravely disappointing for Technicolor. Consolidated net income fell to $ 3.445 million from the previous year's figure of $ 17,073 million. Much of the decline was attributable to write-offs associated with two divisions (Gold Key and Audio-Visual, discussed below), which the company decided in June 1982 to sell, and to losses incurred by those divisions in fiscal 1982. Profits had also declined in the company's core business of film processing.

As of September 1982, and through the date of the merger, Technicolor engaged in a number of distinct businesses through separate operating units.

(a) Film Processing: The Core Business

In FY1982, film processing laboratories located in North Hollywood, California, New York City, London and Rome generated 61% of Technicolor's total revenues and 155% of its gross operating income. The North Hollywood operation was the most significant aspect of this part of the company's business. North Hollywood developed film for theatrical release (mostly 35mm) and for industrial and educational use (mostly 16mm and Super 8mm). This latter [*15] category of film was steadily declining in absolute terms and as a proportion of Technicolor's total film development business; it accounted for only 16% of the total output of all film development in 1982.

The film laboratories also generated income through the sale of silver, which was a byproduct of film processing. As mentioned, profits from silver reclamation were unusually high in fiscal years 1980 and 1981, because the Hunt brothers' attempt to corner the silver market resulted in artificially inflated silver prices during calendar years 1979 and 1980. n12

n12 See Alcar Rpt. p. 3.2.

In January 1983, a small number of film processing companies comprised the theatrical film processing industry; they served a market of movie distributors which was also concentrated in a small number of firms. The practice in the industry was for processing companies to sign service contracts with movie distributors, usually for two or three year periods. n13 Customer relations were, therefore, quite important to Technicolor. [*16]

n13 Dx 221 at 8.

The business was intensely price competitive. Thus, Mr. Kamerman emphasized cost controls and efficiency; his successful cost-cutting mission in the late 1970's had given Technicolor a temporary competitive advantage over its rivals. The outlook in January 1983 for the future of Technicolor's film processing division was unclear, however, and the issue is contested by the parties.

The company operated three smaller divisions as an adjunct to the professional film processing division.

Standard Manufacturing manufactured film splicers and related equipment for use in the wholesale consumer photofinishing industry. The division generated operating income of $ 224,800 in fiscal year 1982.

Magna Crafts engaged in the business of adding soundtrack to film. Magna Crafts generated $ 380,000 in operating income in fiscal year 1982.

Vidtronics provided film-to-tape transfers and tape editing facilities for the post-production phase of filmmaking. Similar services were provided for television [*17] productions. The division generated operating income of $ 2,549,080 in fiscal year 1982.

(b) Videocassette Duplicating

In 1981, Technicolor opened its videocassette duplication division in Newbury Park, California. The business consisted of reproducing videocassettes under contract with film copyright owners. The technology was simple; Technicolor's only comparative advantage was its reputation and its relationships with copyright owners -- the film companies. As of January, 1983, the company had invested assets in videocassette which had a book value of $ 5,811,000. During the first six months of fiscal year 1982, the division suffered an operating loss of $ 983,000. The division rebounded in the second half of the fiscal year, earning its first operating profit in that six month period.

Technicolor's plan for One Hour Photo was an ambitious one. It was risky, not only because of the large capital investment it required, but also because of the nature of the One Hour Photo business. In 1982, that industry was in the early stages of its development and was not certain to establish itself as a stable business. The aggressiveness of Technicolor's [*18] plan -- to open a large number of stores and gain a strong foothold in the industry it planned to eventually dominate -- made Technicolor particularly vulnerable if the industry foundered. Even if the industry blossomed, competition from rival companies could threaten Technicolor's profitability.

Technicolor's board of directors assessed the situation and authorized management to embark on the venture. The directors believed that if it became apparent that the venture was a mistake, the company could limit its losses by refraining from opening more stores and liquidating the then existing stores.

(d) Government Services

The Government Services division provided support services to the United States Government. These services included photographic laboratory operation, photographic image analysis and enhancement, photo instrumentation and remote sensing, as well as non-photographic activities such as management services, warehousing operations, application services, computer support, and operation of information centers for the public. In fiscal year 1982, the division generated $ 2.2 million in operating income.

(e) Audio-Visual

Technicolor's Audio-Visual division [*19] was a thorn in its side during the early 1980's. The division had been manufacturing and assembling Super 8mm film projectors for industrial and educational use. When VCRs became available in the early 1980's, demand for film projectors nose-dived. Management decided to discontinue manufacturing the projectors. Audio-Visual would sell a new product -- a quarter-inch miniature video camera. Technicolor would not manufacture the mini-camera. Rather it reached an agreement with Funai Electronics Trading Co., Ltd. to sell cameras manufactured in Japan by Funai. The minicamera was a flop in the retail market and, in 1982, Technicolor decided to liquidate the division.

In January 1983, Technicolor's Audio-Visual was being liquidated. Its primary asset was property in Costa Mesa, California where its operations had been located. Efforts to sell the Costa Mesa property had failed. Twice agreements had been reached with prospective buyers; both deals fell through. Technicolor's board estimated that the property could be sold for $ 5 million to $ 6 million. n14

n14 Tr. XIX (Kamerman) at 86.

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(f) Gold Key

Gold Key was engaged in the business of acquiring and licensing rights to Grade B motion pictures. Gold Key suffered an operating loss of $ 788,000 in fiscal year 1982 in contrast with a $ 2.6 million profit the previous year. The decline was attributed to the loss of much of the sales staff following the termination of Gold Key's president. After his termination the company discovered facts which led it to conclude that he had diverted company funds by acquiring films through companies owned by him, and selling them to Gold Key at inflated prices. On August 25, 1982 the board of directors authorized the company's officers to seek a buyer for Gold Key. No buyer had been found by the time of the merger.

(g) Consumer Photoprocessing

Through its consumer photoprocessing division, Technicolor operated five wholesale developers of consumer films that performed overnight processing for retail outlets. Mr. Kamerman was concerned that customers of Technicolor's consumer photoprocessing division might view Technicolor as having a conflict of interest because it was engaging through One Hour Photo in direct consumer processing. Thus, it was thought possible that [*21] the photoprocessing division would need to be sold. By the end of 1982, however, there were no plans to sell the division.

C. Technicolor's Stock Price

Technicolor's stock was traded on the New York Stock Exchange. It was widely held. There was no control block, or even any large stockholders (petitioner, who had acquired its stock in 1982, and Mr. Bjorkman -- see n. 5, supra -- appear to be only significant stockholdings prior to MAF's acquisition effort).

On June 30, 1978, the end of its 1978 fiscal year, Technicolor's stock was trading on the New York Stock Exchange at $ 7.75. The following year, Technicolor's consolidated net income grew, climbing from $ 3.5 million in FY1978 to $ 7.9 million in FY1979. The company experienced a corresponding increase in its stock price to $ 10.333 on June 30, 1979. Consolidated net income more than doubled again in FY1980 to more than $ 17 million. Of that amount, however, about $ 9 million reflected the value of silver recovered from film processing. (Silver prices -- and silver recovery profits -- soared during the period because of an attempt by the Hunt Brothers to corner the silver market). Technicolor's stock price [*22] rose during that period, reaching $ 24.667 by June 30, 1980. The benefit from high silver reclamation profits was short-lived, however, as the silver market subsided in 1981.

Despite receiving abnormally high profits from the sale of silver in FY1981, Technicolor's consolidated net income stagnated during that period. As earnings stagnated and silver began to fall, Technicolor's stock, which reached a high of $ 28.50 on April 7, 1981, began to decline.

On June 4, 1981, Technicolor announced its decision to enter the One Hour Photo business. At the time of the announcement, Technicolor's stock was trading at $ 22.13. The stock market's reaction to the announcement was negative. By July 7, Technicolor's stock price had fallen to $ 18.63. The decline continued during the balance of 1981 and in 1982 as the company struggled and experienced a further drop in earnings. On June 30, 1982, the stock closed at $ 10.37. In September 1982, it reached $ 8.37 and at the end of that month stood at $ 11.25.

II. A Preliminary: A Note on Judicial Method In this Appraisal Proceeding

In this case the expert opinions on value cover an astonishing range. Two experts looking at the same [*23] historic data and each employing a discounted cash flow valuation technique arrive at best estimates as different as $ 13.14 per share and $ 62.75 per share. n15

n15 A significant part of this difference is accounted for by the differing discount rates used in the DCF models. If one substitutes the higher discount rate used by respondent's principal expert for the lower rate used by petitioner's expert and makes no other adjustment to either DCF model the difference reduces from $ 49.61 a share to $ 20.86. See Post-Trial Stipulation P 2(d). Dkt. No. 450.

In many situations, the discounted cash flow technique is in theory the single best technique to estimate the value of an economic asset. Prior to our Supreme Court's decision in Weinberger v. U.O.P., Del. Supr., 457 A.2d 701 (1983) however, that technique was not typically employed in appraisal cases in this jurisdiction. But with Weinberger's implicit encouragement this technique has become prominent. See, e.g., [*24] Cavalier Oil Corp. v. Harnett, 1988 Del. Ch. LEXIS 28, Del. Ch., C.A. No. 7959, Jacobs, V.C. (Feb. 22, 1988); Neal v. Alabama By-Products Corp., 1990 Del. Ch. LEXIS 127, Del. Ch., C.A. No. 8282, Chandler, V.C. (Aug. 1, 1990). The DCF model entails three basic components: an estimation of net cash flows that the firm will generate and when, over some period; a terminal or residual value equal to the future value, as of the end of the projection period, of the firm's cash flows beyond the projection period; and finally a cost of capital with which to discount to a present value both the projected net cash flows and the estimated terminal or residual value.

*** While the basic three-part structure of any two DCF models of the same firm, as of the same date, will be the same, it is probably the case (and is certainly true here) that the details of the analysis may be quite different. That is, not only will assumptions about the future differ, but different methods may be used within the model to generate inputs. This fact has a significant consequence for the way in which this matter is adjudicated. Sub-parts of the DCF models used here are not interchangeable. With certain exceptions, each expert's model is [*25] a complex, interwoven whole, no part of which can be removed from that model and substituted into the alternative model. n16

n16 The most notable exceptions are, the cost of capital component and, the long-term debt figure. They are free standing and may be adjusted without affecting other aspects of the model.

For example, following trial the court inquired of counsel (see Appendix to Dkt. No. 450) whether the record would permit calculation of the fair value of Technicolor stock as of January 24, 1983, by accepting petitioner's expert's revenue and cost projections (i.e., net cash flows) for the film processing division, while accepting the other aspects of the model of the company's principal expert. A number of other possible cross-matching of this type were inquired into. In response, counsel took the position, which I accept as correct, that essential differences in the way these two experts approached the DCF task left the record incapable of performing such tasks.

The parties agree, and I conclude, [*26] that the two expert models do not, for the most part, include interchangeable parts. This fact limits the court's flexibility now.

An appraisal action is a judicial, not an inquisitorial, proceeding. The parties, not the court, establish the record and the court is limited by the record created. The statutory command to determine fair value is a command to do so in a judicial proceeding, with the powers and constraints such a proceeding entails. Accepting that the expert testimony has been so structured as to largely foreclose the court from accepting parts of one DCF model and sections of the other, it follows that the court must decide which of the two principal experts has the greater claim overall to have correctly estimated the intrinsic value of Technicolor stock at the time of the merger. Having decided that question, it will be open to me to critically review the details of that expert's opinion in order to determine if the record will permit, and judicial judgment require, modification of any inputs in that model. What the record will not permit is either a completely independent judicially created DCF model n17 or a pastiche composed of bits of one model and pieces [*27] of the other.

n17 For good reasons aside from technical competence, one might be disinclined to do so. Simply to accept one experts' view or the other would have a significant institutional or precedential advantage. The DCF model typically can generate a wide range of estimates. In the world of real transactions (capital budgeting decisions for example) the hypothetical, future-oriented, nature of the model is not thought fatal to the DCF technique because those employing it typically have an intense personal interest in having the best estimates and assumptions used as inputs. In the litigation context use of the model does not have that built-in protection. On the contrary, particularly if the court will ultimately reject both parties DCF analysis and do its own, the incentive of the contending parties is to arrive at estimates of value that are at the outer margins of plausibility -- that essentially define a bargaining range. If it is understood that the court will or is likely to accept the whole of one witnesses testimony or the other, incentives will be modified. While the incentives of the real world applications of the DCF model will not be replicated, at least the parties will have incentives to make their estimate of value appear most reasonable. This would tend to narrow the range of estimates, which would unquestionably be a benefit to the process.

[*28]

III.

The estimation of the fair value as of January 24, 1983, of Technicolor of Professor Rappaport is, in my considered opinion, a more reasonable estimation of statutory fair value than is the alternative valuation of petitioner's expert. In reaching that judgment I have considered a large number of factors, none of which was itself decisive. Together these factors point overwhelmingly to this conclusion.

The following statement of the reasoning leading to this conclusion is in three principle parts reflecting the tripartite structure of the DCF model used by each witness. The first part (pp. 22-63) treats the generation of net cash flows for the forecast period for the various Technicolor businesses and a particular legal question relating to cash flow projection upon which the parties divide (pp. 42-63). The second aspect of the DCF model -- the terminal or residual value of the company at the conclusion of the forecast period -- is treated at pp. 63-68. It is in connection with that aspect of the model that the methodological differences between the DCF methodology of Mr. Rappaport/Alcar and that of Mr. Torkelsen/PVR will be treated. Finally, at pp. 68-74 the selection [*29] of an appropriate cost of capital/discount rate will be discussed.

Differences in the witnesses treatment of each of these three principal components contributes to the vastly different estimations of value presented. As I have gone through the process of evaluation of the testimony, I have tried to roughly assess the extent to which particular differences in inputs contribute to the total difference. These assessments are not precise and in most instances (but not valuation of the videocassette business) play no real role in the evaluation of which experts' testimony presents the most reasonable estimation of statutory fair value. They do help to some extent to understand where in these competing models value is generated and to what extent. To that extent these calculations may highlight particularly important aspect of this dispute.

A. Projection of Net Cash Flows By Line of Business

1. Valuation of the Film Processing Business

Technicolor's film processing business was the most important source of economic value of the firm in January 1983. That business was carried on within a number of profit centers. The principle center of this activity was the North [*30] Hollywood operation which itself accounted for 61% of the company's gross revenue and 155% of gross operating income in FY1982. Of substantially less importance were film processing operation in New York, London and Rome, as well as Magna Crafts. Professor Rappaport values North Hollywood as having a fair value on the merger date of $ 45 million and the other processing centers as having a fair of $ 10 million or a combined value of $ 55 (or about $ 12.00 per share. If one takes into account corporate debt and headquarters expense, and prorates them over the assets with a positive value (see Alcar Rpt. Summary Page), the per share value that Rappaport implicitly attributes to film processing would be restated very roughly to about $ 8.00 a share or about 60% of Technicolor's per share value in his opinion.

Trying to get some perspective on how important film processing is to Mr. Torkelsen's $ 62.75 value is more difficult. My estimate, which is at best an approximation, is that film processing accounts for about $ 39.16 per share of PVR's estimate of per share value (or 57%). n18 These figures are estimated, and perhaps in a flawed way, but I set them forth simply to try to [*31] put the importance of this business to the valuation in perspective. In all events, the film processing business was the most important aspect of the analysis and the North Hollywood operation was very much the dominant part of film processing. It was the part of film processing that the experts most focused upon.

n18 That figure is derived as follows. From the $ 62.75 total per share value is deducted $ 6.00 per share which represents the per share value of the assets Mr. Torkelsen assumes will be sold (net after payment of corporate debt). The film processing portion of the remaining $ 56.75 of value is approximated by roughly calculating the proportion of Technicolor operating profit forecast (Vol. 2 Px 445 p. 146) represented by all film processing units (very rough at 69%, since that percentage does not accord weight to when cash flows are projected to come). This leads to an estimate of $ 39.16 (.69 x 56.75).

For the reasons that follow, I conclude that Professor Rappaport's forecasts more reliably than [*32] Mr. Torkelsen the prospects for the North Hollywood division as of January 24, 1983, and more reasonably values the film processing business.

(a) Mr. Torkelsen's Analysis of Film Processing

(i) Assumptions

Mr. Torkelsen's analysis is based on, inter alia, the following assumptions:

1) Technicolor would retain its 1982-83 market share throughout the forecast period;

2) there were (in 1982-83) no foreseeable external threats to the vitality of the film processing business;

3) all Technicolor's material economic relationships would remain stable during the forecast period. These assumptions are in important respects not the most reasonable assumptions that one valuing this company might make.

(aa) Market Share Assumption

Torkelsen's assumption that Technicolor's market share would remain steady during the forecast period is not altogether reasonable. In 1981, United Artists was a very substantial Technicolor customer. It had, however, recently been acquired by Metro-Goldwyn-Mayer ("MGM"), whose professional film service needs were fulfilled by its subsidiary Metrocolor. United Artists notified Technicolor that it would not renew its contract with Technicolor [*33] upon the contract's expiration in 1983. n19

n19 In mid-1982, Orion Pictures acquired Filmways, another customer of Technicolor. Orion transferred Filmways' work to a competitor of Technicolor. In August 1982 Technicolor began doing business with Clint Eastwood. Respondents concede that Clint Eastwood's business would be sufficient to make up for the loss of Filmways.

The loss of United Artists' business, although not devastating to Technicolor's prospects as of 1983, was significant. United Artists' business had over recent years n20 accounted for approximately 11% of North Hollywood's revenues. See Alcar Rpt. at 35. No easily foreseeable replacement for that business existed on January 24, 1983. n21 Because Technicolor was aware, on January 24, 1983, of the impending loss of approximately 11% of North Hollywood's customer base, Mr. Torkelsen's assumption that the company would retain its 1982-83 market share during the forecast period is not the most reasonable assumption one could make in this respect. [*34]

n20 From 6/80-12/82.

n21 Technicolor's contractual arrangements with each of its major customers required it to provide those customers with the lowest price Technicolor provided to any other customer. This "most favored nation" clause hindered Technicolor's ability to engage in price competition to attract new customers.

(bb) No External Threats to the Business Assumption

Mr. Torkelsen assumed that there were no technological or other external threats to film processing business. This assertion is contested by respondents and seems, on balance, to be unsound.

Petitioner explains that Torkelsen's assumption that North Hollywood faced no external threats was based partially on respondent's interrogating answer "that there was not a strong likelihood that new significant competitors would enter the professional motion picture film processing field." n22 The assumption, however, also necessarily relies upon a conclusion that the industry "faced no significant technological threat from any electronic-based [*35] new delivery mediums for years to come." n23 Given the existence in 1983 of emerging videocassette technology, videodisc technology and the growth of cable television and the prospect for the development of direct satellite transmission of movies to theaters, this statement is difficult to accept.

n22 Petitioner's Opening Brief at p. 665.

n23 Id.

While, having listened to (and read) the evidence, I regard the movie industry as of January 1983 as basically being a relatively stable business, it is an exaggeration to say that as of that time it faced no new technological threats. More pertinently, however, the film delivery mode did face some particular risks of future technological obsolescence. Thus, I cannot accept Mr. Torkelsen's assumption that no technological or external threat to North Hollywood's business existed at the merger date.

(cc) Stable Economic Relationships Assumption

Mr. Torkelsen's assumptions that Technicolor's material economic relationships would remain stable during the [*36] forecast period appears to me to be sound, except as it relates to the impending loss of the United Artists' account discussed above.

As a whole, I find the assumptions underlying Mr. Torkelsen's North Hollywood analysis to be unduly optimistic. I do not, however, base my preference for Professor Rappaport's analysis of film processing solely on the unreasonableness of some of Torkelsen's assumptions. I am equally troubled by the methodology used by Mr. Torkelsen.

(ii) Mr. Torkelsen's Method of Forecasting Film Processing Net Cash Flows

To forecast earnings for North Hollywood during the period 1983 through 1987, Torkelsen did not simply project an established history of net revenues into the future. He adopted a much more complex technique to estimate Technicolor's future cash flows from film processing. He used a bi-variant regression analysis and assumptions concerning future growth derived from projected growth in movie screens.

Stated quite broadly, regression analysis is used to ascertain a mathematical relationship between two (or more) variables. If a sufficient correlation between variables is found to exist, expectations of future changes in one variable (the [*37] independent variable) about which one is presumably relatively confident is used to predict changes in the other (dependent) variable. Regression analysis, therefore, is most useful when the variable one desires to estimate is difficult to estimate directly, but is well correlated with a variable with a more easily predicted value, which can then be used to project future values of the dependent variable.

In his North Hollywood regression, Mr. Torkelsen projected revenues (the dependent variable) for North Hollywood, based on predicted (by him) levels of two independent variables -- 35mm film footage output by Technicolor and inflation. He estimated costs for North Hollywood during the forecast period based on the same two independent variables. From these calculations, the witness was able to create a set of net operating profit projections for North Hollywood during the forecast period. I need not delve into the detailed and complex issues of "T values," "r squared values" "degrees of confidence," etc., which pervade the world of regression analysis. Nor do I feel compelled to discuss respondents' argument that the use by PVR of an inflation variable in its regression equation [*38] renders the PVR analysis unreliable. Rather I focus my attention on that which I find to be a major weaknesses of Mr. Torkelsen's model, the projection of one of the independent variables, 35mm footage, the type of film that is used in commercial motion picture business.

Assuming a correlation between the dependent and independent variables, a regression analysis can be a reliable tool in predicting the value of a dependent variable only if the predicted value (i.e., input selected) of the independent variable is reliable. For the reasons set forth below, I cannot accept as reasonable the inputs selected by Mr. Torkelsen for one of his critical independent variables -- 35mm footage output by North Hollywood.

(aa) Base Year Projection of 35mm Footage

Mr. Torkelsen's projection of North Hollywood 35mm footage output for its base year (calendar year 1983) seems unreasonable. He assumed that total theatrical 35mm footage output for a given year equals the number of release prints processed in that year multiplied by the average footage per release print. He then assumed that the number of release prints processed equals the number of motion pictures released multiplied [*39] by release prints demanded per motion picture. To estimate the number of feet per release print, Mr. Torkelsen divided the 35mm theatrical footage processed during fiscal year 1982 and divided that number by the number of 35mm theatrical prints processed during that period. These initial assumptions seem quite reasonable. It is the next step, in which he selects inputs for the equation described above, that I cannot conclude is a reasonable way to do what the model requires.

In estimating the number of motion pictures to be processed in 1983 and the number of release prints demanded per picture, Mr. Torkelsen performed two different calculations and selected the lower of the two for use in his model. Neither method used is, in my opinion, reliable.

The first calculation (and the one Mr. Torkelsen actually uses) was performed as follows. He estimated the number of motion pictures to be released by North Hollywood's customers in 1983, by adopting Technicolor management's projections for its major customers. To predict the number of release prints to be processed per picture, however, he chose not to use Technicolor's estimates, but instead used the average, by customer, for calendar [*40] year 1982. No persuasive logic is offered for this step. The average number release prints processed per motion picture in 1982 represents the prints demanded per picture based on the motion pictures released in 1982. That number reflects certain characteristics of the movies released in 1982, including the popularity of the pictures released, n24 how broadly each movie was released, the number of movies released, etc. Torkelsen's calculation implicitly assumes that motion pictures released in 1983 possess in the same proportions characteristics identical to those released in 1982, at least to the extent those characteristics bear on the number of release prints processed per picture. Such an assumption is not reliable and not necessary. Had management's actual estimate for the number of release prints to be processed per picture in 1983 not been available, the use of 1982 data as a "proxy" might be the best one could do. But such actual projections used in the business were available; indeed, Mr. Torkelsen used that data in his alternative calculation.

n24 For example, the distribution pattern in 1982 was affected by the release that year of "ET" one of the most popular movies in history.

[*41]

In the alternative calculation, Torkelsen used management's 1983 projections for release prints processed per motion picture released. But in that calculation, he chose not to accept managements projections for the number of motion pictures to be released in 1983 by its movie studio customers. Instead, petitioner's expert substituted for that figure published projections for the number of pictures to be released per studio. n25 Again, this mixture of apples and oranges is not justified logically.

n25 Mr. Torkelsen did in this calculation use Mr. Cipes projection of films to be released by United Artists.

Under each of these alternatives Mr. Torkelsen is prepared to dignify one or the other of management's planning figures. But no alternative is used in which both of management's elements are used to generate a projection of the kind that businessmen were using in their business (as Professor Rappaport did do).

(bb) Projected Growth in Output During the Forecast Period

Independent of the problematic technique [*42] for developing a 35mm processing footage forecast, is the problematic method Mr. Torkelsen uses to estimate projected growth of that factor.

After estimating 35mm footage output for its base year 1983, Mr. Torkelsen projected a 2.31% growth rate in output for each remaining year of the forecast period. Mr. Torkelsen did not directly forecast the growth rate of Technicolor's 35mm footage output during the forecast period to be 2.31% (by, for example, looking at Technicolor's history). Instead, he used an indirect method to come up with that figure. That is, relying upon expert witness testimony and historic data, he projected (as of 1982) the number of movie screens in the U.S. from 1983-1987. He concluded that the number of screens exhibiting films in the U.S. would grow at a rate of 2.31% annually during the forecast period. Then, assuming a one to one relationship between screen growth and processing demand, Mr. Torkelsen concluded that the demand for Technicolor 35mm footage output would also be expected to grow at 2.31% annually. I cannot accept that reasoning.

As an initial matter, the testimony concerning an expectation in 1982 that the number of movie screens would [*43] increase in the following five years was itself unconvincing. The credibility of petitioner's key witness on that point was severely damaged on cross-examination. Second, I am not persuaded that the growth rate for movie screens in the U.S. is a reliable proxy for projecting North Hollywood's 35mm footage output.

In support of its use of the screen growth proxy, Mr. Torkelsen compiled data comparing the historic (1976-1982) relationship between screen growth and 35mm footage output. n26 The data collected does not suggest any ascertainable relationship, on a year to year basis, between screen growth and North Hollywood's 35mm footage output. n27 Petitioner argues, however, that a longer term one-to-one relationship exists between these variables. Were one to conclude that that relationship existed over that longer term, the calculation of an annual growth rate based on such a relationship for use in a discounted cash valuation would still be problematic. In the DCF model it is quite important (i.e., affects value) when in a period revenue will be received. Thus, even accepting for the moment that over some seven-year periods growth in total theater screens has directly [*44] correlated with growth in total film processing, that fact is of limited use in projecting income for a DCF model where one can demonstrate very substantial year-to-year variance between these two variables. That is the case here.

n26 He went beyond 35mm growth (see Px 544) but the parties agree that 35mm film is the critical product of the companies processing business and that is what Torkelsen uses in his regression.

n27 Professor Hamada supplied some relevant data:

Dx 355, Tab 16; See also for different data supporting the same conclusion Px 544 (especially Technicolor 35mm data).

Equally important, I am not persuaded that the record in this case shows that it is reasonable to assume that a one-to-one relationship exists between these variables even over the longer term. From 1976-1982, [*45] Technicolor's 35mm footage grew 58.9%, while the number of screens nationwide grew only 13.8%. Px 544 (company-wide data). This fact is inconsistent with a long-term correlation of the kind assumed. If one looks at 35mm theatrical film processing (which is the more relevant type of processing) the variables simply do not appear to be significantly correlated; n28 factors other than screen growth would appear to greatly affect North Hollywood's output, thus rendering the use of the screen growth proxy unreliable. n29

n28 Mr. Torkelsen did not perform a regression calculation to analyze the correlation between these two variables.

n29 Indeed the failure to adjust the projections to reflect the loss of United Artists' business exemplifies one problem with using a proxy such as nationwide screen growth to predict the performance of a particular firm -- the proxy fails to account for enven known idiosyncratic characteristics of the individual firm.

(cc) Reality Check

A comparison of Mr. Torkelsen's projections [*46] of North Hollywood's sales and operating profit in the important base year, calendar year 1983, suggests that as of the merger date, reasonable, informed persons did not in fact expect the results for North Hollywood that Torkelsen uses as his base. Mr. Torkelsen's estimate of 1983 North Hollywood sales is 14% greater than the estimate for that period prepared by persons who at the time were creating short-term business plans for the company. He projected North Hollywood's 1983 operating profit to be 36% greater than management projected those profits to be at the time. I find unpersuasive petitioner's effort to disregard these real-world facts on the basis that those who were creating the projections were, essentially, incompetent. Rather, I think what those persons did in the course of their employment is, in this instance, deserving of weight.

(b) Professor Rappaport's Film Processing Valuation

(i) Methodology and Assumptions

Again a discounted cash flow analysis was used. In this instance no regression was performed however. North Hollywood's net operating profit during the forecast period were estimated through a process informed by history and judgment. First [*47] a base (1983) year forecast was established, and then assumptions about growth during the forecast period were made.

For his base forecast, Professor Rappaport adopted management's projections for calendar year 1983 sales at North Hollywood. Alcar then assumed that the company would achieve a 19% operating profit margin during 1983. The 19% figure was based on historic margins at North Hollywood. n30 Alcar normalized the historic data in a responsible way to eliminate the effect that abnormal silver reclamation profits had had upon North Hollywood's profit margin during fiscal years 1980 and 1981. From the sales and profit margin figures, Alcar derived the costs and net operating profit projections for North Hollywood. For years 1984-1987, Alcar adjusted its sales estimate to account for the loss of United Artists as a client, and otherwise assumed flat (zero) growth. Sales were assumed to be constant by Alcar for reasons that on balance I find reasonable and operating profits were estimated to remain at 19% throughout the forecast period.

n30 The 19% forecast exceeds managements forecast of operating profit margin in 1983. Alcar Rpt. p. 3.4.

[*48]

(ii) Reasonableness of Assumptions

The decision to adopt management's 1983 sales forecast for North Hollywood seems to me to be quite reasonable. Historically, the company's one-year forecasts for North Hollywood had been quite accurate. n31 Also, as an intuitive matter, I find the unbiased n32 management forecast ordinarily to be more reliable than estimates later produced by experts who cannot be expected to be as familiar with the company as the company's own management.

n31 E.g., Tr. XIII (Torkelsen) at 71-73.

n32 Petitioners argument that those creating the plans had an economic incentive to under-predict success so that they could qualify for bonuses has been rebutted in the evidence.

I am also comfortable with Alcar's assumption of flat growth in 35mm output during the forecast period. Professor Rappaport, unlike PVR, directly forecasted growth in film processing output for North Hollywood. He based its forecast on historic data published in the Hope Reports Industry Quarterly. That data [*49] indicated that from 1979-1982, Technicolor's 35mm footage output had decreased 4%.

In light of the Hope Report data, and the threat posed by alternative entertainment technologies, I conclude that Alcar's assumptions of flat growth in 35mm footage during the forecast period to be more reasonable, than Mr. Torkelsen's 2.31% annual growth forecast.

*** For these reasons I conclude that Professor Rappaport's valuation of the important film processing component of Technicolor is more likely to accurately estimate the statutory fair value of that component than is Mr. Torkelsen's estimation.

2. Valuation of Videocassette Business

Professor Rappaport's technique (and the results of that technique) for valuing the videocassette business as of January 24, 1983 in my opinion, offers greater assurance of reliability than does Mr. Torkelsen's technique, which is predicated upon a series of statistical operations (logistic curve analysis, experience (cost) curve analysis) the application of which involves even greater speculation than is entailed in the technique employed by Professor Rappaport. Professor Rappaport's technique, while in no sense involving scientific techniques, [*50] was a reasonable way to attempt to predict an especially unclear future. I remarked at trial and affirm my belief that Professor Kloppfenstein's method (upon which Rappaport in part relied) while technical, is in no sense scientific; I do not conclude that it is useless, however.

Professor Rappaport valued the videocassette business as possessing a value (without regard to corporate debt and corporate expenses) of no more than $ 14,400,000 or approximately $ 3.50 per share. If those liabilities are deducted pro-rata from the assets with a positive value (see Alcar Rpt. Summary Page) the adjusted value of the videocassette business per share in Professor Rappaport's report would be about $ 2.00 a share.

As indicated above, comparable figures are not immediately available from Mr. Torkelsen's study. But if one assumes that that portion of total per share value ($ 62.75), minus assets to be sold in his model (net of corporate debt at $ 6.00 per share) (or $ 56.75) represented by videocassette business in Mr. Torkelsen's model, is the same proportion as the proportion of company-wide projected forecast operating profit that videocassette forecast operating profit represents (approximately [*51] 20%, see Px 445 Vol. II p. 146), n33 then one can deduce that Mr. Torkelsen implicitly believes that the videocassette business was worth in the neighborhood of .20 x $ 56.75 or $ 11.35 per share.

n33 A precise calculation would require one to weight the proportions in the earlier year somewhat more heavily and to weight the proportion in the terminal period more heavily as that represents more than half of the total value.

Since there were 4,567,000 shares outstanding, on these assumptions Mr. Torkelsen was implicitly placing a value of about $ 51,835,000 on the videocassette business. Of course, Torkelsen did not separately value videocassette. I recognize that the proportion of his total cash flow generated value ($ 56.75 per share) accounted for by videocassette may, upon a more complete financial analysis prove to be more or less than 20%. I doubt that it can be less than 18% in all events n34 (or .18 x [62.75 - 6.00] x 4,675,000 = $ 46,651,000). But the point here is not to determine an accurate proration [*52] number, but to establish another of magnitude, which I am content that this analysis does. Values in this range are, for the reasons set forth below, completely implausible. n35

n34 The proportion of forecast operating profit accounted for by videocassette business by Mr. Torkelsen is as follows:

1983 - 17%

1984 - 22%

1985 - 27%

1986 - 25%

1987 - 18%

See Px 445 Vol. II p. 146.

n35 In so concluding I have considered as well that I am free to (and infra do) modify either experts discount rate and that doing so would, in effect, reduce the present value of these projected cash flows. The DCF model used does not permit a distinct calculation of videocassettes alone with a new discount rate. But using the data in the Post-Trial Stipulation (Dkt. No. 450) P 2(f) and making the same assumptions as above (20%) one can calculate that Torkelsen's value for videocassette using the cost of capital adopted infra would be about $ 38.06 million ($ 47.67 - 6.00 x .20 x 4,567,000). This number supports the same inference for the reasons stated in text at pp. 41-43.

[*53]

Technicolor's videocassette business was in January 1983 only 18 months old. It was not a large-scale or technologically complex business. The company had built a simple, warehouse-like facility and installed about 2,000 VCR machines to be used in duplicating tapes. Thus, the invested capital was relatively modest. There was no special technology or know-how necessary in duplicating videocassettes. The technology involved essentially the same VCR's that are purchased for home use. Thus, there were substantially no barriers to entry into the business. Technicolor's only comparative advantage was a fragile one: it had existing business relations with the copyright owners.

Technicolor had only started operations of the videocassette business in July 1981. During fiscal 1982 (July 1, 1981 to June 30, 1982), it had produced approximately 750,000 tapes; and lost more than $ 1 million. These losses fell most heavily in the most recent part of that period. Operating losses during April - June 1982 totaled $ 862,000. Things then got much better. It is estimated (Alcar Rpt. at 4.10), and I accept, that the company duplicated only 359,000 units in the first six months of calendar [*54] 1982 but produced 756,000 tapes in the remaining part of that calendar year. The Technicolor videocassette business made a profit for the first time during the first two quarters of fiscal 1983 (6/82-12/82) of $ 1,379,000. The company appears to have had about 17% of the national video duplication business at that time.

The prospects for the videocassette business were cloudy. It was still a new technology without widespread consumer acceptance. Videodiscs and pay-per-view home movies competed with it. Its principal advantage over these was thought to be its ability to "time shift" television broadcasts. This facility, however, created no demand for pre-recorded tapes.

That the future was cloudy is reflected in the techniques that the two experts were required to adopt to generate forecasts of future sales. The future is always undiscernible, but where one has a base of similar experience, one may nevertheless feel somewhat secure in predicting the future. Here we deal with a subject on which, as of January 1983, little history was available. Neither experts' approach is scientific, yet neither seems wholly unreasonable.

But the results generated by Mr. Torkelsen's [*55] method, however, are too strikingly odd to be accepted. n36 The video business was a new technology, low value-added business. Technicolor had no prospects for value-creating innovation. It had no strong competitive advantage in the business and there were no substantial barriers to entry from competitors.

n36 I say that mindful of the fact that petitioner sought to show that its model closely approximated the performance that in fact later occurred. This evidence was excluded from consideration in this case as irrelevant to a statutory appraisal. Even had it been admitted, however, I could not regard it as strongly probative of the assertion that a reasonable person would have been likely on January 24, 1983, to hold views such as those expressed by Mr. Torkelsen. First, the actual experience was in reality effected by the merger. More importantly, through a process of knowledgeable trial and error, one could always create a model in retrospect that accurately "forecasts" financial history in this way. Thus, in the context of an appraisal action which imaginatively stands in the past and pretends to look toward a future that has already occurred, the court must be cautious of such techniques as the one here rejected. It might too easily lead to acceptance of models that are built in order to mirror the post-merger experience.

[*56]

Professor Rappaport's analysis on the other hand seems reasonable and leads to a plausible value. Passing over the details of his analysis (Alcar Rpt. 4.1-4.15) which I have considered, the $ 14,400,000 (gross) value placed on that business by Professor Rappaport appears to me to be reasonable and much nearer to a correct estimate of value then the value implicitly found by Mr. Torkelsen. n37

n37 That I do modify the discount rate used by Professor Rappaport will have the effect of increasing that value. That does not alter my judgment that, of the two models, Professor Rappaport's videocassette value appears to offer greater assurance of reliability. Comparisons continue to be difficult. The implied difference in the valuation of videocassette in the two models are to a notable extent (but not entirely or substantially so) created by the discount rates. If one assumes that the effect of modifying the discount rate in the Alcar model will be proportionately the same on videocassette (gross) value as on total value (See Stipulation P 2(b), Dkt. No. 450) or 56% increase (from $ 13.14 to $ 20.48), then one could assume that the total (gross) value of the videocassette business would increase in the Rappaport DCF model with the adjusted discount rate to about $ 22.4 million (compare note 39) which is quite generous, perhaps excessive, in my opinion.

[*57]

Professor Rappaport found some slight corroboration for his view in the terms of an April 1982 agreement in principle to merge Video Corporation of America (VCA) into Viacom, Inc. VCA stockholders were to receive Viacom stock worth approximately $ 19 million or .82 times VCA's 1981 gross revenues. Rappaport's $ 14.4 million value for Technicolor represents .78 times Technicolor's last six months (best) revenues annualized (that is June-December 1982). While a comparison to a deal (VCA) that didn't close gives no great support, it is some indication that the values that Professor Rappaport found are in the range that business persons at the time would have considered reasonable.

3. Valuation of One Hour Photo

(a) A Predicate Legal Question: Which Technicolor To Value as of January 24, 1983

Before turning to an evaluation of the competing expert views on the value of certain other aspects of Technicolor's business (One Hour Photo; Standard Manufacturer and Consumer Photoprocessing), it is necessary to pause and address a legal issue upon which the parties divide. The issue is whether in valuing Technicolor as of January 24, 1983, the court should assume the business [*58] plan for Technicolor that MAF is said by petitioner to have had in place at that time (called by the parties the "Perelman plan"), or whether a proper valuation is premised upon ignoring such changes as Mr. Perelman had in mind because to the extent they create value they are "elements of value arising from the accomplishment or expectation of the merger." 8 Del. C. § 262(h).

This issue is particularly pertinent when considering One Hour Photo, Standard Manufacturing and Consumer Photoprocessing. Mr. Torkelsen assumes that each of these businesses will be sold by MAF, but Professor Rappaport assumes that these businesses would, but for the MAF acquisition, have been operated as going concerns, and thus he values them as operating businesses.

The question whether the "Perelman plan" assumption or the "Kamerman plan" assumption is appropriate does not affect the valuation of Audio-Visual, or Gold Key because under either plan the hope was to sell these businesses. Nor, more importantly, does it materially affect the valuation of the film processing or videocassette businesses. Thus, as a practical matter this is an issue of limited financial impact. With respect to the three [*59] businesses principally involved the differences can be estimated:

Thus, very roughly estimated, the question of which assumption is legally appropriate with respect to sales of assets accounts for about $ 4.50 per share of the difference between Rappaport's $ 13.14 valuation and Torkelsen's $ 62.75 valuation. n38 Therefore, while the legal question now to be addressed has practical significance for this case, it is easy to exaggerate the financial importance of the two alternative treatments of One Hour Photo.

n38 Gold Key is not included in this listing because, while petitioner assumes a sale and respondent treats it as a going concern, a difference in business plan does not account for this different treatment. See p. 60, infra.

[*60]

In part, the issue is given significance by petitioner's argument that the market price of Technicolor's stock prior to announcement of the MAF transaction has no relevance whatsoever to the issues of this case. That stock traded, for example, between $ 8.37 and $ 11.25 in September 1982. The market was active, and there were no control blocks or other special considerations affecting it. In order to make more plausible petitioner's claim that shares in this company had an intrinsic value of $ 62.75 in January 1983, it is helpful for petitioner to present the company in January as fundamentally different from that September-October company; transformed by something (Mr. Perelman's strategic vision) into an entity so different that the earlier stock price is simply no indication of intrinsic value at all. n39

n39 Under our law stock market value cannot be the sole source of relevant information in fixing "fair value." We must consider "all relevant factors." 8 Del. C. § 262(h). But market price is a relevant factor of some weight where the market is active and where no special consideration indicating that it should be given no weight is present. See pp. 74 - 77 infra.

[*61]

Petitioner argues factually that it was the "Perelman plan" deployment of assets -- which contemplated the sale of several businesses and the focusing of the company on its traditional film processing business and the new videocassette duplication business -- that was governing the operation of Technicolor on January 24, 1983. That strategic plan, therefore, must govern the projection of net cash flows in petitioner's view and renders irrelevant the company's earlier stock price and any future One Hour Photo negative cash flows.

In support of that view petitioner asserts that Mr. Perelman had a fixed view of how assets would be sold before the merger and had begun to implement it by, for example, having MAF retain Bear Stearns & Co. in December to find a buyer for assets, including One Hour Photo. Stated most persuasively petitioner's position is that one who was most knowledgeable about Technicolor and its prospects as of the time of the merger would not have projected (as Professor Rappaport does) that Technicolor would remain in the One Hour Photo business throughout 1983 and 1984. Such a person would have projected sale of One Hour Photo at some point in 1983. I accept this [*62] position as factually correct.

*** The company does not disagree that Mr. Perelman's strategic plan in time created substantial value by redeployment or liquidation of assets. Indeed, it contends that it was the prospect of this new value that permitted MAF to pay a large premium price for Technicolor stock. The company, however, warmly disagrees that petitioner is legally entitled to share to any extent in such additional value in an appraisal of the fair value of that which it gave up in the merger. First, on the evidence, Technicolor asserts that the strategic plan that called for liquidation of a number of its businesses was not sufficiently definite on the date of the merger to form the factual premise for the petitioners cash flow projections from asset sales. As just indicated, I reject this assertion. On balance I find the record supports the conclusion that MAF intended from the outset to realize by one technique or another the capital value of One Hour Photo and to terminate that division's drain on the company's cash flow. Insofar as sale of that enterprise is involved, the "Perelman Plan" was fixed by the merger date. In my opinion, it is immaterial for present [*63] purposes which of several possible techniques to do so would ultimately be employed.

Technicolor's other basis for excluding consideration of the alteration in net cash flows that Mr. Perelman's business plan implied (i.e., asset sales) involves an argument of law. It claims that these alterations and the enhanced value that they generated are, to the extent they were foreseeable on January 24, 1983, results of the merger or its anticipation; to the extent that they may be said to exist at all on January 24, it is only because one is then predicting the results of the Perelman-managed company after the merger. In either event, this aspect of value is, according to Technicolor, excluded from consideration in this proceeding as arising from the expectation or the effectuation of the merger. See 8 Del. C. § 262(h).

Petitioner answers that this is a mistaken assertion because, in fact, MAF was for some weeks prior to the merger the majority shareholder of Technicolor and, it says, in control of Technicolor. It asserts that MAF had began to implement the new strategy. Thus, petitioner contends that it was the closing of the tender offer and the beginning of the implementation [*64] of a new business strategy, not the merger or the expectation of it, that changed the expected cash flows of the company and created new value.

Petitioner reminds us that in Weinberger v. U.O.P., Inc., Del. Supr., 457 A.2d 701 (1983) the Supreme Court construed the statutory phrase:

exclusive of any element of value arising from the accomplishment or expectation of the merger ...

to exclude:

Only the speculative elements of value that may arise from the 'accomplishment or expectation' of the merger. ... But elements of future value ... which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.

457 A.2d at 713.

The implication petitioner draws is that any element of future value that may be proven (i.e., is not speculative), may be considered even if it is an "element of value arising from the accomplishment or expectation of the merger."

While such an interpretation of the quoted language might be sustained if those words are read in a vacuum, that reading is too difficult to square with the plain words of the statute to permit [*65] the conclusion that that is what was intended. Rather, I read Weinberger on this point to affirm a broad, "all relevant factors" approach to determining fair value, and to caution that events that occur after the merger may relate to value on the date of the merger, if they can be proven as of the date of the merger. But, in order to understand the quoted passage when read together with the statutory language, I assume an unexpressed phrase to the effect "unless, but for the merger, such elements of future value would not exist." That the Supreme Court intended to imply such a limitation is not only supported by the apparent requirement of the statute itself but also by the court's reaffirmation in Weinberger that "the basic concept of value under the appraisal statute is that the stockholder is entitled to be paid for that which has been taken from him, viz, his proportionate interest in a going concern." 457 A.2d at 713 (quoting Tri-Continental Corp. v. Battye, Del. Supr. 31 Del. Ch. 523, 74 A.2d 71, 72 (1950)). Future value that would not exist but for the merger cannot, I believe, accurately be said to have been taken from [*66] a dissenting shareholder in the merger, even if it is capable of being proven on the date of the merger.

*** For the following reasons I conclude, in these circumstances, that value added to the corporation by the implementation or the expectation of the implementation of Mr. Perelman's new business plan for the company is not value to which, in an appraisal action, petitioner is entitled to a pro rata share, but is value that is excluded from consideration by the statutory exclusion for value arising from the merger or its expectation. In so concluding, I note that I find in this record no persuasive evidence of a material change in the value of Technicolor or any of its component businesses that occurred between the date of the merger agreement and the effectuation of the merger, other than the arguable change that was associated with the change in control itself (i.e., the new business strategy). n40 Plainly, if, in a two-step acquisition, these are changes in value of the company recognizable prior to the merger and attributable to factors other than the distinctive business strategy of the acquiror or synergies of the merger, they would be considered in an appraisal [*67] under Weinberger. Here the record shows no such material changes.

n40 Capital markets of course fluctuated. In the appraisal I, of course, look to the structure of interest rates in January not earlier to determine an appropriate discount rate.

The conclusion that value that arises only from the acquiror's utilization of the acquired company's assets following a merger is, under the statutory language, not a value in which a dissenting shareholder is entitled to share as part of "his proportionate interest in a going concern" is assisted by considering the facts of this case when placed in the context of a one-step cash-for-stock merger. It would be apparent I suppose that had MAF negotiated a one-step cash merger, its particular plan for the company after the merger would be irrelevant to the "fair value" of a dissenters stock on the date of the merger. That would surely be the case when those plans were a close secret, but it should be no less true if those plans become known after the acquiror signed a merger [*68] agreement and closed on his first-step tender offer. Our statute and a long line of cases that focus our inquiry on "going concern" value recognize that the value that is relevant in an appraisal is the value of the assets in the way they are deployed in the corporation from which the shareholder will exit.

For example, in Bell v. Kirby Lumber Corp., Del. Supr., 413 A.2d 137 (1980) the Supreme Court was required to examine an appraisal in which a 5% minority was cashed out from a natural resource company at $ 120 per share. The appraised value was $ 254.40. The stockholder appealed contending, inter alia, that the company owned timberlands worth $ 670 a share.

Before the Delaware Supreme Court the company contended in answer to an argument of the dissenting shareholder that:

to follow a standard of damages based upon an amount all shareholders would have received in a third party sale negotiated at arms length, [i.e., a "control premium"] is an unwarranted expansion of the appraisal remedy. Kirby claims this calls for an aliquot valuation of shares based upon a sale or liquidation rather than upon a determination of stock value in [*69] a going concern which is the traditional standard established by Tri-Continental Corp. v. Battye, Del. Supr., 31 Del. Ch. 523, 74 A.2d 71 (1950) and its progeny.

413 A.2d at 140 (emphasis in original). The Supreme Court, after reviewing a long line of Delaware cases, affirmed the Vice Chancellor's decision that had accepted the company's position:

Applying the rules laid down by these authorities, the Vice-Chancellor rejected the stockholders' arms' length standard because it "presupposes an acquisition value based upon the very fact that the company will not continue in business on the same basis that existed immediately prior to the merger. It introduces another element, namely the value another would place upon it as a price for merger as opposed to the corporation's independent value as a going concern.

We find nothing in the record to persuade us that the Vice-Chancellor erroneously exercised his judgment in rejecting the stockholders' arms' length standard in favor of the traditional going concern standard under established Delaware law.

413 A.2d at 142 (emphasis added).

Weinberger [*70] did not disavow the 1980 opinion in Bell v. Kirby, particularly on the "going concern" point. Indeed Weinberger quoted approvingly the same language in Tri-Continental Corp. v. Battye referring to the "going concern" concept, as did both the majority and concurring opinions in Bell v. Kirby. Thus, I can find no basis to conclude that our Supreme Court would no longer consider Bell v. Kirby authoritative on the important question whether the "intrinsic value" of dissenting shares includes a proportionate share of a control premium. Bell v. Kirby holds that it need not. n41

n41 As a practical matter, to hold that a dissenting shareholder is entitled in an appraisal to a pro rata share of a control premium in a cash-out merger would mean, for good or ill, that the deal price would effectively form a floor for an appraisal value. The resulting encouragement to dissent from mergers, if it is to be judicially created, should not, in the light of Bell v. Kirby, be created by this court.

These [*71] remarks relate to the so-called Perelman plan because they show, I think, that Delaware law traditionally and today accords to a dissenting shareholder "his proportionate interest in a going concern" and that going concern is the corporation in question, with its asset deployment, business plan and management unaffected by the plans or strategies of the acquiror. When value is created by substituting new management or by redeploying assets "in connection with the accomplishment or expectation" of a merger, that value is not, in my opinion, a part of the "going concern" in which a dissenting shareholder has a legal (or equitable) right to participate.

If one accepts this principle, the question arises how is it to be applied in a two-step arms'-length acquisition transaction. In such a transaction there will be a period following close of the first-step tender offer in which the acquiror may, as a practical matter, be in a position to influence or change the nature of the corporate business, or to freeze controversial programs until they are reviewed following the second-step merger. The company here argues that where the merger agreement is negotiated at arms'-length, the dissenting [*72] shareholder is not entitled to any value that may be added solely by the act of the acquiring entity during the hiatus between the tender offer and the merger.

It is not necessary in this case to attempt to formulate a general rule for two-step acquisition transactions. On the facts of this case it is clear, and I do find, that MAF would not have become a majority shareholder of Technicolor prior to the merger (and would not even arguably be in a position to affect Technicolor's business plan) unless it had earlier negotiated a binding merger agreement. Plainly, the banks that in fact financed the acquisition of stock through the tender offer required the existence of such an agreement. Moreover, Perelman's intent from the outset was to negotiate the acquisition of all outstanding Technicolor stock. It would be speculation inconsistent with the record to find that but for the merger the "Perelman plan" would have had any pertinence to Technicolor as a going concern in January 1983. To the contrary, I conclude that any change to Technicolor's business and its projected cash flows from those that would be projected but for the two-step transaction contemplated by the October 29 [*73] merger agreement, are consequences of the merger that the October 29 agreement contemplated and are, therefore, elements of value arising from the expectation or accomplishment of the merger.

(b) The Competing Valuations of One Hour Photo

Thus, in my view, petitioner's entitlement in this action to fair value, exclusive of value created by or in anticipation of the merger, means he is entitled to a pro rata share of the going concern value of the enterprise and that the going concern here was the business, as of the merger date, subject to the business plan of the Kamerman management. That view is inconsistent with adoption of Mr. Torkelsen's valuation of One Hour Photo and consistent with acceptance of Professor Rappaport's valuation method and opinion. Mr. Torkelsen did not value One Hour Photo as a going concern. Rather, on the assumption that as of January 24, 1983, the controlling shareholder (MAF) intended to sell that business, he valued One Hour Photo as an $ 8 million ($ 1.75 per share) asset to be liquidated by July 1983. (Px 445 Vol. 2 p. 181).

Professor Rappaport valued One Hour Photo as a going concern (Alcar Rpt., 5.1 et seq.). He concluded that it [*74] would continue to be a persistent money loser and that it was likely that the company would ultimately be forced to sell it by the end of 1984. He opined that One Hour Photo had a negative $ 7.7 million value (-$ 1.69 per share).

Professor Rappaport generated two projections of net cash flows for One Hour Photo. The first was based upon optimistic management long-term plans. These plans appear to be the only long-term plans the company generated; they are, in several respects, unlike the year-to-year plans that were used by Professor Rappaport in connection with valuing film processing. Most importantly, those planners had a record of creating good year-to-year forecasts. In addition they were only year-to-year plans and thus would be inherently more reliable.

The management plan for One Hour Photo was prepared in February 1982. n42 It predicated a rapid annual growth rate for photofinishing (10.3%) and an emerging large share of that business (25%) going to the new on-site development processors (minilabs). Management assumed it could capture 15% to 25% of this market and generate between $ 882 million and $ 1.47 billion in revenue by 1989. This vision called for 960 Technicolor [*75] stores in place by 1986. Professor Rappaport estimated the net present value of Technicolor One Hour Photo under the management plan to be $ 75.1 million.

n42 Alcar Rpt. at 5.4.

In his second, "base case" forecast, Professor Rappaport accepted management's February 1982 projections of fixed and variable cost structures, depreciation, administration, and start-up expenses. Instead, of management's revenue forecast, however, he estimated Technicolor's One Hour Photo revenue to equal the average revenue per minilab (i.e. photofinishing store) in 1982 multiplied by the number of Technicolor minilabs in operation during each year of the forecast period. Professor Rappaport assumed annual growth in revenues equal to the rate of inflation (5%). The base scenario predicted heavy operating losses for each year of the seven-year forecast period. Professor Rappaport, however, assumed that the substantial losses in the first two forecast years would convince management to cut their losses and exit the One Hour Photo [*76] business. n43

n43 Thus Professor Rappaport ignored the base forecast of operating losses for 1985-1989.

Professor Rappaport assumed that at the end of 1984, Technicolor would sell each minilab for $ 125,000. The net present value of One Hour Photo under the base forecast was negative 16.9 million.

To estimate the value of One Hour Photo at the time of the merger, Professor Rappaport used a weighted average of the two scenarios. Professor Rappaport concluded that the base forecast more reasonably estimated the value of One Hour Photo in January 1983 than did the management plan. Accordingly, he assigned only a 10% weight to the management scenario and a 90% weight to the base scenario. The result was an estimated negative 7.7 million value to One Hour Photo at the time of the merger.

Estimating the value of One Hour Photo in 1983 is a difficult task. At that time, Technicolor was a newcomer to the industry which was itself in its infancy. In comparing the competing models in their treatment of the business, [*77] two factors seemed critical. First, Mr Torkelsen's assumption that Technicolor would sell the One Hour Photo division in 1983 is contrary to the record testimony concerning Mr. Kamerman's plan for the business. It is the value of Technicolor under that plan that is at issue in this case. Second, Professor Rappaport's weighted valuation of the business seems reasonable. For the reasons discussed below, I am convinced that management's forecast was overly optimistic and that Professor Rappaport's base scenario is the most reliable valuation of the business and therefore deserves greater weight than the management forecast. n44

n44 Although I find management's forecast for One Hour Photo problematic, I recognize the uncertainty one would experience in valuing the business in 1983 and, therefore, conclude that it is not improper to accord the management scenario some weight. The weighted approach applied by Professor Rappaport is conceptually different than and not subject to the same criticisms as Mr. Torkelsen's "mixing" of data in his North Hollywood regression.

[*78]

I do not lightly criticize management's One Hour Photo forecast. As a general rule, I am of the view that management projections done for real-world purposes are deserving of substantial weight. The following reasons, however, lead me to conclude that Professor Rappaport was reasonable in heavily discounting the management plan.

1. Management had no experience in the One Hour Photo business and no track record of forecasting the businesses prospects.

2. The industry itself was in its infancy and faced uncertainty and risk.

3. Management's plan for store openings in 1982 was far off the mark. The plan, prepared in February 1982 was thus unable to include consideration of the problems the company would face as a result of its failure to establish the strong foothold in the industry that had been anticipated. That strong, rapid accumulation of locations was viewed by Mr. Kamerman and the market as critical to success in the business. Had management prepared its report in January 1983, an entirely different estimate may have resulted. n45

n45 The stores that did open were suffering operating losses.

[*79]

4. Management's poor forecast of store openings in 1982 suggests that the management scenario was not accurate.

5. The stock market reaction to the announcement of Technicolor's One Hour Photo venture was strongly negative.

6. The management scenario implies a value of One Hour Photo approximately $ 75 million (or $ 16 per share). A reasonable person in 1983 would not have valued this struggling start-up business at that price. n46

n46 Indeed, this value represents a large (more then 50%) premium over Technicolor's total market capitalization in the June-September period.

Having rejected Mr. Torkelsen's assumption of a sale scenario in 1983, and having accepted Professor Rappaport's weighted valuation, I feel it necessary to comment on one other point. Petitioners assert that Professor Rappaport's selection of the end of 1984 as the time that Technicolor would exit the rapid consumer photofinishing is arbitrary.

I recognize that the timing of 1984 sale scenario represents a subjective judgment by Professor [*80] Rappaport. I do not, however, view it as arbitrary. The trial record indicates that as of October 1982, Mr. Kamerman remained committed to his plan. It would seem improbable that Technicolor would liquidate the business by the end of 1983. By the end of 1984, however, after three years of operating losses greatly exceeding those expected (see Alcar Rpt. at 5.7) it is reasonable to conclude that business would be liquidated. That scenario is consistent with the board reasoning in approving the One Hour Photo investment, which was based partially on the knowledge that if the venture were proceeding poorly, the minilabs could be sold. The terms of the posited liquidation (book value of recently acquired assets) also seems quite reasonable.

4. Valuation of Other Businesses

The experts' disagreement concerning a number of other businesses is for the most part relatively unimportant in terms of their values. On the assumption that the "Perelman plan" is the proper predicate, Mr. Torkelsen assumes the sale of certain assets which Professor Rappaport assumes that the Kamerman-run (going concern) company would operate. But the difference impacts are small for most of the [*81] businesses:

Total differences for these businesses = $ 1.58 per share.

More significant is the divergent treatment of the Gold Key division. Mr. Torkelsen assumes it to be worth $ 25 million because MAF hoped to sell it for that. Professor Rappaport, while recognizing that the Kamerman management hoped to sell Gold Key, assigns it a present value as an operating company of $ 14 million. The difference is $ 2.41 a share.

The Kamerman management had in August 1982 made a determination to sell Gold Key. While it had shopped the business, the only offer received was in January 1983 for $ 20 million from a person who sought to finance the price and could not do so. Rappaport opines that as of January one could not conclude that there was a sale price available, certainly not $ 25 million. No such price had been forthcoming after some period. He values the business as a going concern as of January 24.

Professor [*82] Rappaport inputs to that discounted cash flow calculation seem generous to the petitioner. They were taken from a Bear Stearns selling document. 20% sales growth; 36.1% operating margin; minimal incremental fixed capital and a modest (5%) working capital increment as a percentage of increased sales. These assumptions appear reasonable.

The Rappaport alternative again strikes me as the more reasonable approach to valuing this aspect of Technicolor's fair value, as of January 24, 1983. That MAF or the company hoped to get $ 25 million for this asset is small basis to value it at that figure in these circumstances in which over a substantial period that price was unavailable.

Concerning the remaining businesses (Vidtronics and Government Services) both experts treat them as going concerns; they contribute a small percentage to either model's value.

5. Long-Term Corporate Debt

Two aspects of Professor Rappaport's DCF model are free-standing in the sense that one could substitute an input from Mr. Torkelsen's model without otherwise affecting the operation of the model with respect to the projection of net cash flows. n47 Those are the choice of an appropriate discount rate [*83] (cost of capital) which is treated below and the estimation of long-term debt. In the valuation process, such debt is deducted from the present value of the sum of projected net cash flows and terminal value.

n47 Professor Rappaport's assumption of corporate expense, which in his DCF model is projected as a separate negative cash flow item not in connection with any particular business segment cash flow, is reasonable, given the determination that it is the business plan of the Kamerman managed concern that is pertinent.

Mr. Torkelsen estimates that debt as $ 19.9 million. Professor Rappaport assumes $ 25 million. A balance sheet for Technicolor as of the merger date is unavailable in the record. Mr. Rappaport relies on a balance sheet prepared (apparently) for internal purposes as of November 20, 1982. (Dx 353). That balance sheet shows long-term debt and current maturities of long-term debt of $ 24,691,000. PVR (Mr. Torkelsen) relies upon Px 403 a Form 10K filing of MAF for the fiscal year ending December [*84] 31, 1983. That document reflects in the notes to its balance sheet (p. 22) that as of December 31, 1982, Technicolor had long-term debt of $ 19.9 million. No satisfactory reconciliation of these numbers is possible from the record alone. Respondent suggests that perhaps the difference represents intercompany loans that, while valid liabilities of Technicolor, would not need to appear on a consolidated balance sheet. It is, however, completely improbable (and there is no evidence) that MAF had extended long-term credit to Technicolor by November 20, 1982, which would have to be the case in order for such an explanation to work. Moreover, the suggestion that cash might have been used to reduce long-term debt by about $ 5 million also seems very improbable; the November 20, 1982 balance sheet records cash at $ 2,160,000.

I regard Mr. Torkelsen's technique as more reliable only because the 10-K appears to be a document of greater dignity than the unaudited working paper that Professor Rappaport relies upon.

If this element of the model were so deeply intertwined with projection of net cash flows that one could not substitute a different long-term debt figure into Mr. Rappaport's [*85] model without materially affecting the functioning of the model otherwise, I would adopt Mr. Rappaport's model nevertheless for all of the reasons set forth elsewhere in this opinion. But as I do understand that this substitution can be made without having such an effect and because, on balance, I conclude that Mr. Torkelsen's estimate seems somewhat more reliable, I will affect the substitution, (in some ways beyond my better judgment see note 17 supra) by adding the per share difference in the long-term debt figures used (25,000,000 - 19,900,000 / 4,567,000 = $ 1.12 per share) to the adjusted (see infra) opinion of Mr. Rappaport on the fair value of Technicolor stock as of January 24, 1983.

B. Methodology and Residual Values

The most basic conceptual difference in the two DCF models used is this: Professor Rappaport assumes (and Mr. Torkelsen does not) that for every company its particular set of comparative advantages establish, as of any moment, a future period of same greater or lesser length during which it will be able to earn rates of return that exceed its cost of capital. Beyond that point, the company (as of the present moment of valuation) can expect [*86] to earn no returns in excess of its cost of capital and therefore, beyond that point, no additional shareholder value will be created. Professor Rappaport calls this period during which a company's net returns can be predicted to exceed its costs of capital, the company's "value growth duration," which is a coined term. While Professor Rappaport has copyrighted some software that employs this concept, the basic idea is not unique to him. It is an application of elementary notions of neo-classical economics: profits above the cost of capital in an industry will attract competitors, who will over some time period drive returns down to the point at which returns equal the cost of capital. At that equilibrium point no new competition will be attracted into the field. The leading finance text includes a reference to this concept of a future period beyond which there is no further value is created. See R. Brealey & S. Myers, Principles of Corporate Finance (3d ed. 1988) at 65-66. The existence of such a point in time does not mean that there is no value attributed to the period beyond that point, but rather that there is no further value growth.

I accept as sound (as a "technique [*87] ... generally considered acceptable in the financial community" Weinberger at 713) the methodology of Professor Rappaport. See, e.g., In Re Pullman Constr. Indus., 107 B.R. 909 (Bankr. N.D. Ill. 1989). n48 Mr. Rappaport's method is in most respects conceptually similar to that employed by Mr. Torkelsen. Its distinctive feature -- forecasting net cash flows for a "value growth duration" ("VGD") rather than a defined period (often 5 years) -- is, however, difficult to apply here. There were no firms closely comparable to Technicolor in order to estimate VGD with confidence (in my opinion). The other principle movie labs were small departments of much larger motion picture studios. Nor when one looked for structurally similar firms from a financial point of view did a clear VGD pattern emerge. See Alcar Rpt. at 9.1 et seq. Ultimately, a 5 year VGD period was chosen for existing businesses and 7 years for videocassettes and OHP. It is unquestionably a weakness in the VGD aspect of Professor Rappaport's DCF analysis that no clear VGD could be generated for these businesses, but I am persuaded that Professor Rappaport is nevertheless in a position to [*88] make a responsible estimation.

n48 I reject petitioners legal argument that Professor Rappaport's testimony, when fully understood, is predicated only on stock price and thus (not considering "all relevant factors"), is incompetent to form the major predicate for this court's decision. While VGD calculation does involve stock price data, the DCF analysis of Professor Rappaport entails much more than resort to stock price alone to form the opinion given.

In the final analysis, however, Professor Rappaport used a period to project Technicolor's most important net cash flows similar to that employed by Mr. Torkelsen (5 years). Therefore, the practical significance of this conceptual difference between the DCF model used by Rappaport and that used by Torkelsen is in connection with what each does with cash flows at the end of the projection period, that is how each creates the terminal or residual value component of his DCF analysis. To estimate residual value Rappaport capitalizes a constant (last forecasted year) [*89] cash flow; he assumes no new value creation beyond the forecast period (but nevertheless much of his total value is attributed to the residual value). In creating his estimation of residual value Torkelsen, on the other hand, increases the last forecasted year's net cash flows by 5% each year (for inflation) into infinity, before capitalizing those flows. The result -- and this is the practical gist of this theoretical difference between the experts -- is that Mr. Torkelsen assumes that Technicolor net profits (along with all other aspects of its cash flow) and its value will increase every year in perpetuity, while Professor Rappaport assumes there will come a time when, while it may make profits, Technicolor will not be increasing in value.

The absolute difference in the residual value of each model is large. That difference is attributable not simply to methodology but to three differences in the assumptions of the models: differing discount rates (see note 15 supra), the differing estimates of cash flows in the last year projected and the assumption by PVR of a net cash flow that is perpetually increasing at 5%, a stipulated rate of inflation. It is this [*90] last assumption that most pointedly relates to the differing DCF methodology of the witnesses. PVR's assumption of a 5% growth rate in cash flows after the projection period is striking when one recalls that PVR projects growth during the 5 year explicit forecast period in the critical film processing business at 2.3% (which I find to be less probable then Alcar's no growth assumption in that business). This 5% growth assumption adds very substantial additional value to the discounted present value of a share of Technicolor stock. That assumption alone contributes $ 16.56 in per share value (making all other assumptions PVR makes). (See Stip. of September 13, 1990 [$ 62.75 - $ 6.00 (see p. 37) x .2918 (see Stip.) = $ 16.56]).

In estimating residual value, Professor Rappaport, capitalizes a constant (the last forecast year) cash flow, not a perpetually growing one. He asserts that this is consistent with an inflating (or deflating) future world because he posits that whatever the value of money and indeed whatever the size of the company's cash flows, the most reasonable assumption about the future is that there will be a future time at which the firm will not [*91] earn returns in excess of its cost of capital. That is if, after that point, one posits increases cash flows, due to inflation (or decreases due to deflation) his model stipulates off-setting increases (or decreases) in the firms overall cost of capital.

Neither approach can be said to be wrong as a matter of logic nor (aside from the "Perelman plan" assumption of PVR) is either methodology inconsistent with the record. n49 Thus, methodology cannot be decisive on choice of the most dependable of the two opinions. The impacts of methodological differences are only expressed through specific application, which of course involves substantive assumptions about the business and its future. Thus, the financial impact of the most important methodological difference -- the 5% growing cash flow -- is itself derivative from the cash flows generated in the last year. That difference at $ 16.56 a share of present value is huge in this context, but it would be larger still, or smaller, if the net cash flows projected were different. That significant $ 16.56 per share difference is also affected by the discount rate.

n49 That is not to say that none of the assumptions employed in implementing those methods are inconsistent with the record or unreasonable in light of it. See, e.g., pp. 23 - 34, 37 - 42 (PVR's unreasonable assumptions re: film processing and videocassette cash flows).

[*92]

Therefore, while I believe it is incumbent upon the court to examine the experts methods, where as here those methods each present a reasonable approach recognized in the world of financial analysis, other factors, such as the projection of future cash flows, the cost of capital and sources of corroboration are necessary in order to make the overall assessment concerning which opinion is more likely to estimate fair value as defined in Section 262.

C. Discounting With the Cost of Capital

The cost of capital supplies the discount rate to reduce projected future cash flows to present value. The cost of capital is a free-standing, interchangeable component of a DCF model. It also allows room for judicial judgment to a greater extent than the record in this case permits in other areas of the DCF models.

Professor Rappaport used two cost of capital rates. For most of the cash flows (notably film processing and videocassette) he used a weighted cost of capital of 20.4%; for One Hour Photo and two small related businesses he used 17.3%.

Professor Rappaport used the Capital Asset Pricing Model (CAPM) to estimate Technicolor's costs of capital as of January 24, 1983. That model [*93] estimates the cost of company debt (on an after tax basis for a company expected to be able to utilize the tax deductibility of interest payments) by estimating the expected future cost of borrowing; it estimates the future cost of equity through a multi-factor equation and then proportionately weighs and combines the cost of equity and the cost of debt to determine a cost of capital.

The CAPM is used widely (and by all experts in this case) to estimate a firm's cost of equity capital. It does this by attempting to identify a risk-free rate for money and to identify a risk premium that would be demanded for investment in the particular enterprise in issue. In the CAPM model the riskless rate is typically derived from government treasury obligations. For a traded security the market risk premium is derived in two steps. First a market risk premium is calculated. It is the excess of the expected rate of return for a representative stock index (such as the Standard & Poor 500 or all NYSE companies) over the riskless rate. Next the individual company's "systematic risk" -- that is the nondiversified risk associated with the economy as a whole as it affects this firm -- is estimated. [*94] This second element of the risk premium is, in the CAPM, represented by a coefficient (beta) that measures the relative volatility of the subject firm's stock price relative to the movement of the market generally. The higher that coefficient (i.e., the higher the beta) the more volatile or risky the stock of the subject company is said to be. Of course, the riskier the investment the higher its costs of capital will be.

The CAPM is widely used in the field of financial analysis as an acceptable technique for estimating the implicit cost of capital of a firm whose securities are regularly traded. It is used in portfolio theory and in capital asset budgeting decisions. See generally R. Brealey & S. Myers, Principles of Corporate Finance (3d ed. 1988) at pp. 47-66 and 173-196; V. Brudney & M. Chirelstein, Corporate Finance (3d ed. 1987) at pp. 75-113. It cannot, of course, determine a uniquely correct cost of equity. Many judgments go into it. The beta coefficient can be measured in a variety of ways; the index rate of return can be determined pursuant to differing definitions, and adjustments can be made, such as the small capitalization premium, discussed [*95] below. But the CAPM methodology is certainly one of the principle "techniques or methods ... generally considered acceptable [for estimating the cost of equity capital component of a discounted cash flow modeling] in the financial community ..." Weinberger v. UOP, Inc. at 713. See, e.g., Northern Trust Co. v. C.I.R., 87 T.C. 349, 368 (1986).

In accepting Professor Rappaport's method for estimating Technicolor's costs of capital, I do so mindful of the extent to which it reflects judgments. That the results of the CAPM are in all instances contestable does not mean that as a technique for estimation it is unreliable. It simply means that it may not fairly be regarded as having claims to validity independent of the judgments made in applying it.

With respect to the cost of capital aspect of the discounted cash flow methodology (in distinction to the projection of net cash flows and, in most respects, the terminal value) the record does permit the court to evaluate some of the variables, used in that model chosen as the most reasonable of the two n50 (i.e., Professor Rappaport's) and to adjust the cost of capital accordingly. I [*96] do so with respect to two elements of Professor Rappaport's determination of costs of equity for the various Technicolor divisions. These businesses were all (excepting One Hour Photo, Consumer Photo Processing and Standard Manufacturing) assigned a cost of equity of 22.7% and a weighted average cost of capital of 20.4%. The remaining businesses were assigned a cost of equity of 20.4% and a weighted average cost of capital of 17.3%.

n50 Actually three experts opined on an appropriate cost of capital. I need not inquire into Dr. Hamada's testimony on this subject.

In fixing the 22.7% cost of equity for film processing and other businesses Professor Rappaport employed a 1.7 beta which was an estimate published by Merrill Lynch, a reputable source for December 1982. That figure seems intuitively high for a company with relatively stable cash flows. Intuition aside, however, it plainly was affected to some extent by the striking volatility in Technicolor's stock during the period surrounding the announcement of MAF [*97] proposal to acquire Technicolor for $ 23 per share. Technicolor stock rapidly shot up to the $ 23 level from a range of $ 9 to $ 12 in which it traded for all of September and the first week of October. Technicolor stock was thus a great deal more volatile than the market during this period. Applying the same measure of risk -- the Merrill Lynch published beta -- for September yields a significantly different beta measurement: 1.27. Looking at other evidence with respect to Technicolor betas n51 I conclude that 1.27 is a more reasonable estimate of Technicolor's stock beta for purposes of calculating its cost of capital on January 24, 1983, than 1.7, even though that latter figure represents a December 1982 estimation. n52

n51 E.g., Px 565; Dx 368.

n52 I have no similar reservation with respect to the 1.19 beta used for One Hour Photo, Consumer Photo Processing and Standard Manufacturing. That beta was determined by proxy (Fotomat Corp. and Fox Stanley Photo, Inc.) and was not affected by Technicolor's stock rise in the fall of 1982.

[*98]

The second particular in which the record permits and my judgment with respect to weight of evidence requires a modification of Mr. Rappaport's cost of capital calculation relates to the so-called small capitalization effect or premium. This refers to an unexplained inability of the capital asset pricing model to replicate with complete accuracy the historic returns of stocks with the same historic betas. The empirical data show that there is a recurring premium paid by small capitalization companies. This phenomena was first noted in 1981 and has been confirmed. The greatest part of the additional return for small cap companies appears to occur in January stock prices. No theory satisfactorily explaining the phenomena has been generally accepted.

Professor Rappaport classifies Technicolor as a small capitalization company and expressed the view that its cost of equity would include a 4% premium over that generated by the CAPM.

The question whether the premium can be justified in this instance is difficult because of the inability of academic financial economists to generate an accepted theory of the phenomena. While Technicolor may qualify as a small cap company, the particulars [*99] of its situation are different from many small cap companies. It was an old, not a new company. It existed in a relatively stable industry -- motion picture film processing. That industry was an oligopoly and Technicolor was a leader. It had "brand name" identification. Do these distinctive characteristics that Technicolor had in common with many giant capitalization companies, matter at all in terms of the "small cap" anomaly? One cannot say. Yet the impact of a 4% increase in the cost of equity (yielding a 3.44% increase in the cost of capital of the Film Processing & Videocassette divisions) would be material to the value of the company and the appraisal value of a share. In these circumstances, I cannot conclude that it has been persuasively shown that the statutory fair value of Technicolor stock would more likely result from the inclusion of a small capitalization premium than from its exclusion. In this circumstance, I conclude it should not be considered.

Thus, in summary, I find Professor Rappaport's calculation of a cost of capital follows an accepted technique for evaluating the cost of capital; it employs that technique in a reasonable way and, except for the [*100] two particulars noted above, in a way that is deserving of adoption by the court. Applying these adjustments they lead to a cost capital of 15.28% for the main part of Technicolor's cash flow and 14.13% for the One Hour Photo related cash flows.

Mr. Torkelsen suggests a range of discount rates from 9.96% (weighted average cost of capital of MAF) to 15% (the average cost of capital for all manufacturing companies). He uses a 12.50% rate (an average of these two) to generate the $ 62.75 figure which he presents as his best estimation of value. This technique of estimating a discount rate is decidedly less reliable than Professor Rappaport's technique. It is not an acceptable professional technique for estimating Technicolor's cost of capital to look to the cost of capital (CAPM derived) of the acquiring company. Mr. Torkelsen's alternative of the average of all industrial concerns is far too gross a number to use except where no finer determination is feasible, which is not the case here.

D. Corroborative Indicia of Value

(a) Stock Price

The only more or less objective indicia of value is the market for Technicolor shares. Market prices are of course not conclusive [*101] of "intrinsic value" but they may have pertinence in attempting to estimate that value.

In Application of Delaware Racing Assoc., 42 Del. Ch. 406, 213 A.2d 203, 211 (1965) the Delaware Supreme Court said, with respect to the market value of shares for which an appraisal was sought:

It is, of course, axiomatic that if there is an established market for shares of a corporation the market value of such shares must be taken into consideration in an appraisal of their intrinsic value. Chicago Corporation v. Munds, 20 Del. Ch. 142, 172 A. 452. And if there is no reliable established market value for the shares a reconstructed market value, if one can be made, must be given consideration. Tri-Continental Corp. v. Battye, supra. It is, of course, equally axiomatic that market value, either actual or constructed, is not the sole element to be taken into consideration in the appraisal of stock.

Market price of a traded security must always be evaluated to ascertain the degree of weight it deserves in an appraisal. In some cases it will deserve very little weight: where, for example, [*102] as in a recent case, n53 a control block of stock renders the stock market capitalization an especially poor measure of the corporations value. See also Bell v. Kirby Lumber Corp., Del. Supr., 413 A.2d 137 (1980) (control block present).

n53 Neal v. Alabama By-Products Corporation, 1990 Del. Ch. LEXIS 127, Del. Ch., C.A. No. 8282, Chandler, V.C. (Aug. 1, 1990).

In this instance the market place of Technicolor's stock is one important factor of several indicating that Professor Rappaport's valuation is a more reasonable estimation of statutory fair value than is Mr. Torkelsen's. The stock was traded on the New York Stock Exchange. The market was a relatively active one. The stock price showed trends that appear related to the companies underlying economic performance and prospects. Thus, while we are directed to consider "all relevant factors" and can in no instance rest an appraisal upon a market price alone, those prices are undoubted relevant in this case.

The market price following announcement [*103] of the MAF transaction (and certainly following closing of the MAF tender offer) was quite obviously not reflecting a proportionate interest in a going concern but was supported by the prospect of a $ 23 cash payment at or near the merger date. It was the price unaffected by the merger that has relevance here (that relevance is not affected, as it theoretically could be, by intervening changes in the business of Technicolor, or markets within which it operated, as I conclude that there were no such material changes). That market price was, from June through September floating in a range roughly between $ 9 and $ 11 per share. After the first week of October it began to climb. It moved from $ 11.875 on October 8 to $ 17.375 on October 27.

I here employ the market price data not as an independent source of valuation but as corroboration of the judgment that Professor Rappaport's valuation is a reasonable estimation of intrinsic value of Technicolor as of January 24, 1983, exclusive of elements of value arising from expectation or accomplishment of the merger, and Mr. Torkelsen's is not.

This market price history, itself, makes implausible but not impossible the correctness of Mr. [*104] Torkelsen's opinion that Technicolor had an inherent value of $ 62.75 on January 24, 1983. The assertion by petitioner that the stock price of Technicolor prior to the announcement of the MAF deal is irrelevant, because of the changes in the company observable by January 24, 1983 due to the "Perelman plan" is rejected for two reasons. First, even if one accepts that petitioner is entitled to a pro rata share of value created by the "Perelman plan" it would not render the earlier stock price irrelevant. The Perelman plan did not radically transform the company in a twinkling. Its immediate financial effect on value was modest. See pp. 45-47.

Secondly, in my opinion, petitioner is entitled to the "going concern" value of Technicolor. This means it is not entitled to share in value created by MAF in the circumstances of this case. Therefore the earlier stock price remains one relevant consideration in valuing "what petitioner was deprived of by the merger."

(b) Corroborative Indicia of Value: The decision of knowledgeable insiders to accept $ 23; the Contemporaneous View of Bankers

The Technicolor insiders (especially Mr. Kamerman) had substantial ownership [*105] interests that were personally important to them. It is safe to say that no one knew more about Technicolor as a going concern than Mr. Kamerman. The allegations that he had a dominating conflicting interest in the transaction are unpersuasive. As will be more fully set forth in the forthcoming opinion in the personal liability case, the contract that was negotiated concerning his employment cannot be seen in context as presenting a real incentive to support the acquisition, if he thought substantially more might be achieved elsewhere. If petitioner's expert was close to correct in his opinion on value, the opportunity cost involved in the sale of the company was enormous. Yet knowledgeable officers and directors all sold their stock for $ 23 per share. This fact while itself not conclusive is relevant in concluding that as of January 24, 1983, sophisticated, knowledgeable persons would not have concluded that Technicolor stock had an inherent value of $ 62.75 (or $ 48.89 or $ 91.00, being other numbers that Mr. Torkelsen mentions as fallbacks by using differing capitalization rates).

Finally, while the opinion of investment bankers that a transaction is at a fair price will [*106] generally be entitled to little weight in the question of the statutory fair value to be determined in an appraisal case. n54 Goldman Sachs analysis of value including any possible LBO value is worthy of some consideration given the fact that Mr. Torkelsen's opinion deviates radically with the view expressed by Goldman Sach's at the time one must conclude that, for such corroboration as it supplies, that the Goldman Sachs opinion is more supportive of the Rappaport view than of Mr. Torkelsen's view.

n54 Because, inter alia, the value being measured is different -- going concern value vs. change in control value (see pp. 48-52) and because the court may have a greater opportunity to inspect evidence and is sure to be unaffecting by compensation arrangements in making its determination.

*** For the foregoing reasons, I conclude that Professor Rappaport's model presents a reasonable method to estimate the value of Technicolor on January 24 under either the assumption that the entity he valued is subject to [*107] the business plan of the Kamerman management, or that of the Perelman management; that the value of the Kamerman managed company as of January 24, 1983, is the relevant value here; that Professor Rappaport's opinion as to value is far more likely then that of Mr. Torkelsen to correctly estimate the fair value of Technicolor, excluding value arising only from the expectation or accomplishment of the merger, as of the date of the merger; and that that estimate of value as modified by adjustment to the discount rate as indicated above and to the long-term corporate debt figure, is reasonable and is determined as the fair value, as defined in our statute, of a share of Technicolor stock on that day. That value is $ 20.48 (see Stipulation of August 16, 1990) plus $ 1.12 adjustment for long-term debt or $ 21.60 per share.

IV.

A. Interest

The appraisal statute directs that a "fair rate of interest" be paid upon the appraised value of petitioner's shares. The court is directed to take into account "all relevant factors" in fixing such a rate. For the reasons set forth below I determine that interest should be paid on the appraised value of the petitioners stock at the rate [*108] of 10.72 per year, compounded annually.

1. Legal Rate of Interest

When there is no agreement between the parties as to a rate of interest, interest is calculated at the legal rates. That rate is established by statute as a rate 5% above the Federal Reserve discount rate. 6 Del.C. § 2301. In appraisal actions, however, this court is not bound by that provision. See Sporborg v. City Specialty Stores, Inc., Del. Ch., 35 Del. Ch. 560, 123 A.2d 121, 127 (1956). Here we are directed to make a more detailed inquiry, that considers, "all relevant factors." The legal rate is arguably such a factor (see Neal v. Alabama By-Products, supra) and will be considered with other factors here in fixing a fair rate of interest.

On January 24, 1983, the Federal Reserve discount rate was 8.5%. The legal rate was therefore 13.5%.

2. Prudent Investor Portfolio

In determining a fair rate of interest in appraisal cases, this court has historically examined the return that a prudent investor would have received if he had invested the judgment proceeds at the time of the merger. Even after a 1981 amendment expanding the scope of a court's permissible considerations [*109] in determining interest under section 262, the prudent investor portfolio remains a very important consideration for the court in making its determination. Pinson v. Campbell-Taggart, Inc., 1989 Del. Ch. LEXIS 50, Del. Ch., C.A. No. 7499, Jacobs, V.C. (Feb. 28, 1989) (revised Apr. 21, 1989; Aug. 11, 1989); Charlip v. Lear Siegler, Inc., 1985 Del. Ch. LEXIS 455, Del. Ch., C.A. No. 5178 (July 2, 1985). The parties agree that the prudent investor's portfolio is a relevant factor here, and through different routes reach a similar conclusion as to the prudent investor rate: 9.3%.

3. Surviving Company's Cost of Borrowing

The statute specifically identifies as one factor that may be considered the "rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the [appraisal] proceeding." 8 Del.C. § 262. The theory apparently is that if the surviving corporation had not had use of the petitioner's money during the appraisal suit, the surviving corporation might have borrowed such funds. Therefore, the surviving corporation should compensate the petitioner at a rate that takes into account the rate at which the surviving corporation would have borrowed alternative [*110] funds.

After the merger, Technicolor was a wholly-owned subsidiary in MAF's group of affiliated corporations. Technicolor, it appears, did not borrow independently after the merger. Instead, MAF which did borrow money, financed its operations. Petitioner argues that in the circumstances MAF's borrowing rates are relevant factors under the statute. Respondent argues that there is evidence of Technicolor's borrowing rate at the date of the merger and that the rate is 11%.

In the absence of data regarding independent borrowing by Technicolor after the merger, MAF's cost for debt is relevant during that period. This does not mean that the 11% factor identified as Technicolor's borrowing rate at the time of the merger is irrelevant. I take into account both Technicolor's rate at the time of the merger and MAF's rates thereafter.

Petitioner cites 15.63% as MAF's cost of debt at the merger date and 13.86% as MAF's average cost of debt between 1983 and 1989. Respondent argues that petitioner miscalculated these numbers, because petitioner disregarded MAF's lines of credit. The interest rate on MAF's lines of credit in the first quarter of 1983 was 11.952% and the average interest [*111] rate on MAF's lines of credit between 1983 and 1989 was 10.27%. Petitioner does not persuasively defend its decision to omit the credit line data.

4. Cinerama's cost of debt

Petitioner urges the court to consider Cinerama's cost of borrowing. As of the merger date, this cost was 11.25%. From the merger date until September, 1989, this cost was 10.02%. Petitioner argues that since respondent had the use of petitioner's funds, respondent should compensate petitioner for the costs petitioner incurred in replacing those funds.

This court has rejected consideration of a plaintiff's return on investments as a factor in calculating interest rates. Lebman v. National Union Electric Co., Del. Ch., 414 A.2d 824 (1980). Petitioner here invites the court to consider petitioner's cost of borrowing. This consideration, like the plaintiff's return on investments at issue in Lebman, is far removed from the circumstances of the appraised entity. The statutory amendment did not overturn Lebman which, in my view, offers the surest guide here.

The relevant factors are thus the legal rate at 13.5%, the prudent investor rate at 9.3%, Technicolor's [*112] borrowing rate at 11%, MAF's borrowing rates at 15.63% (at the merger date disregarding credit lines), 13.86% (over the 1983 to 1989 period disregarding credit lines), 11.95% (credit lines at the merger date), and 10.27% (credit lines over the period).

These factors are not deserving of equal weight. The prudent investor rate will in my opinion ordinarily be the most significant indicia of a fair rate. Here it deserves, in my opinion, the greatest weight as well. I assign it a .65 weight; I assign a .30 weight to respondent's cost of funds. That cost of funds rate will itself be estimated as 12% (a rate that falls within the range of all the rates mentioned above). I assign a 5% weight to the legal rate. Thus I determine a fair rate of interest to be 10.72% (.65 x 9.3 + .30 x 12 + .05 x 13.5).

B. Costs

Section 262(j) provides for the payment of costs in appraisal proceedings as follows:

The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal [*113] proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal.

Petitioner asks the court to require respondent to reimburse petitioner's expert witness fees. No affidavit or other statement of what those fees are has been supplied. Given the extraordinary length of the testimony and complexity of the techniques employed one might imagine that those fees are quite substantial.

In Pinson v. Campbell-Taggart, supra this court held that under Section 262(h) as amended, the only way in which expert witness fees could be shifted is pursuant to the second sentence of that section, which authorizes apportionment of such fees among the appraised shares. See also Campbell v. Caravel Academy, Inc., 1989 Del. Ch. LEXIS 23, Del. Ch., C.A. No. 7830 (March 16, 1989) (accord). I regard myself as bound by those determinations. Even if, consistent with 8 Del. C. § 8906 there were discretion to require the corporation to pay such fees in an appraisal action, however, I could see no equity recommending that course in this case. Plaintiff's principal expert presented unusually [*114] complex testimony. It was not strictly necessary to approach valuing Technicolor in the way PVR did. Professor Rappaport's DCF model was less complex. I do not question that it was PVR's best professional judgment that its techniques represented the best way to value this company as of January 24, 1983. But where that testimony proved unhelpful and the result of the appraisal is that the merger price is found to be in excess of the statutory fair price, I am unable to apprehend why the corporation should be required to share the cost of the plaintiff's litigation in this way. In so saying I do not mean that the court must in all instances rely upon the expert testimony in order to justify shifting the cost of it to the defendant. See Consolidated Fisheries Co. v. Consolidated Solubles Co., Del. Supr., 35 Del. Ch. 125, 112 A.2d 30 (1955). The ordinary court costs will, however, be borne by the respondent.

*** A judgment order consistent with the foregoing may be submitted on notice.

	Theatrical
	Footage
Year	(000's)	% Change	Screens	%Change
1979	646,275	--	16,901	--
1980	635,261	--1.7	17,590	+4.1
1981	697,493	+9.8	17,800	+1.2
1982	557,491	--20.1	18,040	+1.4

	Petitioner	Company
	Estimated	Estimated
	Sale Value	Value	Difference

Audio Visual	$ 8.8mm (sale)	$ 6mm (sale) + 2.8mm
Standard Manufacturing	1.2 (sale)	1 (operate) + .2
Consumer Photoprocessing	7.2 (sale)	3 (operate) + 4.2
			7.2mm

		Rappaport's
	Torkelsen's	Assumed
	Assumed	going
	Sale	Concern		Difference
	Value	Value	Difference	Per Share
One Hour
Photo	$ 8mm	-7.7mm	15.8mm	3.46

Standard
Manufacturing	$ 1.2mm	1mm	2.2	.05

Consumer
Photoprocessing	$ 7.2mm	3mm	4.2	.92
Total			$ 20.2	$ 4.43