Merion Capital, L.P. v. 3M Cogent, Inc., C.A. No. 6247 (Del. Ch. July 8, 2013) (Parsons, V.C.)
In this post-trial opinion, Vice Chancellor Parsons determined the fair value of the shares of Cogent Inc. (“Cogent” or the “Company”) in a statutory appraisal proceeding arising from the merger of Cogent and 3M Company (“3M”). Several former stockholders of Cogent (“Petitioners”), who had acquired their Cogent shares after the announcement of the merger, rejected 3M’s offer of $10.50 per share and sought appraisal pursuant to 8 Del. C. § 262. After trial, the Vice Chancellor held that the fair value of Petitioners’ shares was $10.87.
At trial, Petitioners relied solely on their expert’s DCF analysis and contended that the fair value of Cogent was $16.26 per share. Respondent, 3M Cogent, on the other hand, claimed that Cogent’s fair value was $10.12 per share. In support of its valuation, 3M Cogent gave equal weight to its experts’ DCF analysis, comparable companies analysis, and comparable transactions analysis. The Vice Chancellor noted that, generally speaking, it is preferable to take the more robust approach involving multiple techniques to triangulate a value range, as the various methodologies individually have their own limitations.
The Vice Chancellor first addressed the comparable companies analysis conducted by 3M Cogent’s expert. The Vice Chancellor explained that the utility of this market-based method depends on having companies that are sufficiently comparable such that their trading multiples provide a relevant insight into the subject company’s own growth prospects. For several reasons, the Vice Chancellor found that the companies in 3M Cogent’s analysis were not sufficiently comparable, rendering the analysis unreliable. For instance, the Vice Chancellor found that each of the companies was significantly smaller than Cogent and none had generated a profit as Cogent had for several years. The Vice Chancellor also found that the companies were not from the same business or industry as Cogent. For these reasons, the Vice Chancellor afforded no weight to 3M Cogent’s comparable companies analysis.
As for 3M Cogent’s comparable transaction analysis, the Vice Chancellor similarly found it to be unreliable and accorded it no weight. For one, the Vice Chancellor found that 3M Cogent’s comparable transactions analysis contained insufficient data points to support any meaningful conclusions. It noted that of thirty-six potential EBITDA multiples identified, 3M Cogent was only able to provide eight meaningful multiples. In the view of the Vice Chancellor, reliability was diminished even further by the fact that the data points were widely dispersed. As an example, the Vice Chancellor noted that while the mean of the forward EBITDA multiple was 25.4x, the standard deviation was 25.1x. For these reasons, among others, the Vice Chancellor again accorded no weight to Respondent’s comparable transactions analysis.
Turning to the DCF analyses conducted by both parties, the Vice Chancellor first addressed a threshold dispute between the parties—whether it was appropriate to rely on five-year projections prepared by Cogent’s management for the purposes of selling the company, as opposed to in the ordinary course of business. The Vice Chancellor noted precedent suggesting that projections made outside of the ordinary course of business may not be entitled to the same deference typically afforded management projections. However, based on the evidence adduced at trial, Delaware’s long-standing preference for management projections, and the lack of any extraordinary circumstances involving management conflicts of interests, the Vice Chancellor accepted the management projections as a reliable starting point for the DCF analysis. After addressing several competing inputs and assumptions, the Vice Chancellor concluded that the equity value of Cogent as of the merger date was approximately $963.4 million. Based on that valuation, it determined the price per share to be $10.87.
In reaching his decision, the Vice Chancellor also rejected 3M Cogent’s argument that the Court should rely on the merger price as evidence of the fair value of Petitioners’ shares. The Vice Chancellor cited recent precedent refusing calls to defer to the merger price, as shifting the responsibility to determine fair value from the court to the private parties and not focused on the company’s going concern value. The Vice Chancellor also reasoned that 3M Cogent itself did not simply rely on the $10.50 merger price, but instead relied on its experts’ analyses to arrive at the lower price of $10.12. For that reason, and because the price was not adjusted to produce the going concern value of Cogent, the Vice Chancellor found the merger price largely irrelevant to the case and focused primarily on the experts’ testimony and analyses.
The Vice Chancellor also addressed whether Petitioners were entitled to statutory interest at the legal rate despite the fact that they acquired their shares after the merger was announced. The Vice Chancellor explained that adopting a rate different from the statutory rate “may be justified where it is necessary to avoid an inequitable result, such as . . . a bad faith assertion of valuation claims.” 3M Cogent argued that it would be inequitable to award interest at the legal rate because Delaware law disfavors the purchase of a lawsuit and statutory interest is not intended to benefit purchasers of after-acquired shares. Relying in part on precedent from the Court of Chancery case, Salomon Brothers Inc. v. Interstate Bakeries Corp., the Vice Chancellor held that Delaware law does not disfavor the purchase of shares after the announcement of a merger. The Court found unpersuasive 3M Cogent’s reliance on case law recognizing that the appraisal right was intended to protect “stockholders—who by reason of the statute lost their common law right to prevent a merger—by providing for the appraisement of their stock and the payment to them of the full value thereof in money.” The Vice Chancellor noted that statutory interest also serves to avoid an undeserved windfall to the respondent in an appraisal action, “who would otherwise have had free use of money rightfully belonging to the petitioners.”