“Fair Value” Appraisal of Minority Shares Held by Hedge Fund

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Cornerstone Research was retained by counsel representing hedge fund minority shareholders of an electronic brokerage company.

Cornerstone Research was retained by counsel representing hedge fund minority shareholders of an electronic brokerage company. The majority owner of that company entered into a cash transaction that broke the company up into several parts. One part was sold to a publicly traded competitor and another to a group comprising the company’s management and a private equity firm. However, between the time that the transaction was announced and when it closed almost eight months later, market valuations for the target company’s industry rose substantially. Despite this, the majority owners of the company did not renegotiate the transaction, requested no new fairness opinions, and turned down a higher offer for the part of the business that was to be sold to the management.

This analysis highlighted the significant rise in the market’s expectations regarding the company’s operating prospects.

Cornerstone Research worked with Professor Paul Gompers of the Harvard Business School to assess the fair value of the company at the time the transaction closed. This analysis highlighted both the significant rise in the market’s expectations regarding the company’s operating prospects, as well as the diminution in risk associated with the company’s industry. The analysis also empirically demonstrated that the increase in the stock price of the acquiring competitor when the transaction was announced, and the decrease in the stock price of the target company, stood in contrast to typical stock price changes following transaction announcements. The case settled in arbitration.

Case Expert

Paul A. Gompers

Eugene Holman Professor of Business Administration,
Harvard Business School,
Harvard University;
Senior Advisor, Cornerstone Research