Transaction Price Essentially Constituted Fair Value Despite Hostile Bid, Del. Ch. Holds

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By Michael Greene

July 1 — Ramtron International Corp. shares were not undervalued when Cypress Semiconductor Corporation acquired the company in a hostile cash merger, according to a June 30 Delaware Chancery Court ruling.

In a 72-page opinion, Vice Chancellor Donald F. Parsons Jr. concluded that the transaction price minus synergies provided the most reliable method for determining the fair value of Ramtron's shares, even though the merger resulted from a hostile bid.

In doing so, the court rejected petitioner LongPath Capital LLC's expert's valuation, which relied on a combination of a discount cash flow (”DCF”) and comparable transaction analysis.

Wading through the parties' “widely disparate valuations numbers,” Parsons ultimately held that the fair value was $3.07 per share, which was $0.03 less than the merger price.

Unreliable Inputs

LongPath, who purchased its shares after the announcement of the merger for the purpose of pursing appraisal litigation, contended that the fair value was $4.96 per share.

The respondent argued for a valuation of $2.76 per share, which Parsons also rejected because it overstated net synergies.

In determining that the transaction price provided that best evidence of fair value, the court ruled out both a DCF and comparable transaction approach.

While noting that Delaware court typically tend to favor the DCF model, Parsons found the methodology inappropriate here because it was based upon unreliable management projections.

Specifically, Parsons found that “none of the indicia that often justify deferring to management projections” were present and that the projection suffered from “numerous flaws.”

Among the nine flaws he cited: the projections were made out of the ordinary course of business and “in anticipation of future disputes and of shopping the Company to potential white knights.”

Likewise, the court found that a comparable transaction analysis would not produce a reliable valuation because LongPath failed to show that comparables existed.

Transaction Price Best Indicator

Conversely, Parsons held that the transaction price provided the most reliable valuation of the acquired corporation.

“[I]n the situation of a proper transactional process likely to have resulted in an accurate valuation of an acquired corporation, this Court has looked to the merger price as evidence of fair value and, on occasion, given that metric one-hundred percent weight,” he noted.

Moreover, the court concluded that the transaction process substantiated that the merger price was a reliable indicator despite it resulting from Cypress' hostile bid.

Specifically, the court noted that Cypress repeatedly raised its offer while pursuing the acquisition and that during that time, Ramtron actively shop itself to potential buyers.

However, the court found that the evidence supported LongPath's approach to synergies and that $0.03 should be excluded from the merger price.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The opinion is available at http://www.bloomberglaw.com/public/document/LONGPATH_CAPITAL_LLC_a_Delaware_limited_liability_company_Petitio.