Defense counsel retained Cornerstone Research to evaluate the fairness of an acquisition price and whether the analyses and inputs used to support the sale price were reasonable.
Following the acquisition of Flow International Corporation (Flow) by a private equity firm, American Industrial Partners (AIP), Flow’s shareholders sued for breach of fiduciary duty. They claimed Flow’s board had engaged in an unfair sale process and that shareholders had received less than the fair value of their equity. Defense counsel retained Dr. Allan Kleidon of Cornerstone Research to evaluate the acquisition price and the valuation analyses used to support the fairness opinion of the board’s financial advisor.
Dr. Kleidon concluded that the acquisition price paid by AIP was higher than Flow’s standalone value and that the financial advisor’s fairness opinion was based on reasonable valuation procedures and inputs.
To determine whether the acquisition price was fair, Dr. Kleidon examined the market for Flow’s stock. He demonstrated that Flow’s stock price quickly incorporated value-relevant new information. Dr. Kleidon opined that, under these circumstances, Flow’s stock price represented the best objective estimate of the value of Flow’s equity. Moreover, since a firm’s stock price reflects the possibility of a future sale of the company, that price exceeds a firm’s standalone value. Dr. Kleidon concluded that the acquisition price paid by AIP was fair because it exceeded Flow’s stock price preceding the announcement of the sale.
In addition, Dr. Kleidon’s review of the sales process—which involved many potential buyers and multiple bidders—and the reactions of large shareholders in Flow, indicated that the third parties did not view Flow’s standalone value as more than the acquisition price.
Dr. Kleidon also examined the valuation methodologies and inputs used by the board’s financial advisor and concluded that the fairness opinion was based on reasonable methods and inputs. The case settled.