Tuesday, August 1, 2017
Today, the Delaware Supreme Court issued its much-awaited decision in DFC Global Corp. v. Muirfield Value Partners, LP, et al., regarding the proper role of the deal price when determining fair value in a corporate appraisal action. In an opinion by Chief Justice Strine, the court rejected calls for a bright-line rule deferring to the price, but emphasized that market pricing is generally the best evidence of value. In one passage that struck me as curious, the court held that the purpose of an appraisal action is not to award dissenters the very highest price their shares could command, but to “make sure that they receive fair compensation for their shares in the sense that it reflects what they deserve to receive based on what would fairly be given to them in an arm’s-length transaction.” Which, you know, sounds an awful lot like deal price. And not a whole lot like valuing a company “as a going concern, rather than its value to a third party as an acquisition,” In re Petsmart, 2017 WL 2303599 (Del. Ch. May 26, 2017), which is how appraisal has previously been described.
I will leave it to others to analyze the implications of DFC for appraisal litigation going forward, but one aspect to note is that Strine summarized his point with the colorful observation that fair value “does not mean the highest possible price that a company might have sold for had Warren Buffett negotiated for it on his best day and the Lenape who sold Manhattan on their worst.” He then elaborated with the reasoning quoted below. As the kids say, shot:
Capitalism is rough and ready, and the purpose of an appraisal is not to make sure that the petitioners get the highest conceivable value that might have been procured
had every domino fallen out of the company’s way....
The real world evidence regarding public company M&A transactions underscores this. Various factors prevalent in our economy, which include Delaware’s own legal doctrines such as sell-side voting rights, Revlon, Unocal, the entire fairness doctrine, and the pro rata rule in appraisals, have caused the sellside gains for American public stockholders in M&A transactions to be robust. …[T]here is a rich literature noting that the buyers in public company acquisitions are more likely to come out a loser than the sellers, as competitive pressures often have resulted in buyers paying prices that are not justified by their ability to generate a positive return on the high costs of acquisition and of integration. As one authority summarizes:
“According to McKinsey research on 1,415 acquisitions from 1997 through 2009, the combined value of the acquirer and target increased by about 4 percent on average. However, the evidence is also overwhelming that, on average, acquisitions do not create much if any value for the acquiring company’s shareholders. Empirical studies, examining the reaction of capital markets to M&A announcements find that the value-weighted average deal lowers the acquirer’s stock price between 1 and 3 percent. Stock returns following the acquisition are no better. Mark Mitchell and Erik Stafford have found that acquirers underperform comparable companies on shareholder returns by 5 percent during the three years following the acquisitions.”
Which leads me to, chaser:
M&A deals create more value for acquiring firm shareholders post-2009 than ever before. Public acquisitions fuel positive and statistically significant abnormal returns for acquirers while stock-for-stock deals no longer destroy value. Mega deals, priced at least $500 mil, typically associated with more pronounced agency problems, investor scrutiny and media attention, seem to be driving the documented upturn. Acquiring shareholders now gain $62 mil around the announcement of such deals; a $325 mil gain improvement compared to 1990–2009. The corresponding synergistic gains have also catapulted to more than $542 mil pointing to overall value creation from M&As on a large scale. Our results are robust to different measures and controls and appear to be linked with profound improvements in the quality of corporate governance among acquiring firms in the aftermath of the 2008 financial crisis.
That last quote is from the abstract of a new paper published by G. Alexandridis, N. Antypas, N. Travlos, called Value creation from M&As: New evidence, where they find, well, new evidence that the old deals-are-bad-for-the-acquirer saw may no longer hold.
As you can see, the authors speculate that the increased acquirer-side value is due to improved post-crisis governance. I actually have a different theory on that which I’m working through, but perhaps a more important point is this: Whatever value target shareholders receive is necessarily a function of the governing law – including, as the Delaware Supreme Court says, Revlon, Unocal, and the entire fairness doctrine. But with new cases like Corwin and Kahn, those are rapidly going the way of the dodo. (See, e.g., J. Travis Laster, Changing Attitudes: The Stark Results Of Thirty Years Of Evolution In Delaware M&A Litigation; Steven Davidoff Solomon & Randall Thomas, The Rise and Fall of Delaware’s Takeover Standards). It may once have been true that acquirers overpaid for targets, but it’s dangerous to change the legal landscape and expect the market to remain the same.