Chancery Values Non-Public Company with No Reliable Market-Based Data Using Discounted Cash Flow Analysis
Kruse v. Synapse Wireless, Inc., C.A. No. 12392-VCS (Del. Ch. July 14, 2020)
This case illustrates how appraisal works outside of the public market context when a lack of data hinders a reliable valuation. Here, stockholder William Richard Kruse (“Kruse”) sought appraisal of his shares of SynapseWireless, Inc. (“Synapse”), a privately-owned corporation. McWane Inc. (“McWane”) acquired Synapse in two rounds of investments: McWane, first, acquired a controlling interest in 2012, and, then, acquired the remaining Synapse shares in 2016 in a cash-out merger (the “Merger”). As part of the 2012 transaction, McWane gained the right to purchase newly issued Synapse shares at a price set by the 2012 acquisition. Synapse had disappointing performance after the 2012 merger, posting less than half of the projected revenues used to calculate the 2012 merger price. To mitigate Synapse’s poor performance, McWane provided loans and purchased Synapse shares at the price set by the 2012 merger. For example, in 2014, McWane bought $31 million of shares at $4.99 per share to keep Synapse afloat, and to increase McWane’s ownership of Synapse to realize tax benefits.
McWane bought the remaining Synapse shares in the 2016 Merger at $0.43 per share, but Kruse refused McWane’s offer and filed this appraisal action in the Court of Chancery. At trial, Kruse’s expert valued Synapse at $4.19 per share as of 2016, while Synapse’s expert calculated a value between $0.06 and $0.11 per share. Both experts used three valuation methods: (i) a Prior Company Transaction analysis; (ii) a Comparable Transactions analysis, and (iii) a Discounted Cash Flow (DCF) analysis. The Court of Chancery eschewed the first two valuation methods as unreliable, but adopted Synapse’s DCF analysis with minor adjustments. Accordingly, the Court appraised Synapse at $0.23 per share.
In assessing the parties’ contentions, the Court found that, because there was no market check or competitive sales process, there was no contemporaneous market evidence to aid the Court in determining fair value. The Court also ignored a report on Synapse’s value from an investment bank because no employee of the investment bank testified at the trial and hence was not subject to cross-examination.
In lieu of market data, the Court first considered the parties’ Prior Company Transaction analyses. These analyses derived the value of Synapse from the price McWane paid for Synapse shares in prior transactions. Because Synapse had dramatically underperformed the revenue projections used to calculate the 2012 merger price, the 2012 merger price was “stale as of the 2016 Merger.” Additionally, McWane’s purchases of Synapse stock in 2014 were at a price contractually agreed-upon at the time of the 2012 merger, and for that reason did not reflect fair value as of 2016.
The Court next considered the parties’ Comparable Transactions analyses, which estimated the value of Synapse by comparison with other transactions within a similar timeframe, industry and company size. The Court held that neither party had carried its burden to show that its Comparable Transactions analysis reflected Synapse’s fair value. This was because the experts each made thoughtful objections to the other’s analyses, including the comparability of the transactions, and neither expert successfully rebutted the other’s objections.
Finally, the Court evaluated the parties’ DCF analyses. According to the Delaware Supreme Court, a DCF analysis is “widely considered the best tool for valuing companies when there is no credible market information and no market check . . . .” The DCF measures a company’s value by projecting its future cash flows, and then discounting the projections to present value. The Court found Synapse’s DCF calculation more reliable because it better accounted for Synapse’s poor performance, and so adopted the calculation with minor adjustments, finding the fair value on the date of the Merger to be $0.23 per share.