The opinion of the court was delivered by: PARKER
(Renselaar Corporation and Mailbag/M.I.I.)
BARRINGTON D. PARKER, District Judge:
On August 22 and 23, 1984, hearings were held to determine what valuations should be placed on Renselaar Corp. ("Renselaar") and Mailbag International, Inc. ("Mailbag") and its affiliate M.I.I. Services, Inc. ("M.I.I.") collectively referred to as Mailbag/M.I.I. At the hearings, the Court received and considered testimony, exhibits and other evidence submitted and proffered by Duff & Phelps, Inc. ("Duff & Phelps"), the expert witness engaged by the Special Master. Also reviewed and considered were the testimony, exhibits and evidence proffered by the claimants Renselaar and Mailbag/M.I.I., represented by their former owners Raymond Gold and George Schiele and their expert witnesses Gabriel Nagy and Thomas Dewey.
At this time, the Court is called upon to make a de novo determination of the reasonable fair market value for the two companies acquired by National Student Marketing ("NSM"). The fair market value of a company under the circumstances presented is the price a willing buyer would pay a willing seller in an arm's-length transaction in which both parties are reasonably informed and knowledgeable about all relevant facts, and are not acting under compulsion.
In the spring and summer of 1969, the former owners of Renselaar and Mailbag/M.I.I. exchanged their stock in those corporations for NSM shares. At the time, Renselaar and Mailbag/M.I.I. shares were not publicly traded and there was no active market for the stock. The only known "sales" of their stock occurred in connection with the 1969 NSM mergers. Under the circumstances it was thus appropriate to consider a variety of factors in determining the fair market values of the companies at the time of merger. Among the relevant factors considered were: the nature of the companies' products; the life and history of the companies; their size and growth potential; and, the financial operations of the companies.
After a review of the testimony, exhibits, documents and all evidence presented at the valuation hearings; after weighing the credibility, experience and expertise of the several witnesses appearing both for the Special Master and the claimants; and, after considering the post-hearing memoranda of the parties, the Court determines that: the fair market value of Renselaar as of the date of acquisition -- April 10, 1969, was $ 4.1 million; the fair market value of Mailbag/M.I.I. as of the date of acquisition -- October 14, 1969, was $ 2,987,057.
Pursuant to Rule 52, Fed.R.Civ.P. the Court makes the following findings of fact and conclusions of law.
In March 1983, Charles Duncan, Esquire and the law firm of Peabody, Lambert & Meyers were appointed as Special Master in this proceeding. Their responsibility, inter alia, was to process and to determine the validity of proofs of claims submitted by claimants who had previously exchanged stock in corporations owned by them for NSM shares.
With Court approval the Special Master engaged Duff & Phelps, a Chicago-based firm, to undertake an independent financial analysis and to assist in establishing the validity of the submitted claims and determining the reasonable fair market values for the several companies acquired by NSM in a stock for stock transfer. For more than 20 years Duff & Phelps has been involved in investment research, provided financial analyses to corporations and institutions, and also provided professional consulting and special valuation studies for companies involved in mergers and acquisitions. They are not brokers/dealers or investment bankers. Duff & Phelps was no stranger to this litigation. Earlier in the proceeding it served as an independent financial analyst to counsel for NSM and counsel for the class plaintiffs.
The Special Master, and Duff and Phelps gathered all available information relevant to the value of the companies at the time of acquisition. Based on that data, Duff & Phelps then determined what they considered to be a range of reasonable and fair values for each company.
With few exceptions a range of values was based on a discounted cash flow analysis, using projections of operations of a particular company as if it had not been acquired by NSM. In determining the reasonableness of its results, Duff & Phelps compared the price/earnings ratio resulting from the discounted cash flow analysis with price/earnings ratio relating to other acquisitions by NSM during this period as well as relevant financial data from other comparable companies.
Over and beyond this approach and the valuations determined by Duff & Phelps, the Special Master made an independent determination of what it considered to be the fair market value of NSM shares received by former owners of an acquired company. However, values ascribed to those shares by the claimants, and in some cases the number of shares, were higher than what the Special Master determined was appropriate.
An important aspect of the valuation process utilized in connection with NSM shares transferred outright was that of discounting by one-third the quoted market price on the date of the acquisition to reflect the fact that the acquired NSM shares were "lettered" or "restricted," not registered with the Securities and Exchange Commission, and thus could not be sold readily on the open market. This was an acceptable and recognized procedure in the valuation process. Indeed it was first utilized and sanctioned in connection with an evaluation and study of the private placements of restricted NSM stock during the period September 1, 1967 to December 31, 1970. Touche Ross, an accounting firm, reviewed NSM accounting through that period, including all private placements of restricted stock, and concluded that, on the average, such stock sold for two-thirds of the market price of unrestricted stock. Accordingly, on that basis, the Special Master consistently and appropriately applied a one-third discount in valuing restricted NSM stock.
The Court has no problem with such an approach. The practice and reasoning is sound. It recognized the realities of the securities market. It is a well-established and generally recognized principle employed in determining stock values. It was ...