Chancery Adjusts Deal Price to Account for Synergies and Post-Signing Change in Value in Statutory Appraisal of Investment Bank
BCIM Strategic Value Master Fund, LP v. HFF, Inc., C.A. No. 2019-0558-JTL (Del. Ch. Feb. 2, 2022)
In a statutory appraisal proceeding, Delaware courts may rely upon the deal price adjusted for net synergies as the most persuasive evidence of fair value provided the transaction process contains sufficient indicia of reliability.
Here, the Court of Chancery reviewed multiple valuation methodologies in a part-stock, part-cash acquisition. Jones Lang LaSalle (“JLL”), a professional services firm that specializes in real estate and investment management, acquired HFF, Inc. (“HFF”), an investment bank that focused on real estate deals. Petitioner argued that the Court of Chancery should value the company by giving 90 percent weight to a discounted cash flow analysis and 10 percent weight to the trading price prior to the merger announcement adjusted upward to account for unexpected, good post-announcement performance. JLL argued in favor of the deal price at the time of signing, adjusted for synergies allocated to HFF.
Based on the availability of market-based metrics, the Court concluded instead that a third option should form the basis of its valuation: the deal price, adjusted for synergies and for changes in value between the signing and closing. The Court first determined that the transaction process exhibited sufficient indicia of reliability. Although HFF’s senior managers had conflicts of interest based on their seeking post-acquisition roles, their conflicts overall did not undermine the sale process. Other indicia were met, including that JLL was an unaffiliated acquirer and had conducted due diligence, there was public access to information because HFF was a publicly-traded company, there were negotiations over the merger price, and a post-signing passive market check provided an opportunity for competing bidders to emerge.
To determine net synergies, the Court relied on JLL’s own pre-transaction estimate of their value, its expert’s DCF model to calculate a per-share value, and its expert’s reliance on a broad market study that had estimated average synergy allocations. The Court reasoned that savings of the costs that HFF had born as a public company should be excluded from the fair value determination because they would occur only as a result of the going-private acquisition. The Court also reasoned that the transaction’s employee retention payments were a cost that JLL had to pay to achieve the deal, and thus should not be included as an enhancement to the deal price.
Finally, the Court added an appropriate enhancement over the deal price in its fair value determination to account for HFF’s post-signing, pre-closing outperformance. The Court did not directly rely on movements in HFF’s stock price between signing and closing because the announcement of the merger agreement already had tied HFF’s stock price to the likelihood of the transaction closing. The Court instead accepted the enhancement supported by the JLL expert’s model, which relied on an event study and regression to estimate the proportion of increases in stock prices attributable to news of stronger than expected financial performance.Share