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Intrinsic Value Realization




The Delaware Supreme Court issued a ruling on December 14, 2017 that endorsed its interpretation of the "Efficient Market Hypothesis" as a foundation for relying upon market pricing to define a company’s “fair value” in appraisal proceedings. The Forum accordingly reported that it would resume support of marketplace processes instead of judicial appraisal for its participants' realization of intrinsic value in opportunistically priced but carefully negotiated buyouts. See:

December 21, 2017 Forum Report

 Reconsidering Appraisal Rights for Long Term Value Realization



Forum distribution:

Court's independent analysis supports competitively established pricing of strategic buyer as fair value


For the court decision reported below, see

[page 47] "The Merger was not an MBO. To the contrary, the Company’s management team believed that Fidelity would not retain them if it acquired the Company. This gave the management team a powerful personal incentive not to favor Fidelity and not to seek (consciously or otherwise) to deliver the Company to Fidelity at an advantageous price. Instead it gave the management team an additional incentive to seek out other bidders and create competition for Fidelity."


Source: Law360, December 16, 2016 article

Chancery Uses Market Price In LPS-Fidelity Deal Appraisal

By Jeff Montgomery

Law360, Wilmington (December 16, 2016, 6:18 PM EST) -- A Delaware Chancery judge appraised Lender Processing Services Inc. on Friday at the final deal price of $37.14 per share in the company's roughly $3.5 billion sale to Fidelity National Financial Inc., deviating from a recent clip of appraisal cases where market value took a backseat to other factors.

In a 75-page opinion that examined several valuation methods, Vice Chancellor J. Travis Laster wrote that in this instance, he “gave 100 percent weight to the transaction price,” ruling that LPS ran a sale process that “generated reliable evidence of fair value.”

The decision sided with one of the positions LPS went with at trial: that the final merger price, which had a per-share value that was nearly four dollars higher than when the deal was revealed, ought to be the ceiling for appraising the company’s value.

Vice Chancellor Laster wrote that although LPS did also provide a discounted cash flow analysis as valuation evidence, that methodology was not as reliable in this case, because even small changes to the assumptions behind the methodology led to wild variations in the company’s value. The petitioners seeking appraisal had provided such an analysis that generated a value upwards of $50.46 per share, but when the vice chancellor went about trying to resolve the differences in the methods, he came up with a price that came very close to the final merger price, bolstering his confidence that the deal price was the way to go, according to the opinion.

“My best effort to resolve the differences between the experts resulted in a DCF valuation that is within 3 percent of the final merger consideration,” Vice Chancellor Laster wrote. “The proximity between that outcome and the result of the sale process is comforting.”

The decision comes amid a relatively tense climate in which the Chancery Court has been the target of some criticism for giving less to weight to, or in some cases abandoning, deal price when appraising transactions.

Under Delaware law, stockholders who did not vote for a deal can petition the Chancery Court to examine the transaction, and if the court rules a company was undervalued, it can be on the hook to make up the difference to the shareholders who have asked for the process.

Many cases — such as LLC, BMC Software Inc. and CKx Inc., all presided over by Vice Chancellor Sam Glasscock III — have gone with the deal price as what the court terms as “fair value” for the transaction, but at least two recent and high-profile deals deviated from that track.

Chancellor Andre G. Bouchard ruled in September that Lone Star Fund VIII underpaid by more than $100 million when it bought payday lender DFC Global Corp. for $1.3 billion, a decision that drew strong rebuke from the target company on appeal.

DFC Global argued that the chancellor’s decision threatened to embolden shareholders who use appraisal actions as an investment strategy and inject too much uncertainty into the merger market.

Vice Chancellor Laster had also given limited weight to deal price in his May appraisal of Dell Inc.’s take-private deal by company founder Michael Dell, finding that the transaction was undervalued by nearly 30 percent.

The vice chancellor cited the Dell decision in his LPS opinion Friday, noting that in Dell's case, he evaluated a management-led buyout and “the petitioners proved that there were structural impediments to a topping bid on the facts of the case, particularly in light of the size and complexity of the company and the sell-side involvement of the company’s founder.”

In the LPS case, the petitioners, two Merion Capital Group funds, had argued that the deal left $1.2 billion of value on the table, and that the actual market price of the company did not accurately capture its value, because Fidelity never faced any sort of competitive bidding when courting its target. Also, the deal took place at a market low, the funds said.

LPS had just gone through a bruising regulatory gauntlet brought on by the subprime mortgage crisis and was poised for healthy long-term growth because of the breadth of the company's products and good relationships with customers, Merion Capital argued.

LPS countered that Merion Capital’s analysis could not withstand multiple methodologies, including the deal price, that disagreed with such a wide valuation gap, and said the petitioner’s numbers were “litigation-driven.”

Representatives for Merion did not immediately respond to requests for comment Friday. A representative for LPS declined to comment.

The dispute stems from Fidelity’s buying back its former spinoff LPS in a $2.9 billion cash and stock deal that closed in 2014 after the Federal Trade Commission, which had said it had limited antitrust concerns about the tie-up, gave the transaction the OK on the condition that the companies sell certain title insurance assets in Oregon.

At the time the deal was unveiled, in May 2013, LPS shares were valued at $33.25 apiece, and the company was to be folded into Fidelity's ServiceLink business, with Boston-based Thomas H. Lee buying a 19 percent stake in the new entity — dubbed Black Knight Financial Services Inc. — for about $381 million.

By the time the deal closed, the aggregate value stockholders received from the transaction was $34.17, according to the opinion.

Merion Capital is represented by Steven T. Margolin of Greenberg Traurig LLP and Stephen E. Jenkins, Marie M. Degnan and Peter H. Kyle of Ashby & Geddes PA.

LPS is represented by Bradley R. Aronstam and S. Michael Sirkin of Ross Aronstam & Moritz LLP and John A. Neuwirth, Evert J. Christensen Jr., Matthew S. Connors and Elizabeth Kerwin-Miller of Weil Gotshal & Manges LLP.

The case is Merion Capital LP et al. v. Lender Processing Services Inc., case number 9320, in the Court of Chancery of the State of Delaware.

--Additional reporting by Jody Godoy and Melissa Lipman. Editing by Edrienne Su


© 2016, Portfolio Media, Inc.


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