MEMORANDUM OPINION
PARSONS, Vice Chancellor.
In this appraisal action, the petitioner asks the Court to determine the fair value of its shares in the respondent. On November 10, 2012, a third party acquired the respondent in a hostile cash merger for $3.10 per share. The deal had an equity value of approximately $110 million and paid a 71% premium over the respondent's unaffected stock price of $1.81.
The petitioner acquired its shares after the announcement of the merger and demanded appraisal pursuant to 8 Del. C. § 262. The respondent contends the merger price less synergies offers the most reliable measure of the fair value of its shares. That methodology, as applied by the respondent's expert, yields a value of $2.76 per share. The petitioner's expert, relying on a combination of a discounted cash flow ("DCF") analysis and a comparable transactions analysis, contends that the fair value is $4.96 per share.
For the reasons that follow, I conclude that a DCF analysis is not an appropriate method of determining fair value in this instance. The utility of a DCF ceases when its inputs are unreliable; and, in this instance, I conclude that the management projections that provide the key inputs to the petitioner's DCF analysis are not reliable. The parties agree that there are no comparable companies. The petitioner relies, in part, upon a comparable transactions approach, but I conclude that his two-observation data set does not provide a reasonable basis to determine fair value. Although the petitioner thoroughly disputes this point, I conclude that the sales process in this instance was thorough and that the transaction price less synergies provides the most reliable method of determining the fair value of the petitioner's shares. The respondent, however, has not shown that the synergies in fact amounted to $0.34 per share, as it claims. Instead, I adopt the petitioner's estimate of $0.03 per share in synergies, resulting in a fair value of $3.07 per share.
I. BACKGROUND
I begin by providing a brief overview of the parties, the respondent and its business, and the process leading up to the merger.
A. The Parties
Petitioner, LongPath Capital, LLC ("LongPath"), is an investment vehicle that began acquiring shares of the respondent in mid-October 2012, about a month after the announcement of the merger.
Respondent, Ramtron International Corporation ("Ramtron" or the "Company"), is a fabless semiconductor company that produces F-RAM. A "fabless" semiconductor company is one that does not manufacture the silicon wafers used in its products, but instead, outsources that task to a separate company known as a "fab" or a "foundry."
Nonparty Cypress Semiconductor Corporation ("Cypress") issued a bear hug letter to Ramtron on June 12, 2012, offering to buy all of its shares for $2.48 per share.
B. Ramtron's Operative Reality
Throughout this litigation, Respondent has portrayed Ramtron as a struggling company unlikely to be able to continue as a business had the transaction with Cypress not concluded successfully. Petitioner, by contrast, describes Ramtron as a company with strong patent and intellectual property protection of its core products, a successful new management team, and excellent business prospects. Indeed, in relying on the management projections, Petitioner characterizes Ramtron as a company on the verge of taking off like a rocket. Perhaps unsurprisingly, I find that Ramtron's operative reality at the time of the Merger was somewhere in between these practically polar opposite characterizations.
1. Ramtron's foundry situation
As a fabless semiconductor company, Ramtron's relationships with its foundries were vitally important. Indeed, Ramtron depended on its foundry to manufacture its products. At the time of the Merger, Ramtron's primary foundry was Texas Instruments ("TI").
Semiconductor foundries were the subject of a substantial amount of testimony at trial. As will be seen, the subject of foundries relates to both the reliability of the management predictions and the disputed cause of Ramtron's poor performance in 2012. Gery Richards, Ramtron's CFO at the time of the Merger,
The testimony at trial made clear that transitioning foundries is not a simple process. Semiconductors are complex products. In fact, even the silicon wafers from which the semiconductors are created are not commodities but instead vary by company.
In fact, Ramtron's own track record of foundry transitions suggests that two years probably is a significant underestimate. When Fujitsu gave Ramtron a last-time buy notice in 2009, Ramtron already had been attempting to develop a second foundry relationship with TI. The effort of transitioning to TI had begun in 2004 and took seven years to complete.
To increase its flexibility and reduce its dependence on TI, Ramtron sought to develop a second foundry relationship with IBM. That effort, however, never succeeded. Thomas Davenport, Ramtron's Vice President of Technology at the time of the Merger,
The witnesses at trial uniformly attested to the difficulty of transitioning foundries.
2. Ramtron's business and finances
Ramtron's board of directors installed Eric Balzer as the Company's new CEO in January 2011.
The difficult transition from Fujitsu to TI caused problems for Ramtron's day-to-day business throughout 2011 and into 2012. A brief overview of Ramtron's sales process is required in order to understand that effect. Ramtron sold some of its product directly to customers, but the majority was sold to distributors who in turn sold the products to the end users.
Theoretically, the two systems should arrive at the same results. Unless the distributors are buying exactly the same amount of inventory as they are selling during each financial reporting period, however, the systems will result in revenue being recognized at different times. To take a simplistic example, suppose a company sells 100% of its products through distributors and that the company develops a new product in the first quarter. The following chart provides an example of how the company would recognize revenue under the two different regimes assuming the company sold 100 units of the product to the distributors at $1 each over the course of a year:
This comparison deliberately highlights an important dispute between the parties in this case: the point-of-purchase method makes it difficult to forecast actual demand because the distributors provide a buffer. Indeed, in this example, under the point-of-purchase method, demand appears to be falling, while under the point-of-sale method, it appears to be rising.
Several of the witnesses testified that they believed Ramtron's point-of-purchase revenue system made it more difficult accurately to forecast future sales.
The second reason that Ramtron's point-of-purchase revenue recognition system is relevant is because it allows management to alter the Company's revenue by forcing more inventory into the distribution channels. This practice is known as "channel stuffing." As discussed in more detail in Section III.A infra, I find that Ramtron's management did stuff the channel in the first quarter of 2012, thereby distorting the company's revenue.
The combination of over-orders from customers that were placed on allocation and Ramtron's stuffing of the channel led to a massive build-up of inventory. The chart below
Ramtron Inventory
This inventory needed to be financed, which took a serious toll on Ramtron's cash position. Ramtron's primary lender was Silicon Valley Bank ("SVB"). Throughout 2011 and 2012, the years affected by the inventory bubble, Ramtron either missed or needed to renegotiate its loan covenants repeatedly. For example, the Company missed its April 2011 liquidity covenant and received a forbearance for May of that year.
Around this time, Cypress began expressing an interest in Ramtron. On March 8, 2011, Cypress made a non-public written offer to Ramtron for $3.01 a share.
After rebuffing Cypress and renegotiating its bank covenants, Ramtron still needed capital. SVB apparently had shifted to lending to Ramtron on an asset-backed basis, meaning that its loans were collateralized by the Company's receivables instead of being unsecured. Ramtron considered borrowing from other lenders, but concluded that the cost was too high.
As the above chart shows, Ramtron's inventory continued to increase throughout 2011. Despite the recent equity raise, Ramtron soon fell short on cash again. At least one internal Company email from January 2012 suggests that the first quarter covenants would be tight.
Overall, the evidence shows that Ramtron continually had difficulty meeting its bank covenants, but that SVB seemed willing to renegotiate those covenants. There is no evidence that SVB ever sought to call its loans or that the Company actually faced a serious risk of foreclosure. Richards concisely summed up Ramtron's relationship with SVB as "rocky in regards to the covenants" but that he "had a good relationship with the bankers."
C. The Merger
On June 12, 2012, Ramtron issued a public letter declaring its intent to acquire Ramtron for $2.48 a share.
Only two days after Cypress announced its public bid, Balzer, Ramtron's CEO, ordered the creation of new long-term management projections (the "Management Projections"). While, as discussed infra, the parties vigorously dispute the accuracy of Ramtron's prior forecasts, there seems to be no dispute that the Company's management had not previously created multi-year forecasts and instead generally only created five-quarter forecasts.
A June 14, 2010 email chain among those five individuals shows a team undertaking a new and unfamiliar project. As if emphasizing that the projections were not being prepared in the ordinary course of Ramtron's business, Balzer wrote that he wanted a "product by product build up, with assumptions, for it to hold water in the event of a subsequent dispute."
Meanwhile, Cypress' hostile offer continued. On June 21, 2012, Cypress commenced a hostile tender offer for Ramtron at $2.68 per share.
The witnesses at trial agreed that Ramtron's second quarter performance was disappointing.
It is conceivable that Cypress' offer may have had some negative effect on second quarter sales, but the weight of the evidence shows that operational shortcomings of Ramtron were the primary cause of the decline in sales. Ramtron appears to run on a calendar fiscal year. As such, less than three weeks remained in June (and the second quarter) when Cypress issued its bear hug letter on June 12 and at most ten days remained after Cypress initiated its hostile tender offer. The most probable explanation for the poor second quarter is that Ramtron's management had stuffed the Company's distribution channel with inventory in the first quarter of 2012, and that caused the Company's distributors to order less product in quarter two. I discuss channel stuffing in Section III.A infra. Here, it suffices to note that, as of the first quarter of 2012, Ramtron had $25.5 million in inventory, a 264% increase over the previous year. Even assuming Ramtron's optimistic 2012 projection of $70 million in revenue, Ramtron had roughly nineteen weeks worth of inventory, for which it already had recognized revenue, at the beginning of the second quarter of 2012.
Other factors support the conclusion that Cypress' hostile bid did not drive Ramtron's poor second quarter performance. First, Davenport disagreed with the allegation that the distributors were pulling back because of Cypress. Davenport viewed Zimmer's comments to that effect as excuses for not hitting his sales targets.
Notwithstanding the poor second quarter, Cypress increased its offer price to $2.88 per share on August 27, 2012, and extended the term of the tender offer.
Beginning on September 12, 2012, representatives of Cypress and Ramtron engaged in active negotiations. Cypress increased its offer to $3.01 per share on September 16 and then again to $3.08 on September 17. Later that same day, Ramtron and Cypress agreed on the final transaction price of $3.10 per share.
D. Procedural History
LongPath filed this appraisal action on December 11, 2012. After the parties engaged in discovery, the Court presided over a three-day trial from October 7 to 9, 2014. Eight witnesses testified, including the parties' experts. After extensive post-trial briefing, I heard final argument on March 3, 2015.
I also note, for completeness, that a stockholder class action challenging the Merger was filed on October 15, 2012. Those plaintiffs moved to preliminarily enjoin the Merger, but that motion was denied. Thereafter, the defendants in the class action moved to dismiss. On June 30, 2014, I issued a memorandum opinion granting those motions and dismissing the stockholder class action with prejudice.
E. Parties' Contentions
Both parties base their positions on expert testimony. Petitioner called David Clarke as its expert; Respondent relied upon Gregg Jarrell. Not surprisingly, the experts arrived at widely disparate conclusions. Clarke contends that the fair value of Ramtron's stock as of the Merger was $4.96 a share. Jarrell opines that the stock was worth only $2.76. Petitioner's fair value of $4.96 a share is more than 274% of Ramtron's unaffected stock price of $1.81.
Clarke bases his conclusion of $4.96 per share on a combination of a DCF analysis and a comparable transactions analysis, which he weighted at 80% and 20%, respectively. Clarke relied on Ramtron's management projections and a three-stage DCF analysis to arrive at a value of $5.20 per share. He based his comparable transactions analysis on a dataset consisting of only two transactions and obtained a fair value of $3.99 per share. Because Clarke found no comparable companies, he did not rely on that valuation method.
Jarrell rather unusually began his analysis with two premises: (1) that the Merger price was the result of a fair and competitive auction; and (2) that the management projections were overly optimistic. Based on these predicates, Jarrell opted to examine the transaction price and back out any synergies in order to determine fair value. This approach resulted in a fair value of $2.76 per share. In addition, Jarrell conducted a DCF analysis, in which he relied upon the management projections he earlier concluded were overly optimistic. Based on that analysis, Jarrell opined, apparently in the alternative, that the fair value of the Company's shares was $3.08 each, a number coincidentally only two pennies from the Merger price. As a result of his analysis, Jarrell also concluded that there were no comparable companies or comparable transactions.
Much has been said of litigation-driven valuations, none of it favorable.
II. STANDARD OF REVIEW
In a statutory appraisal action brought pursuant to 8 Del. C. § 262, the Court is tasked with "determin[ing] the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value."
As is well-known, the Delaware appraisal statute places the burden of proof on both parties.
III. ANALYSIS
A survey of the case law reveals that there are four main, or at least recurring, valuation techniques generally presented in an appraisal action: a discounted cash flow or DCF analysis, a comparable companies approach, a comparable transactions approach, and an examination of the merger price itself, less synergies. Like all tools, each has its own strengths and weaknesses. The parties agree that there are no comparable companies. Jarrell and Clarke disagree about whether there are comparable transactions, but the universe of potential comparables, even according to Clarke, is limited to two. Both sides conducted a DCF analysis, but disagree about certain issues in addition to the reliability of the Management Projections, such as the proper size premium, the appropriate method of modeling future capital expenditures, and whether a two-step or three-step DCF is more appropriate, as well as several more minor issues. The parties strongly disagree about the appropriate weight, if any, to give the Merger price, which Respondent weighs at 100%. Petitioner places the most weight on its DCF analysis. Accordingly, I begin there and then address the utility of a comparable transactions approach before turning to the transaction price.
A. A Discounted Cash Flow Analysis Is Inappropriate Because the Management Projections Are Unreliable
A discounted cash flow analysis "involves projecting operating cash flows for a determined period, setting a terminal value at the end of the projected period, and then discounting those values at a set rate to determine the net present value of a company's shares."
The reason that "Delaware law clearly prefers valuations based on contemporaneously prepared management projections" is "because management ordinarily has the best first-hand knowledge of a company's operations."
1. A new Ramtron management team prepared projections not in the ordinary course using a methodology they never had employed before
The team in charge of creating the new Management Projections consisted of Richards and one of his employees, Zimmer, and Emley, with oversight by Balzer.
Aside from having relatively new employees tasked with creating the inputs, the team that developed the Management Projections utilized: (1) a new product-by-product build-up method; (2) a point-of-sale instead of the usual point-of-purchase methodology; and (3) a multi-year projection period.
Additionally, the projections were not prepared in the ordinary course of business. There is no evidence Ramtron ever had prepared forecasts for more than five quarters, with the exception of Richards's deferred tax asset projections.
In sum, Ramtron's new management team employed a new methodology to create long-term projections, which they were not accustomed to doing, out of the ordinary course of business, with knowledge that the projections could or would be used: (1) in a subsequent dispute; (2) in marketing the Company; (3) as the inputs for Needham's DCF analysis;
2. Management's forecasting capabilities
The parties vigorously dispute Ramtron management's forecasting accuracy. One dispute, for example, involves Respondent's contention that Ramtron often missed its publicly issued guidance for annual revenue going back to 2007, four years before Zimmer and Emley even joined the Company. This line of attack is something of a red herring. The proper focus should be on the forecasting accuracy of the management team that actually made the projections. Whether other, prior executives had or lacked the gift of seeing into the Company's future and predicting the success of its business is less relevant and barely probative of the forecasting capabilities of the pre-Merger management team. Accordingly, I would assign little weight to Ramtron's alleged historic forecasting prowess, even assuming it was proven.
The record is surprisingly unclear on exactly what projections were made by the then-current Ramtron management team, aside from the occasional public guidance.
Respondent's argument is straightforward: the waterfall chart appears in a presentation to the Board,
More practical reasons lead me to the conclusion that the waterfall chart likely represented management's actual forecasts. First, contemporaneous emails suggest that the management team saw these numbers as goals they should hit. In a late January 2012 email chain, Balzer writes to Zimmer, Richards, and Yates that the Company "really need[s] to find a way to hit $14.5. That is what we said we would do."
I find it most likely that management began with high aspirations for future quarters and reduced those expectations toward the actual expected results as the quarter drew nearer. This suggests that management's near-term forecasting abilities were mediocre at best. Even so, the waterfall forecasts and the public guidance forecasts were done with a different methodology than the Management Projections. Accordingly, I conclude that management, even under its traditional forecasting system, was of middling quality when it came to forecasting Ramtron's future business. Several witnesses at trial testified that, in general, the semiconductor business is difficult to forecast.
3. The projections incorporate unrealistic assumptions regarding ROHM
I also note that the Management Projections assume cost reductions, over time, associated with the transition to ROHM's foundry. The projections reflect an assumption that production of F-RAM at ROHM would to begin in January 2013 at 150,000 units a month and increase by 50,000 units per month thereafter.
Ramtron entered into a manufacturing agreement with ROHM in late July 2012 pursuant to which ROHM would serve as a second foundry for Ramtron.
Additionally, evidence presented at trial buttresses this conclusion. Consistent with the other testimony on the lead time for getting a product from concept to full-fledged commercial sale,
4. The Management Projections rely on 2011 and 2012 revenue figures that were distorted because of customer allocation issues and channel stuffing
As discussed in the next Subsection, the Management Projections for revenue assume a constant growth rate of 24% for 2014, 2015, and 2016.
In Section I.B.2 supra, I discussed the massive inventory build-up that Ramtron experienced beginning in 2011. During no quarter in 2010 did Ramtron have more than $7 million in inventory. Over the course of 2011, however, Ramtron shipped a huge amount of inventory into its distribution channels until, in the first quarter of 2012, Ramtron had $25.5 million in inventory. Even under favorable assumptions for Ramtron, that amounts to about nineteen weeks of inventory in the channel and it consists of product for which Ramtron already had recognized revenue.
Ramtron's management, however, expected to hit their reduced forecasts for the first quarter of 2012. Although I already have discussed the difficulties with the point-of-purchase revenue recognition system, there is another pitfall not yet discussed: channel stuffing. Channel stuffing is the practice of stuffing inventory into the channel in order to recognize the attendant revenue sooner, notwithstanding the fact that the revenue does not correspond to underlying increases in demand. Hence, it is a form of revenue manipulation.
I find that Ramtron's management pushed excess inventory into the Company's distribution channels in the first quarter of 2012. In an already referenced email chain from late January 2012, Balzer remarked that the Company "really need[ed] to find a way to hit $14.5" million.
All of this matters for two reasons. First, forcing excess inventory into the channel in early 2012 meant that there would be a corresponding fall off in revenue at some point in the future absent a demand spike.
The problem, however, goes beyond just the amount of improperly recognized revenue. The timing of the revenue also is affected significantly. If 2011 and 2012 are used as base years in forecasting, but those years include inflated revenue because of either over-ordering by customers placed on allocation or channel stuffing, then the reliability of the projections is affected. Thus, customer allocation issues in 2011 and channel stuffing in the first quarter of 2012 throw significant doubt on the accuracy of the underlying revenue figures for those periods. In that regard, I do not consider it productive (even assuming it is feasible) to attempt to quantify how much in extra revenue Ramtron recognized in 2011 or 2012 based on these factors.
5. The projections defy historical trends
Historical performance does not control a company's future performance. It is, however, a red flag when projections suggest a dramatic turnaround in a company despite no underlying changes that would justify such an improvement of business. This is the classic "hockey stick" problem. The Management Projections, prepared days after Cypress made its bid and with knowledge that Needham would use the Projections to market the Company, fall into this category. Both revenue growth and gross margins are shown as undergoing dramatic improvements. The following chart shows Ramtron's historical revenue (for the ten years before the projection period) versus its projected revenue.
Presented in another perspective, the following chart shows the Company's compound annual growth rate ("CAGR") over various periods.
Petitioner attempts to justify the Management Projections as reasonable by comparing the projections to a set of internal Cypress projections. In what was called the President's Strategic Plan (the "PSP"), Cypress forecasted the potential F-RAM market in terms of total available market, service available market (which was Cypress' term for a product's core market) and predicted share of the market.
The chart below compares Cypress' predictions for Ramtron, as a division of Cypress, against the Ramtron Management Projections. Dollar values are in millions.
Petitioner's argument is unpersuasive. The PSP forecasts Ramtron as a division of Cypress—i.e., after a possible merger. That alone makes the comparison of market share unavailing. More importantly, Cypress predicted a moderate, but falling market share for Ramtron or, at best, that Ramtron would maintain its market share.
6. Management utilized other projections for ordinary business purposes
The fact which I find to be the final nail in the coffin for the Management Projections is that Ramtron did not rely on them in the ordinary course of its business. Although Balzer suggested that the Management Projections were used for other purposes, such as cash management,
The final version of the Management Projections utilized by Needham in preparing its fairness opinion is from September 18, 2012.
7. There are insufficient reliable inputs to produce a reliable DCF analysis
In summary, the Management Projections suffer from numerous flaws. Specifically, they: (1) were prepared by a new management team, (2) in anticipation of future disputes and of shopping the Company to potential white knights, (3) using a new methodology, and (4) were for a significantly longer period of time than previous forecasts. In addition, I note the following problems: (5) management's track record at forecasting was questionable even under their standard method of forecasting; (6) the final projections incorporate speculative elements relating to ROHM, (7) rely on distorted base year figures that resulted from customer allocation issues and channel stuffing, and (8) predict growth out of line with historical trends; and, finally, (9) management itself was providing other, "more accurate" projections to the Company's bank. None of the indicia that often justify deferring to management projections are present in this case. Thus, Petitioner has not proven that the Management Projections are reliable, and I conclude that they are too questionable to form the basis of a reliable DCF valuation.
"[W]ithout reliable five-year projections, any values generated by a DCF analysis are meaningless."
B. The Comparable Transactions Method Does Not Produce a Reliable Value
The parties' experts agree that there are no comparable companies to Ramtron.
A comparable transactions approach requires "identifying similar transactions, quantifying those transactions through financial metrics, and then applying the metrics to the company at issue to ascertain a value. The utility of a comparable transactions methodology is directly linked to the `similarity between the company the court is valuing and the companies used for comparison.'"
The purportedly comparable transactions are the acquisitions of Actel Corporation ("Actel") and Virage Logic Corporation ("Virage"), both of which Clarke concluded were companies that produced memory products but, like Ramtron, operated without their own foundry.
Jarrell contests Clarke's choice of comparable transactions. He notes that the proxy statement in the Virage transaction included a list of comparable companies from two industries similar to Virage's and that Ramtron was not listed in either group.
In the past, "[t]his Court has found comparable transactions analyses that used as few as five transactions and two transactions to be unreliable."
Clarke then went on to: (1) subtract a 13% synergy discount from each of the implied equity values; and (2) average the three figures to arrive at a comparable-transactions-based equity value for Ramtron of $141.9 million.
Even assuming these two transactions qualitatively are comparable transactions, in that the acquired companies operated similar businesses to Ramtron, the meager number of data points and the range of multiples indicate that this valuation approach is of questionable reliability in this instance. The EV/LTM multiple, for example, yields synergy-adjusted per share values of $2.74 to $6.13, a range of $3.39, which exceeds the Merger price of $3.10.
I see little justification for Clarke's simple averaging method, particularly with only two data points. His comparable transactions approach implies per share values ranging anywhere from $2.72 to $6.13. Two of the multiples have high-low ranges exceeding Ramtron's unaffected stock price. I am not convinced it is productive to utilize a method that implies Ramtron's fair value is somewhere between 88% and 198% of the deal price.
C. The Transaction Price Provides the Best Evidence of Fair Value
A DCF analysis attempts to value a company by looking within the company, extrapolating its financials into the future, and then discounting these cash flows to present value. A comparables approach instead looks outside the company and attempts to value it by market analogy. The former method is only useful to the extent its inputs are reliable; the latter is helpful only to the extent actual comparables exist. Neither approach yields a reliable measure of fair value in this case. Instead, I conclude that the Merger price offers the best indication of fair value.
A merger price does not necessarily represent the fair value of a company, as the term "fair value" is interpreted under 8 Del. C. § 262. For example, in a short-form merger under Section 253, the merger price is set unilaterally by the controlling stockholder; the minority stockholders are forced out of the company and left with appraisal as their sole remedy. To presume that the merger price represented fair value in such a situation would leave the minority stockholders effectively without the remedy offered by Section 262 of an independent analysis of a company's fair value. In 2010, the Delaware Supreme Court in Golden Telecom, Inc. v. Global GT LP
Nevertheless, in 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.
At the outset, I note that I am not aware of any case holding that a multi-bidder auction of a company is a prerequisite to finding that the merger price is a reliable indicator of fair value. Here, unlike in Union Illinois or Huff Fund, only one company, Cypress, made a bid. This case also differs in that the Merger was a hostile deal. As detailed below, however, I conclude that "the process by which [the Company] was marketed to potential buyers was thorough, effective, and free from any spectre of self-interest or disloyalty,"
Ramtron could, and repeatedly did, reject Cypress' overtures. Simultaneously, Ramtron actively solicited every buyer it believed could be interested in a transaction. The Company provided several of those potential buyers with the much-vaunted Management Projections. No one bid. LongPath contends that the lack of other bidders indicates a flawed process. I disagree. Any impediments to a higher bid resulted from Ramtron's operative reality, not shortcomings of the Merger process.
1. TI and Ramtron's operative reality
Much already has been said about Ramtron's operative reality as of the Merger. Petitioner focuses on one particular factor that it contends irredeemably corrupted the sales process: Ramtron's foundry relationship with TI. Under Ramtron's manufacturing agreement with TI, Ramtron was guaranteed three additional years of production if TI terminated the agreement.
The parties do not dispute that Cypress began preparing for its hostile bid well in advance. Part of that diligence involved predicting potential interlopers. Another aspect of Cypress' preparation involved essentially seeking TI's blessing for its potential bid. Because of the change-in-control provisions, Cypress sought to get some form of assurance from TI in advance of issuing its bear hug letter that TI would not exercise that right in relation to an acquisition by Cypress. Rodgers testified that he called TI's president to discuss a potential acquisition of Ramtron. In that regard, Cypress offered to avoid competing with one of TI's F-RAM products if TI agreed not to terminate the foundry relationship with Ramtron. Cypress never received a contract or other written agreement from TI—in fact, it appears that TI never explicitly agreed to support Cypress` bid. Cypress did receive, however, enough of an informal assurance that it deemed the risk of proceeding with the acquisition acceptable.
As Petitioner emphasizes, Rodgers began discussing this issue with TI in March 2011, over a year before Cypress' bid for Ramtron.
LongPath argues that Cypress had an unfair tactical advantage and that other bidders were unlikely to get TI's support. This appears to be nothing but speculation. Ramtron's relationship with TI was part of its operative reality. A Cypress planning document, titled "Potential Interlopers," listed five such plausible interlopers. For three of them, Cypress predicted that TI would not extend foundry support because those companies directly competed with TI.
I find these predictions and Petitioner's reliance upon them somewhat puzzling. Even though Cypress offered not to encroach on one specific TI product line, "low power microcontrollers,"
Petitioner has not shown that any other company that wanted to acquire Ramtron was in a worse position than Cypress in terms of getting TI's assent. Indeed, some may have been better positioned than Cypress. Construed most favorably to LongPath, all bidders were in the same boat as Cypress vis-à-vis TI. Ramtron's manufacturing agreement with TI simply was part of the Company's operative reality at the time of the Merger.
Furthermore, there is no evidence that the change-in-control provisions in the TI manufacturing agreement actually deterred any of the potential bidders.
2. Ramtron tries to sell itself to anyone but Cypress
Ramtron authorized Needham, its financial advisor, to market the Company to other potential acquirers and explore strategic alternatives. According to an August 30, 2012 Needham presentation, Needham had: (1) contacted twenty-four third parties, including Cypress; (2) sent non-disclosure agreements ("NDAs") to twelve of those entities, again including Cypress; (3) received executed NDAs from six interested parties, which did not include Cypress; and (4) remained in discussions with two companies other than Cypress.
SMART Modular and Atmel were two of the companies with which talks proceeded the furthest. As noted, both companies declined to pursue a transaction because of what they viewed as problems with Ramtron's cost structure. The evidence does not reveal why each and every other company declined to bid for Ramtron. At least one that executed an NDA saw no synergies in the transaction.
Not one of the specific explanations in the record relates to TI. Instead, what evidence there is suggests that these other companies did not see value in Ramtron exceeding Cypress' bid. The importance of this point is amplified by the fact that Needham's call log indicates that the NDAs all were executed in late June,
Petitioner focuses at length on Ramtron's discussions with ROHM. On July 17, 2012, Ramtron's management proposed two alternative transactions to ROHM: (1) a purchase of seven million shares of Ramtron common stock at $3.50 per share together with a board seat; or (2) seven million shares of Ramtron convertible preferred stock at $4.00 per share and a board seat.
According to Petitioner, ROHM's interest in a minority investment at a price slightly below the deal price indicates that the Merger price undervalued Ramtron. If ROHM in fact had made such an investment, I might be inclined to agree.
ROHM itself, it seems, was concerned with justifying the above-market premium. Perhaps, because of the manufacturing agreement between it and Ramtron, ROHM might have been able to exploit synergies between the two companies or otherwise unlock value in Ramtron not available to other bidders. Ultimately, however, ROHM backed away from pursuing a deal for Ramtron at the end of August. Citing "growing apprehension in ROHM's own business environment," ROHM determined that it was "not in a position to make an investment under present business outlook."
3. Ramtron extracts a substantial premium from Cypress
Finally, LongPath criticizes Cypress' hostile approach, arguing that Cypress pounded Ramtron into submission at a below-market rate. I already have found that, to the extent Cypress' hostile bid negatively altered Ramtron's performance, such effects were dwarfed by Ramtron's own business problems, which included channel stuffing earlier in the year. Those flaws are part of Ramtron's operative reality. On the other hand, there is support in the case law for disregarding temporary distortions in determining a company's fair value.
In that regard, there is no evidence that Cypress' hostile approach hampered the ability of other companies to bid for Ramtron or otherwise affected the Merger process. Only one company contacted by Needham stated that it did not wish to bid against Cypress.
4. Conclusion
The Merger resulted from Cypress' hostile bid. Cypress spent three months attempting to acquire Ramtron, during which time the Company actively shopped itself to other conceivable buyers, several of which indicated serious interest. None of those potential alternative buyers made a firm offer. Cypress, however, repeatedly raised its price until it and Ramtron's Board agreed on final Merger price of $3.10 per share. This lengthy, publicized process was thorough and gives me confidence that, if Ramtron could have commanded a higher value, it would have. "For me (as a law-trained judge) to second-guess the price that resulted from that process involves an exercise in hubris and, at best, reasoned guess work."
D. Transaction Price Less Synergies
Thus far, I have concluded that the Management Projections are unreliable, making the use of a DCF inappropriate. Additionally, the parties agree that there are no comparable companies and I concur with Respondent that the comparable transactions approach does not provide a reliable indication of fair value here. By contrast, the Merger process was thorough and supports my reliance on the Merger price as an indication of Ramtron's fair value. In the absence of alternative methodologies, I weigh the Merger price at 100% in determining the fair value of Petitioner's shares.
In an appraisal action, however, it is inappropriate to include merger-specific value. Accordingly, I must exclude from the $3.10 Merger price any portion of that amount attributable to Cypress-specific synergies, as opposed to Ramtron's value as a going concern.
Preliminarily, I reject LongPath's contention that synergies should be subtracted not from the Merger price, but instead from the value that Cypress attributed to Ramtron, which, according to Petitioner, is between $3.90 and $5.44. Those valuations estimated Ramtron's worth as a division of Cypress. Petitioner's requested approach is contrary to the language of Section 262, which commands that I "determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation."
As to the synergies in this transaction, I find Respondent's argument that over 10% of the transaction price represented synergies to be without merit. Jarrell first provided a market-wide analysis of the premia paid by financial versus strategic buyers and from this approach concluded that average synergies could be removed from the purchase price by applying the ratio of the average financial buyers' premium to the average strategic buyers' premium, i.e., effectively multiplying the Merger price by 0.73, which results in a fair value of $2.75.
This general data, however, does not tell me anything about this specific transaction, which must be the focus in a Section 262 action. With respect to Cypress-specific synergies, Jarrell compared the Management Projections to a set of Cypress projections
Although Clarke rejected the transaction-price-less-synergies approach, he opined that negative revenue synergies and transaction costs would have to be added back to any value based on Jarrell's estimate of synergies. I find this approach to be reasonable and supported by the record. The testimony at trial indicates that Cypress expected significant negative synergies from the Ramtron acquisition.
E. Reality Checks
As a final step, I consider it appropriate to touch briefly on some of the "real world" evidence that Petitioner contends undermines the Merger price as a reliable indicator of fair value. Some of these items are entitled to zero weight. Balzer, for example, testified at his deposition that he told Cypress at the time of its nonpublic offer in 2011 that he believed Ramtron's stock would be worth $6 to $8 "several years out."
Similarly, I give no weight to the $4 target trading price Merriman Capital announced in January 2012,
The one factor that does cause me some pause, however, is the ROHM potential investment. The fact that ROHM apparently was seriously considering a minority equity investment at $3.00 per share casts some doubt on the Merger price of $3.10. Ultimately, however, ROHM did not make this investment and, in fact, expressed serious concern about paying an above-market price for Ramtron stock. Because ROHM had extensive information about Ramtron and ultimately decided not to pursue the minority investment, I discount its importance. ROHM made exactly as many actual bids as the rest of the market: zero. In that regard, the ROHM equity "investment" is simply another non-event.
Indeed, I suspect that, rather than the Merger price being low, it was more likely that the ROHM proposal was inexplicably high. Recall, for example, that, in 2011, long before Cypress made its public offer, Ramtron executed a secondary public offering in which it diluted its equity holders and sold about 20% of its shares for $2.00 each, with a net to itself of $1.79. By July 2012, based on the findings in this Memorandum Opinion, Ramtron's financial condition was no better than it was when it made the secondary public offering. For these reasons, I conclude that the ROHM investment, which never actually occurred, does not cast doubt on the Merger price as a reliable indicator of fair value.
IV. CONCLUSION
For the foregoing reasons, I determine the fair value of Ramtron as of the Merger date to be $3.07 per share. Counsel for Petitioner shall submit, on notice, an appropriate final order to that effect, including provisions for pre- and post-judgment interest.
FootNotes
increased the difficulty of transitioning.
(Buss).
credit for the over-order of wafers).
related to the fact that Ramtron recently had renegotiated its covenants yet again).
objection in its briefing.
ordinary course of its business.").
2003), revised (July 9, 2004), aff'd in part, rev'd in part, 884 A.2d 26 (Del. 2005).
(1) management never before had prepared similar projections; (2) the projections were so "indisputably optimistic" that the petitioner's own expert testified that a discount would have been appropriate; and (3) management "itself had no confidence in its ability to forecast"); Owen v. Cannon, 2015 WL 3189204, at *19-21 (Del. Ch. June 17, 2015) (rejecting an attack on the management projections when those projections did not include speculative business items, were not inconsistent with historical performance, were not "created by novices," and instead generally resulted from a "deliberate, iterative process over a period of three years to create, update and revise multi-year projections for the Company").
callous to key the Bonus Plan to even higher targets that were not achievable").
forecast); id. at 378-80 (Buss).
Q: Did you attempt to make improvements in the quality of the projections?
Balzer Dep. 50. These comments temper the reliability of Balzer's position that the Management Projections "were the most likely of what would happen if
Cypress walked away." Id. at 83.
24%, for 2012 through 2016, respectively).
Company should avoid stuffing the channel. JX 10; JX 242.
recognition systems).
point-of-purchase revenues. JX 174.
that it must be from sometime in 2012.
one issue we wrestled with.").
JX 88.
attached to that information by any particular bidder, even the winning bidder").
Comment
User Comments