Defendant’s Merger ProjectionsAccepted
Merion Capital v. 3M Cogent, Inc.,
Delaware Chancery Court, Civil Action
No. 6247-VCP (July 8, 2013)
In this case, Merion Capital (“Merion”
or the “Plaintiff”), a stockholder in
3M Cogent, Inc., formerly Cogent,
Inc. (“Cogent” or the “Defendant”)
dissented and filed a petition
for appraisal regarding Cogent’s
acquisition by 3M for $10.50 per
share. The Plaintiff claimed that
Cogent’s common shares were worth
$16.26 per share as of the closing
date of the acquisition, not $10.50
per share.
Background
The main disagreement between
the Plaintiff and the Defendant
regarded the projections used in the
discounted cash flow (“DCF”) analysis
to value Cogent. The Plaintiff’s
projections were based on industry
revenue growth rates that were
higher than the Defendant’s projected
growth rates and clearly had not been
met by Cogent in the past.
Also, the Plaintiff’s projections
included a cash deployment scenario
that assumed Cogent would acquire
target companies and realize positive
returns from these acquisitions,
which the Court concluded was too
speculative.
In contrast, the projections by the
Defendant’s CFO were prepared only
after 3M gave a verbal offer and
were based on significant input from
the Defendant’s investment bank.
Additionally, the Defendant previously
did not have projections beyond one
year. Although the Court found this
factor of the Defendant’s projections
to be problematic, it found that the
Defendant’s CFO was not under
threat of losing his position after the
acquisition of Cogent and therefore
was not preparing projections for an
alternate bid.
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As a result, the Court
mainly relied on the Defendant’s
projections.
The Court’s Conclusion
The Court concluded a per share
value of $10.87 for Cogent based on:
1. The projections prepared by
the Defendant’s CFO, which were
considered close to
contemporaneous projections
and consistent with the Delaware
Chancery Court’s preference for
management projections.
2. A greater assumption of excess
cash compared to the Plaintiff’s
assumption, albeit with the
Plaintiff’s speculative cash
deployment scenario not used in
the DCF.
Best Practices
Cogent management’s projections
were relied upon for the Court’s DCF
analysis and the Court highlighted
that contemporaneously prepared
management projections are more
likely to be in accordance with
valuation standards. This case
reinforces the importance of using
management projections, and not
including future acquisitions by the
subject company.
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Valuation Vantage
Spring-Summer 2014
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1
In the Gearreald case, where directors or officers of a subject company risked
losing their positions from the subject company, the Court found that these
individuals prepared different projections for different strategic alternatives in
order to protect their positions. As a result, the Court found that the projections
prepared by management would not be truly reflective of the subject company’s
projections as of the valuation date.
