April 2015 | Issue 79
A recent Delaware appraisal proceeding produced a stock valuation that was within 7/10 of 1% of the actual price of the transaction. The case is In Re Appraisal of Ancestry.com, Inc., Del. Ch. LEXIS 21, (January 30, 2015).
Ancestry, Inc., located in Provo, Utah, is a leading company in the online family research market. Its websites contain more than 15 billion genealogical records, which are used by its two million plus subscribers to do family research.
In 2009, Ancestry became a public company, coming public at $13.50 a share.
In March 2010, Ancestry became the finance and research sponsor for the NBC television show Who Do You Think You Are? This show, which ran for three years, featured celebrities learning more about their own family histories. The publicity for Ancestry generated by the show did much to spur the company’s growth. By early 2011, Ancestry stock was trading at over $40 per share. Then, in May 2012, the show was cancelled (the same day that it was nominated for an Emmy).
A Sale Process Begins
In early 2012, Ancestry stock was trading in the low $20s. As a result of receiving a number of unsolicited overtures, Ancestry’s board began to explore a possible sale of the company.
In May of 2012, the company, through its investment banker, Qatalyst Partners, began reaching out to potential buyers and financial sponsors. These included private equity firms and potential strategic partners. Qatalyst ultimately had discussions with 14 potential bidders. Of these, seven submitted non-binding preliminary indications of interest, with bids falling in a range from $30-$32 to $35-$38 per share.
The bidding and negotiating process continued, and on October 22, 2012, Ancestry announced a merger agreement with an affiliate of private equity firm Permira Advisors, LLC, at a price of $32 a share. The price represented a 41% premium over the concurrent unaffected trading price of the company’s stock.
On December 28, Ancestry shareholders approved the merger, with 99% of the voting shares being voted in favor of the transaction.
The Parties Go To Court
In December 2012, Ancestry received written demands for appraisal from holders of 1,415,000 shares of Ancestry common stock. As a result, the parties found themselves in an appraisal proceeding in front of Vice Chancellor Glasscock in Delaware Chancery Court.
The Experts Speak
Each side had an appraisal expert. The experts of both the Petitioners and Respondent relied solely on a discounted cash flow (“DCF”) approach to valuing Ancestry as of the date of the merger (December 28, 2012). The decision to rely solely on the cash flow approach was credited to the difficulty the experts had in finding comparable companies or transactions that could be used as guidelines to value.
The DCF approach begins with the preparation of financial projections of future cash flows of the company. These future cash flows are then discounted back to the present at an appropriate discount rate, to produce the present value of the company.
Although Ancestry management did not routinely prepare operating projections, they did prepare three sets of projections in 2012 in connection with the prospective sale, an optimistic one in May and two less optimistic ones in October.
At trial, Petitioners’ expert opined that the value of Ancestry was at least $42.81 per share. Respondent’s expert arrived at a value of $30.63 per share. The principal causes of the difference in value were:
- Petitioner gave more weight to the more-optimistic May projection.
- Petitioner employed a considerably higher EBIT margin in its analysis.
- Petitioner used a discount rate of 10.96% as contrasted to Respondent’s discount rate of 11.71%
The Court Speaks
The court performed its own valuation analysis. It began by choosing to rely exclusively on the two October projections, weighted 50-50. It felt that the May projections were unreliable. The court also felt more comfortable using the Respondent’s EBIT margin. Finally, the court adopted a discount rate of 10.71%, which it determined through application of the Capital Asset Pricing Model.
The court’s analysis, which is spelled out in considerable detail in the opinion, produced a value for Ancestry of $31.79 per share.
The court took note of the fact that its cash flow valuation result was extremely close to the deal price of $32. It commented as follows; “because the inputs here, the October projections (as well as the …May projections) are problematic…and because the sale process was robust, I find fair value in these circumstances best represented by the market price.”
The court then concluded that the merger price of $32 is the best indicator of Ancestry’s fair value as of the merger date.