LongPath Capital, LLC v. Ramtron Int'l Corp., C.A. No. 8094-VCP (Del. Ch. June 30, 2015) (Parsons, V.C.)
In this appraisal action, the Court of Chancery determined that the negotiated merger price less synergies yielded the fair value of Ramtron International Corporation (“Ramtron”) for purposes of Section 262 of the Delaware General Corporation Law. In so ruling, the Court found other suggested valuation techniques, including discounted cash flow analysis, inappropriate due to unreliable management projections and lack of comparable transactions and relied instead on the result of the company’s sales process.
In June 2012, Cypress Semiconductor Corporation (“Cypress”) made an unsolicited bid in the form of a bear hug letter for respondent Ramtron. Following Ramtron’s initial rejection of that offer, Cypress’s subsequent hostile tender offer, and negotiations, Ramtron and Cypress agreed on a transaction price of $3.10 per share and, in September 2012, announced they had signed a merger agreement. After that announcement, petitioner LongPath Capital, LLC (“LongPath”) began acquiring Ramtron shares. The merger closed in November 2012, and LongPath commenced an appraisal proceeding shortly thereafter.
The parties presented competing expert testimony regarding the fair value of Ramtron’s stock. LongPath’s expert used a discounted cash flow (“DCF”) analysis based on management projections and a comparable transactions analysis to reach a purported fair value of $4.96 per share. In contrast, Ramtron’s expert determined the fair value to be $2.76 per share based on an examination of the merger price less synergies. Ramtron’s expert also determined an alternative fair value of $3.08 per share based on a DCF analysis. The Court held that both experts’ analyses were unreliable and that Ramtron’s fair value was $3.07 per share—the merger price of $3.10 less three cents per share in synergies.
In reaching its determination of fair value, the Court found that the experts’ DCF analyses were inappropriate because Ramtron’s management projections were unreliable. The Court based this conclusion on six reasons: (1) the management team responsible for developing the projections was relatively new, having been with the company at most a year, and prepared the projections only after receipt of Cypress’s bear hug letter (i.e., outside of the ordinary course of business, with an incentive to err on the optimistic side) using new, untested methodologies; (2) the evidence suggested that management’s ability to forecast near-term results was “mediocre at best” and of “middling quality”; (3) the projections incorporated speculative, unrealistic assumptions regarding business realities, including assumptions regarding cost reductions and the company’s ability to execute on increased production; (4) substantial evidence suggested that management-projected revenue was inflated due to flawed accounting practices, including the purportedly improper recognition of revenue early through a process known as “channel stuffing,” despite any actual uptick in demand; (5) the projections defied historical trends; and (6) Ramtron never relied on the projections in the ordinary course of business, but rather created them only after Cypress’s offer and in anticipation of litigation.
The Court also rejected LongPath’s expert’s comparable transactions analysis, which was based on two purportedly comparable transactions. The Court determined that, even assuming the two transactions were qualitatively comparable, the meager number of data points and the range of multiples called the reliability of this valuation approach into question. Further, the two comparable transactions implied an overly broad fair value range between 88% and 198% of the merger price and, like the DCF analysis, relied on unreliable management projections.
As neither a DCF nor comparable transactions analysis yielded a reliable measure of fair value, the Court turned to the merger price as the most reliable indication of Ramtron’s fair value. Relying on the lengthy negotiations during an active sales process, during which time Ramtron shopped itself to other buyers, the 25% increase obtained over Cypress’s initial offer, and the lack of any competing bids, Vice Chancellor Parsons concluded that to second-guess the merger price would be an “exercise in hubris and, at best, reasoned guess work.” Thus, the Court adopted the merger price less synergies as the fair appraisal value.