GLOBAL GT LP v. Golden Telecom, Inc.

OPINION

I. Introduction

This is an appraisal action. The petitioners Global GT LP and Global GT Ltd. owned nearly 1.4 million shares of respondent Golden Telecom, Inc. (“Golden”), a Russian-based telecommunications company that was listed on the NASDAQ. The petitioners claim that Golden was undervalued in a 2007 merger in which Golden was purchased for $105 per share by Vim-pel-Communications (“VimpelCom”) — a major Russian provider of mobile telephone services whose two largest stockholders were also the largest stockholders of Golden.

As is typical, the outcome of this appraisal proceeding largely depends on my acceptance, rejection, or modification of the views of the parties’ valuation experts. Both experts were well qualified to testify about the appropriate inputs to use in valuing a public company; but neither had a deep knowledge of the Russian telecommunications market or of Golden itself. Both these men of valuation science purported to apply the same primary method of valuation — the discounted cash flow (“DCF”) method — but the expert for the petitioners came up with a value of $139 per share and the expert for Golden came *499 up with a value of only $88 per share — a modest $51 per share value gap.

In this decision, I reach a valuation of Golden using the DCF methodology, which is the method that both experts viewed as the most reliable. I eschew any reliance on methods based on analogizing to comparable companies or transactions because the experts themselves had even less knowledge of the comparables than they did of Golden and both viewed it difficult to find a good sample of comparables. Thus, I focus on coming up with a solid, if necessarily imperfect, valuation using the DCF method that both experts embraced as the technique most susceptible to useful application.

In focusing on a DCF valuation, I reject Golden’s argument that I should give weight to the merger price itself on the grounds that the merger reflected a market-tested price. I reject that proposition for several reasons. First of all, the Special Committee that negotiated the merger never engaged in any active market check either before or after signing the merger agreement with VimpelCom. Second and most important, the passive market check that is supposed to instill confidence in me required market participants to assume that Golden’s two largest stockholders, Al-timo Holdings and Investments Limited (“Altimo”) and Telenor ASA (“Telenor”), would both sell their Golden stake to another bidder, despite the fact that they had an economic interest in VimpelCom that was far more substantial than their stake in Golden — an unlikely prospect made even more doubtful by Altimo’s public announcement that it did not intend to sell its 26% stake in Golden in another transaction. Given these market realities, it is not surprising that Golden’s Special Committee chairman admitted that the Committee had focused on getting the best deal they could from VimpelCom. There was no open market check that provides a reliable insight into Golden’s value.

After rejecting that argument, I wade through the discrete differences that explain the experts’ differing DCF valuations, which primarily involve Golden’s terminal growth rate, and the appropriate equity risk premium and beta to use in calculating a discount rate. After making my determinations as to these disagreements, I plugged them into the petitioners’ DCF model and generated a per share value of $125.49 per share, which I supplement with an award of interest at the applicable statutory rate.

II. Factual Background 1

The trial record was largely dominated by the testimony of the experts. For their part, the petitioners presented the testimony of Paul Gompers, a Professor of Business Administration at Harvard Business School. 2 Golden offered Marc Sherman, a Managing Director of Alvarez & Marshal, to respond. 3 Both experts are well quali *500 fied generally in the literature of valuation. Although Sherman has a bit more practical telecommunications experience, having done some valuation work involving other telecommunications firms, neither struck me as anything close to an industry expert. Moreover, neither had a deep knowledge of Golden itself or the Russian telecommunications industry.

Golden has tried to impress me with the fact that Sherman spoke with management for Golden after the merger and during the litigation, and therefore supposedly gained a deeper sense of the firm and industry than did Gompers, who did not do so. Of course, the managers for Golden working for the VimpelCom corporate empire had an incentive to cooperate with Sherman, and doubtless Golden would not have given Gompers unfettered access to them. In that respect, the testimony of the two fact witnesses who testified about Golden was not particularly helpful in terms of conveying a good sense of Golden’s prospects.

Fortunately, the experts did agree that there were a reliable set of projections prepared by Golden’s management that existed for the first five years beyond the merger. Given the existence of those projections and the general evidence in the record regarding the telecommunications industry both in Russia and internationally, and the predicted future of the Russian economy, there is a rational, if far from fully satisfying, record from which to resolve the discrete areas of opinion where the experts differ.

What precedes my resolution of those issues is my distillation of the record, such as it is, regarding Golden and its prospects.

A. Golden’s Business And Plans For Expansion

Golden, a telecommunications company, operated in the former Soviet Union, and was publicly traded on the NASDAQ. 4 Its initial public offering took place in September 1999 and, after that time, Golden grew primarily through self-financed acquisitions of regional-based telecommunications companies in Russia and other countries in the Commonwealth of Independent States (the “CIS”). 5 Although Golden was, at first, predominately focused on providing long-distance services, its acquisitions of local telephone companies throughout Russia and certain CIS countries gave Golden the capacity to provide local service to homes and businesses. 6

Golden traditionally focused on providing fixed-line services, meaning that it pro *501 vided telephone services through fiber or copper wiring, 7 and derived its revenues primarily from corporate customers and from services provided to other telecommunications and mobile operators. 8 By 2006, Golden had begun to expand its focus to include Wi-Fi, 9 which was in the early stages of development in Russia and the CIS, and broadband internet, 10 which was available only in major Russian cities. 11 By the end of 2007, Golden had completed approximately thirty acquisitions of smaller companies, and had become a leading faeilities-based provider of integrated telecommunication and internet services in the most populated areas of Russia and other countries of the CIS, and the largest independent telecommunications operator in Russia. 12 In particular, Golden acquired a 51% stake in Corbina, a telecommunications service provider that offers broadband internet in several Russian cities, which allowed Golden to offer bundled services including broadband internet, voice over internet protocol, internet protocol television, and mobile virtual network-based services. 13

B. Golden’s Management Creates A Five Year Plan

Despite its expansion into other areas of the internet and telecom market and its goal to sell a wide variety of related services to the customers on the ends of its cables, Golden remained primarily a fixed-line telecommunications provider for the business sector. Golden’s Board of Directors established a five-year business plan for Golden (the “Five Year Plan”) in October 2007 to chart the company’s continued expansion. 14 The Five Year Plan established a three-pronged strategy for Golden. First, Golden would continue to widen its corporate customer base in large cities, such as Moscow and St. Peters-burg. 15 Second, Golden would continue regional expansion to become a “national market player in both corporate and retail market segments.” 16 Third, Golden would enter the emerging broadband market, and seek to become a “leading provider of broadband access in Russia and the CIS.” 17 Although Gompers contends that Golden’s strategy reflected a marked move away from its prior consistent involvement in mergers and acquisitions activity, my reading of the record suggests that to accomplish this three-pronged strategy, Golden would be required to continue to engage in M & A activity to enter additional markets (which are comprised of cities smaller than Moscow but still far larger *502 than, say, Wilmington, Delaware) and to gain scale in the product markets it wished to enter. 18

The Five Year Plan projected revenue to grow annually at a declining rate:

2007 47.8%

2008 34.8%

2009 20.2%

2010 19.5%

2011 13.0%

2012 8.5% 19

The Five Year Plan also estimated that Golden’s EBITDA margins would grow for three years, and then level off:

2007 25.9%

2008 31.8%

2009 32.1%

2010 32.6%

2011 32.6%

2012 32.5% 20

The projections of Golden’s management were based on Golden’s business plan of expanding its corporate customer base, broadband service, and regional expansion throughout Russia and the CIS. 21 The Five Year Plan considered the increased competition that Golden would face in all segments of its business as the Russian telecom market continued to grow, 22 and a variety of potential risks, including political risk. 23

The predictions in the Five Year Plan are reasonable when considering the trends in the Russian market generally, and the telecom industry in particular. For example, the projected compound annual growth rate (“CAGR”) of the Russian nominal GDP was expected to be 14.6% from 2007 to 2012, which is consistent with the average projected CAGR predicted for Golden in the Five Year Plan of 14.5%. 24 The projected CAGR of the Russian nominal GDP of 8.5% from 2012-2017 is in line with Golden’s projected revenue growth in 2012 of 8.5%. 25 And, the decline in Golden’s growth rate is consistent with the decline in the (still healthy) growth rate of Russia’s overall telecom sector since 2004. 26

C. Russia’s Expanding Telecom Market And Golden’s Predicted Growth

Golden’s Five Year Plan was based, in part, on the reasonable expectation that the Russian telecommunications market *503 would continue to expand. Russia was one of the few remaining growth markets in Europe, and its telecom industry was predicted to grow rapidly, particularly the broadband retail market. 27 Golden was particularly well-poised to grow with the Russian market because it was the only operator present in all segments of Russia’s fixed-line market in 18 of Russia’s 20 largest cities. 28 Renaissance Capital, for example, opined in February 2007 that Golden was “well positioned to maintain its leadership in the corporate [telecom] segment,” and Golden’s residential internet market would become Golden’s “second-largest contributor to operating income in 2010” largely because Golden’s “fiber-to-the-home” internet service was “the best option on the market.” 29 Golden was also in a position to expand because it had very low levels of debt compared to other tele-com companies. 30

D. Golden And VimpelCom, Agree To Merge

Of course, just as Golden hoped to become a major competitor in the Wi-Fi and broadband markets, so too did other industry players have their eye on Golden’s space. One industry player in particular had box seats from which to contemplate Golden. That was VimpelCom.

Golden’s two largest stockholders, Alti-mo and Telenor, also happened to be the largest stockholders of VimpelCom. Indeed, Altimo and Telenor’s combined stake in VimpelCom was larger in both percentage terms and value. Specifically, Sunbird Limited, which owned 26% of Golden’s outstanding common stock, and Eco Telecom Limited, which owned 44% of VimpelCom’s outstanding voting capital, are both subsidiaries of Altimo. And, Nye Telenor East Invest AS, the beneficial owner of 18.3% of Golden’s outstanding common stock, and Telenor East Invest AS, the beneficial owner of 33.6% of VimpelCom’s outstanding common stock, are both subsidiaries of Telenor. Moreover, Altimo and Telenor not only had board representatives on the VimpelCom board, but also had appointed members of the Golden Board. 31 Four nominees of Eco Telecom Limited served on the VimpelCom board, including Oleg Malis and Alexey Reznikovich, who also served on the Golden Board. 32 Four nominees of Telenor East Invest served on the VimpelCom board, including Kjell Morten Johnsen, who also served on Golden’s Board. 33 Together, Altimo and Telenor appointed a majority of the nine-member VimpelCom board, suggesting how deep their interest in VimpelCom was.

*504 Given the cross-holdings and the reality that Golden was strong in fixed-line services and weak in mobile capabilities, and VimpelCom had just the opposite qualities, it was perhaps inevitable that a merger of the two firms would be considered. 34 At first, in February 2007, Golden’s CEO, Jean-Pierre Vandromme, and Vimpel-Com’s CEO, Alexander Izosimov, began to discuss the possibility of the two companies working together by, for example, cross-selling their services. 35 Discussions between senior management of Golden and VimpelCom continued throughout 2007 and, in furtherance of those discussions, the two companies entered into a confidentiality agreement and exchanged non-public information. 36

In April 2007, Izosimov met with Van-dromme, and suggested that the two companies explore a transaction whereby Vim-pelCom would acquire 100% of Golden. 37 Golden’s Board met on May 17, 2009 to discuss VimpelCom’s proposal and decided to establish a Special Committee made up of the four Golden non-management directors who were not affiliated with Altimo or Telenor. 38

The Special Committee retained Skad-den, Arps, Slate, Meagher & Flom, LLP as outside counsel, and Credit Suisse Securities (USA), LLC as its financial advis- or. 39 On July 3, 2007, VimpelCom gave Golden a summary sheet of proposed terms for a combination of the two companies. But because the summary sheet did not specify an offer price, the Special Committee decided not to respond until a more detailed proposal was presented. 40 Around this time, the news of Vimpel-Com’s interest in Golden leaked into the market. In early September 2007, Vim-pelCom proposed to pay $80 per share of Golden’s stock, which the Special Committee rejected, 41 and, in late September 2007, VimpelCom changed its proposal to a range of $80 to $95 per share. 42 The Special Committee felt that the upper end of the range was “sufficiently attractive” to justify continuing the negotiations process and entered into a second confidentiality agreement with VimpelCom, which gave VimpelCom access to Golden’s nonpublic information and Golden’s management. 43

VimpelCom raised its offer price again to $100 on November 12, 2007. 44 But the Special Committee felt that this amount was inadequate, and rejected the offer on November 15, 2007. 45 On November 28, 2007, VimpelCom raised its offer to $103 per share, and the Special Committee again rejected the offer. Although Vim-pelCom initially told the Special Committee that $103 per share was its final offer, VimpelCom raised its offer to $105 per share on December 1, 2007, which the Special Committee agreed to accept pro *505 vided that all other material terms for the merger were fully resolved. 46

According to Patrick Gallagher, Chairman of the Special Committee, Vimpel-Com’s offer of $105 per share represented the “highest per share consideration reasonably obtainable” when considering the inherent risks in Golden’s business plan, such as the increased competitiveness in Golden’s key markets, political uncertainty in Russia, adverse changes in the global credit markets, and VimpelCom’s intention to directly compete with Golden in the broadband market. 47 The Special Committee recommended that the full Board accept the merger and, on December 3, 2007, the Board unanimously approved the merger. Credit Suisse completed a fairness opinion for the $105 per share price (the “Fairness Opinion”) and, at a December 20, 2007 meeting of the Special Committee, opined that the price was fair.

The discounted cash flow (“DCF”) analysis conducted by Credit Suisse came up with a range of $85-$128, and a median value of $102. 48 Importantly, this valuation was premised on a nominal GDP growth rate for the Russian economy of 5.6%. 49 That was supposedly taken from an Economist Intelligence Unit (“EIU”) forecast for 2013 to 2017. The number used, however, does not track the December 2007 EIU data, which forecasted nominal GDP growth of 7.4%. 50 If the figure in the December 2007 EIU data was used in Credit Suisse’s model, its DCF value for Golden would have had a median value of $110 per share.

The merger agreement between Golden and VimpelCom (the “Merger Agreement”) was executed the next day, on December 21, 2007. 51 The Merger Agreement required that at least 63.3% of Golden’s outstanding shares be tendered before the merger could close. 52 Additionally, the merger provided for: (1) an $80 million termination fee, which represented 2% of the $4 billion transaction; (2) a $120 million fee for Golden if Vim-pelCom’s financing fell through; and (3) a matching right for VimpelCom to address superior offers. 53 But Altimo, which owned 26% of Golden, publicly indicated that it did not intend to sell its Golden stake to another bidder. 54 Telenor was more coy, but gave no affirmative indication that it would sell to another bidder, and its representative on the Golden Board had voted for the merger. 55 Unsurprisingly, given the objective facts regarding Altimo and Telenor’s ownership interest in VimpelCom, no third party came forward after the Merger Agreement was signed to express an interest in buying Golden.

E. The Market Reacts Negatively To The Merger Price

After the merger price was announced on December 21, 2007, market analysts *506 commented that the $105 per share price was very favorable to VimpelCom and, perhaps most important, VimpelCom’s stock price rose substantially. 56 Morgan Stanley, for example, downgraded Golden on the day that the price was announced, and expressed its concern that although “Golden offer[ed] attractive organic growth and prospects ... the net realizable value for [Golden’s minority stockholders] may [have been] limited only to the level of the bid price.” 57 Renaissance Capital also commented that the transaction was favorable to VimpelCom shareholders, stating that “even purely taking the difference between [Renaissance Capital’s] valuation of Golden Telecom ($136/ share) and the tender offer ($105 per share) add[ed] about $1.2 per VimpelCom share.” 58

F. Shareholders Overwhelmingly Tender Their Shares At The $105 Price

Although the movement in VimpelCom’s stock price suggested that the market believed that VimpelCom was getting a good deal, an overwhelming majority of Golden’s shareholders tendered their shares at the $105 price. Under the terms of the Merger Agreement, Lillian Acquisition, Inc., a wholly owned subsidiary of Vimpel-Com, was to acquire 100% of Golden in a two step transaction. First, VimpelCom would commence a cash tender offer of $105 per share for the outstanding shares *507 of Golden common stock. 59 Second, a back-end merger would convert all Golden shares not tendered — other than those Golden shares subject to the exercise of appraisal rights — into the right to receive $105 per share in cash.

VimpelCom commenced the tender offer on January 18, 2008. Altimo had already indicated that it intended to tender its shares and did so, but Telenor decided to first conduct its own analysis to determine whether the price was adequate, 60 and finally tendered its shares on February 5, 2008. A total of 94.4% of Golden’s shareholders tendered at the $105 price before the offer expired on February 26, 2008. The merger closed on February 28, 2008, and Golden became a wholly-owned subsidiary of VimpelCom.

G. The Petitioners Request An Appraisal

The petitioners filed their request for an appraisal on April 18, 2008. Following extensive expert discovery, a trial was held on October 14-15, 19, and 80, 2009. This is my opinion on the fair value of Golden.

III. Legal Framework

Under 8 Del. C. § 262(h), this court must, upon finding that a stockholder is entitled to an appraisal, “determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value.” 61 The entity must be valued as a going concern based on its business plan at the time of the merger, 62 and any synergies or other value expected from the merger giving rise to the appraisal proceeding itself must be disregarded. 63

IV. Analysis

In addressing the question of fair value, I proceed in two steps. First, I explain why I reject Golden’s argument that the merger price is itself a reliable indication of fair value. Then, I grapple with the contending positions of the parties’ experts about the value of Golden, in particular regarding the valuation of Golden in light of its future expected cash flows.

A. Deference To The Merger Price

As an initial matter, I find the price that VimpelCom paid for Golden in the merger to have no reliable bearing on my appraisal valuation. Golden argues that deference should be given to the merger price of $105 per share because the Special Committee, assisted by outside advisors, was able to determine for itself the fair price of Golden, and because no other interested bidders came forward despite rumors of the potential merger that leaked to the market in July 2007. It is, of course, true that an arms-length merger price resulting from an effective market check is entitled to great weight in an appraisal. For example, in Union Ill. 1995 Inv. Ltd. P’ship v. Union Fin. Group, *508 Ltd., this court held that the merger price was the best indicator of fair value for appraisal purposes because the merger “resulted from a competitive and fair auction, which followed a more-than-adequate sales process and involved broad dissemination of confidential information to a large number of prospective buyers.” 64 But, as Gallagher, the Special Committee chairman, admitted at trial, the Special Committee did not engage in any sales efforts at all and instead concentrated solely on getting as good a deal as it could from VimpelCom. 65 In essence, the Special Committee treated the context as one closer to a merger proposal by a controlling stockholder, given the reality that Golden’s two largest shareholders — Altimo and Telenor — owned more of VimpelCom, the buyer, than Golden, the seller. Now, in appraisal, Golden acts as if the Special Committee was simply locking in a floor, and creating the perfect conditions for an effective passive market check. That after-the-fact litigation argument is without any factual foundation.

The reality is that any bidder peering in from the outside was confronted by a merger agreement that did not contain an active go-shop provision, and by a public statement by Golden’s largest stockholder, Altimo, that it would not sell its 26% stake in another transaction. 66 Although Golden argues that Telenor was more equivocal about whether it was willing to sell its 18% stake, equivocation in this context does not help Golden. The idea that a rational third-party bidder would make a blind expression of interest in a situation where the economic interests of Golden’s largest stockholders was more heavily weighted toward doing what was best for Vimpel-Com — a corporation on whose board they had seated eight designees — and each stood to gain hugely if the merger generated synergy gains for VimpelCom is not one that I accept. In a situation such as this, to actually entice bids, the Special Committee, if it was relying on a market check to obtain the highest value, should have affirmatively sought guarantees from Alti-mo and Telenor that they would support a higher bid and used those guarantees to attract bidders. Instead, the Special Committee created a situation where other market players would rationally infer that the merger was the deal supported by Golden’s two largest stockholders (and the three directors that Altimo and Telenor appointed to Golden’s Board) whose interest in VimpelCom gave them special reasons to support that deal and not to sell into another transaction.

Golden also makes a more novel argument. It contends that the fact that only a single investor has brought an appraisal claim demonstrates the fairness of the merger price. But analyzing a deal price based on the size of the appraisal class is not supported by the appraisal statute itself, and would require this court to speculate about the reasons for the size of the appraisal class. Investors may choose to forego appraisal for any number of reasons. Appraisal claims are expensive to pursue, and the petitioners get none of the merger consideration during the pendency of the case, making such claims beyond the means of some investors to fund. And, certain institutional investors may be hap *509 py to take a sizeable merger-generated gain on a stock for quarterly reporting purposes, or to offset other losses, even if that gain is not representative of what the company should have yielded in a genuinely competitive sales process.

Critically, if market evidence were to be considered, the weight of the evidence suggests that the market believed that VimpelCom was getting a bargain. As discussed earlier, a number of market analysts felt that the $105 price undervalued Golden, and downgraded Golden after the merger was announced. 67 For example, Alfa Bank suggested that VimpelCom’s offer undervalued Golden, and estimated that $129 per share would have been a more appropriate price. 68 More importantly, VimpelCom’s stock rose substantially from $22.31 per share at the time that rumors about the proposed merger were leaked in July 2007 to $41.98 on December 21, 2007, the day that the Merger Agreement was announced, although the overall market remained relatively stable. 69 When the definitive terms of the merger were announced on December 21, 2007, VimpelCom’s stock rose $2.60 for a price of $41.98 per share, and continued to rise in the immediate days following the merger announcement to $44.98. 70 These realities are noteworthy given that the stock price of an acquiring company will generally drop when it announces that it intends to merge with another company. 71

For all these reasons, I reject Golden’s argument that the merger price is a reliable indication of value.

B. The Experts’ DCF Analyses

The petitioners argue that the fair value of Golden as of February 28, 2008 (the “Valuation Date”) was $138.37 per share 72 Golden, on the other hand, argues that the $105 merger price is generous because $88.14 is the fair value of Golden as of the Valuation Date. 73 The parties’ assertions are based on the reports of their valuation experts — Gompers and Sherman. 74 As I noted earlier, neither Sherman nor Gompers is an expert in Russia or in the telecom industry generally, although Sherman has more experience in conducting valuations of telecom companies in the context of litigation. 75

Both experts conducted a DCF analysis, a comparable companies analysis, and a comparable transactions analysis. But, both give little weight to the latter two *510 analyses. Sherman weighted his comparable companies and transactions analyses at only 20% of his conclusion. 76 Gompers did not give those methods any actual weight in his valuation, using them only as a cheek on his DCF findings. 77 Both experts admitted that there were few, if any, appropriate comparables for Golden and the Golden-VimpelCom merger. 78 As important, neither of the experts convinced me that he really knew Golden deeply as a company, much less that he knew anything substantial about the sparse number of potential comparables, and their expert reports and the information they use to support them do not, in my view, provide me with any reliable basis to come up with a sound group of comparable companies or transactions myself. 79 The lack of confidence I have in this aspect of the experts’ analyses is confirmed by the slight weighting they gave these methods. I am also not going to pretend that I am personally qualified or have the time to engage in a from-scrateh construction of comparable companies and transactions analyses using such public resources as I could obtain.

Therefore, rather than engage in a speculative exercise based on tinkering with analyses that the two experts themselves essentially do not stand behind, I concentrate my valuation analysis on deploying the method that each expert believed was the most reliable and pertinent — the discounted cash flow method — and use that as the basis for my award. 80

The components of a DCF analysis are familiar, and do not require repetition. 81 Both experts largely adopted the projections of Golden’s management, including the Five Year Plan, which I have already found to be reasonable. 82 This provides *511 the court with a largely-agreed upon projection of Golden’s estimated cash flows for the period from 2008 to 2012.

The major area of disagreement between the experts about Golden’s cash flows is the terminal growth value to be used in applying the Gordon growth model version of the DCF, which has been employed by both experts. The smaller argument about the cash flows is the tax rate to be applied to them.

After resolving those arguments, I then address the two critical differences the experts have that are relevant to determining the rate at which Golden’s expected future cash flows are to be discounted back to present value. Both experts purport to apply the capital asset pricing model (“CAPM”). The weighted average cost of capital they derive, however, is different because the equity risk premium and beta they use in coming up with their cost of equity diverge markedly.

1. Terminal Growth Rate

In a DCF analysis, future cash flows are projected for each year during a set period, typically five years. 83 After that time, a terminal value is calculated to predict the company’s cash flow into perpetuity. Generally, once an industry has matured, a company will grow at a steady rate that is roughly equal to the rate of nominal GDP growth. 84 In this case, the experts had access to assumptions by Golden’s management as to its growth rate for a full ten years. The first five years (2008 to 2012) of those assumptions were quite specific projections of future cash flows in the Five Year Plan, and the next five years were based on an assumption that Golden would grow at the rate of Russia’s overall GDP. That is, the management projections assumed that Golden would keep up with Russia’s overall growth during that period, even though, as I shall note, that is a conservative assumption. A -viable company should grow at least at the rate of inflation and, as Golden’s expert Sherman admits, 85 the rate of inflation is the floor for a terminal value estimate for a solidly profitable company that does not have an identifiable risk of insolvency. 86 Sherman argues that the *512 growth rate of the Russian economy will decline significantly in 2017 and beyond, and that Russia will reduce its inflation rate to a level below that which the United States has experienced in the last century. 87 Nowhere in his report or at trial did Sherman explain the basis for his prediction, which also tends to conflict with his suggestion that the risk of revolutionary changes in Russia that could put Golden out of business hangs over Golden. 88 In other words, Sherman somehow suggests that Russia will whip inflation now and have a very low inflation, low growth economy, and that, despite the world-wide popularity of telecommunications-related products, Golden will grow only at that whipped rate of inflation.

But Sherman’s position does not translate, in my view, into a reasonable approach to developing a terminal growth rate. Although Golden was a well-positioned, low-leverage firm that had a demonstrated history of profitability and above-average growth in an industry with above-average growth prospects in a market (the former Soviet Union) with above-average growth prospects, Sherman adopted a terminal growth rate for Golden based on his assumption about the rate of inflation. That is, Sherman assumed that as soon as the ten-year projection period ended, Golden would only grow with the rate of inflation in Russia. That is an unduly pessimistic assumption.

Not only that, Sherman used a 3% estimate for inflation, an estimate that he largely made up himself with no rational basis. 89 Notably, data from the EIU in February 2008 estimates Russian inflation to be an average of 3.9% from 2018 to 2030. For some unexplained reason, Sherman’s terminal rate is below the floor. If Sherman is correct, it is not clear why VimpelCom was interested in buying Golden in the first place, as it was buying a firm that was not expected to even keep pace with Russia’s overall growth, much less provide the above-market returns that, if the projected growth rate of the Russian telecommunications industry was consulted, might have been expected. 90 If the telecom industry in the United States, which grew at an annualized real rate of 9.3% from 1963 to 2003 while the annualized real growth rate of the U.S. GDP *513 was just 3.3%, is any indication, the Russian telecom industry will exceed GDP growth for quite some time. 91 Thus, I believe Sherman’s approach is unduly pessimistic and reject it.

Although Gompers, perhaps even more than Sherman, had a less than ideal understanding of Golden itself, Gompers knew enough about Golden and the telecommunications industry in Russia and worldwide to come to a much more responsible estimate than Sherman did. Sherman gave too slight a weight to Golden’s good financial health, solid record of growth, and to the growth prospects of the Russia telecommunications industry. By contrast, Gompers came to a measured conclusion that gave responsible, but not overenthusiastic, weight to each of these factors. Although the relevant factors might have supported a terminal growth rate equal to the long run growth rate of Russia’s GDP, Gompers used a 5% terminal growth rate. Gompers’ rate is the mid-point between the forecasted long-term Russian nominal GDP growth of 6.2%, and a forecasted inflation rate to 2030 of 3.9%. 92

Gompers’ use of a 5% terminal growth rate is based on a respected source of such projections, the EIU. That approach was measured and realistic given that the Russian telecom industry was expected to grow at a rate significantly exceeding the Russian GDP. 93 The reasonableness of expecting the Russian telecommunication sector to outpace the overall Russian economy is buttressed by actual history in the United States, where the telecom industry has grown at nearly three times the rate of the United States GDP. 94 Gompers’ estimate accounts for the fact that the Russian telecommunications market is continuing to grow and that, with the increase of the broadband and Wi-Fi markets, companies such as Golden would have the opportunity to reach new customers and offer bundled services to existing customers. By choosing the average of the Russian GDP and inflation rate, Gompers accounted for the very real possibility that Golden will be close to (or in my view, likely exceed) the GDP rate for a period of time, but then, as the telecom market matures, settle closer to the inflation rate. I therefore adopt a 5% terminal growth rate. 95

2. Golden’s Tax Rate

Sherman and Gompers also disagree about the tax rate to use. The tax rates in the Five Year Plan for 2008 to 2012 ranged from 30.1% to 35.3%, and the tax rate Credit Suisse used in connection with the DCF analysis undergirding its Fairness Opinion was 30%. 96 Gompers adopted the tax rate used by Credit Suisse in the Fairness Opinion. He also reasoned that a 30% tax rate was “consistent with the numbers forecasted by [Golden’s] man *514 agement.” 97 Sherman, on the other hand, selected a tax rate of 31.6% based on the predictions of Golden’s management, and on Golden’s average historical tax rate for 2004 to 2006, 98 which ranged from 28.7% to 32.4%. Gompers simply adopted Credit Suisse’s calculations without explaining convincingly why those calculations are reasonable. 99 By contrast, Sherman adjusted management’s projections to reflect the average of Golden’s historical tax rate, a rate that is at the conservative end of management’s predictions, which called for tax rates ranging from 30.1% to 35.3% for the period from 2008 to 2012. 100 I therefore adopt Sherman’s tax rate of 31.6% for purposes of my DCF analysis.

3. Equity Risk Premium

To figure out the cost of capital by which to discount Golden’s future cash flows, both Sherman and Gompers had to come up with a cost of equity. One of the two major sources of disagreement between the experts was over what equity risk premium (“ERP”) to use. 101 Sherman relied on an ERP of 7.1%. The ERP Sherman selected is from the 2008 Ibbotson SBBI Valuation Year Book, which is based on long-term historical data from 1926 to year-end 2007. 102 Gompers used an ERP of 6.0%, which he selected based on his teaching experience, the relevant academic and empirical literature, and the supply side ERP reported in the 2007 Ibbotson Yearbook. 103

In a theme that will be continued when I next examine the debate about beta, the parties spar about the approach to take, with the petitioners portraying themselves as using the most reliable, market-accepted method because their method is “forward looking” and thus consistent with the purpose of this valuation, which is to determine the value of Golden based on its prospects in a future, not past, market. For its part, Golden portrays the petitioners as advancing novel, unaccepted approaches that are more speculative and less reliable than the more traditional approaches it advances.

In reality, the debate is not nearly so stark. Although the petitioners, through Gompers, advance techniques that are designed to be forward-looking, those techniques are of course entirely based on using past data to predict the future, just like the techniques advanced by Golden, through Sherman. Each technique depends to a certain extent on taking some combination of past data and using it to predict a necessarily uncertain future.

In the case of their debate about the ERP, that reality can easily be discerned. For its part, Golden uses the most traditional estimate of the ERP, the historic ERP published by Ibbotson. That estimate is based on Ibbotson’s consideration of stock returns from 1926 to the present (or as relevant to this case, to year end 2007). Sherman testified that the Ibbot-son historic ERP (the “Historic ERP”) is *515 the best estimate of predicting long-term future performance because it relies on a long period of history, 104 while a predictive ERP is “an attempt at predicting the future as opposed to just letting history be the guide. 105