June 2014 | Issue 74
Introduction
In a recent Delaware dissenting shareholder case, Vice Chancellor Glasscock was called upon to perform an appraisal in order to determine the fair value of the stock of a company involved in a merger. Instead of using the methods normally employed to perform such an appraisal, such as an analysis of discounted cash flow (DCF), comparable public companies or comparable transactions, the judge used as his measure of fair value the actual purchase price of the subject company. The case is Huff et al. v. CKx, Inc. C.A. No. 6844-VCG (November 1, 2013). The decision was also analyzed in Hempstead & Co. E-Letter # 70.
An important reason that the court felt comfortable in using the deal price ($5.50 per share) was that it felt that the auction process preceding the sale, run by Gleacher and Company, was open, thorough and effective. The court also had little confidence in the cash flow projections and comparable company analyses prepared by the parties’ valuation experts.
The Company
CKx, Inc. was a publicly-traded company. It owned various entertainment properties. Significant assets included the television show American Idol and the dance show So You Think You Can Dance.
Synergy
It is a principle of establishing a dissenting shareholder valuation that the dissenter not be rewarded with the fruits of a merger to which he is objecting. For this reason, an adjustment is sometimes made to an appraisal to eliminate any benefit which is included in the price which arises from synergy between the acquirer and the target. In this transaction, the court believed that there was little or no synergy, owing perhaps to the fact that the buyer was a financial buyer.
Realizing that some might disagree, the court allowed for a process whereby the parties could account for any excludable synergy that might be imbedded in the transaction price. Both sides availed themselves of this opportunity. The result is set forth in a Letter Opinion dated May 19, 2014.
The Parties Respond
Both parties availed themselves of the opportunity to be heard on the synergy issue. The Respondent argued that the merger price should be adjusted downward to exclude synergies that the buyer (Apollo) sought to realize in the merger. The Respondent argued that “the subtraction of synergistic elements of value from the merger price results in a going-concern value of CKx at the time of the merger of $5.21 per share, $0.29 less than the $5.50 per share that Apollo paid in the merger.” The posited synergy arose from $4.6 million in annual cost savings expected to arise from the conversion of CKx from a public company to a privately-held firm.
The Court Rejects a Downward Adjustment
While Respondent asserted that “when a public company goes private, cost savings in some amount will be achieved,” the court concluded that the record “contained insufficient evidence to support a finding that Apollo based its $5.50 per share bid on cost savings that, had the company continued as a going concern, CKx management could not have itself realized.” Accordingly, said the court “I find that the merger price does not include any value derived from the accomplishment of expectation of the merger, and therefore decline to adjust the merger price downward.”
The Court Rejects an Upward Adjustment
The Petitioner contended that if any adjustment to the merger price should be made, it should be an upward adjustment to include value for certain future business opportunities that were part of CKx’s “operative reality” at the time of the merger. Petitioner pointed out that after Apollo submitted its $5.50 bid, but prior to closing in May 2011, CKx management entered into advanced discussions with Sharp Entertainment about a potential acquisition. Petitioner also pointed to a number of other unexploited revenue opportunities, such as So You Think You Can Dance dance clinics and an American Idol website, the value of which, they said, must be added to the price.
The court declined to try to determine if Apollo’s bid incorporated information about the value of certain opportunities. “The subjective valuation placed by Apollo on these opportunities is not relevant…the market had the opportunity to value these opportunities. [B]ecause Apollo topped the market, it would overstate the value of CKx were I to add to the market price the value of the unexploited opportunities.”
Accordingly, the court declined to adjust the merger price upward in this regard, saying that “the sales price is the best indicator of fair value here.”
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction(s) or tax-related matter(s) addressed herein.
