Mergers, Acquisitions, and Corporate Restructurings

By Patrick A. Gaughan | Go to book overview

13
VALUATION OF A
PUBLICLY HELD COMPANY

The need for a systematic valuation process became more pronounced for corporate America during the fourth merger wave, when many companies found themselves the targets of friendly or unfriendly offers. Even companies that had not been targets had to determine their proper value in the event that such a bid might materialize. To exercise due diligence, the board of directors must fully and properly evaluate an offer and compare this price with its own internal valuation of the firm. The need to perform this evaluation as diligently as possible was emphasized in the 1980 bid for the Trans Union Corporation by Jay Pritzker and the Marmon Corporation.

In September 1980 Jerome Van Gorkom, chairman and chief executive officer of Trans Union, suggested to Jay Pritzker that Pritzker make a $55 a share merger bid for Trans Union, which would be merged with the Marmon Group, a company controlled by Pritzker. Van Gorkom called a board of directors meeting on September 20, 1980, on a one-day notice. Most of the directors had not been advised of the purpose of the meeting. The meeting featured a 20–minute presentation on the Pritzker bid and the terms of the offer. The offer allowed Trans Union to accept competing bids for 90 days. Some directors thought that the $55 offer would only be considered the beginning of the range of the value of the company. After a two-hour discussion, the directors agreed to the terms of the offer and a merger agreement was executed.

The Trans Union directors were sued by the stockholders, who considered the offer inadequate. A Delaware court found that the decision to sell the company for $55 was not an informed business judgment.

The directors (1) did not adequately inform themselves as to Van Gorkom's role in forcing the
“sale” of the Company and in the per share purchase price; (2) were uninformed as to the in-
trinsic value of the Company; and (3) given these circumstances, at a minimum, were grossly
negligent in approving the “sale” of the Company upon two hours consideration, without
prior notice, and without the exigency of a crisis or emergency.

The court was also impressed with other deficiencies in the board of directors' decisionmaking process. Among them was the fact that the board did not even have a copy of the merger agreement to review at a meeting convened for the explicit purpose of deciding on the merger. The board members therefore did not read the amendments to the agreement, and they did not request an outside valuation study of the merger offer.1 Based on these

1. Stanley Foster Read and Alexandra Reed Lajoux, The Art of M&A: A Merger Acquisition Buy-
out Guide, 2nd ed. (New York: John Wiley & Sons, 1995), pp. 662–663.

-491-

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