In re: Appraisal of Jarden Corporation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
:
IN RE: APPRAISAL OF : CONSOLIDATED
JARDEN CORPORATION : C.A. No. 12456-VCS
:
MEMORANDUM OPINION
Date Submitted: May 1, 2019
Date Decided: July 19, 2019
Stuart M. Grant, Esquire, Cynthia M. Calder, Esquire, Kimberly A. Evans, Esquire,
Kelly L. Tucker, Esquire and Vivek Upadhya, Esquire of Grant & Eisenhofer P.A.,
Wilmington, Delaware, Attorneys for Petitioners.
Srinivas M. Raju, Esquire, Brock E. Czeschin, Esquire, Robert L. Burns, Esquire,
Sarah A. Clark, Esquire and Matthew W. Murphy, Esquire of Richards, Layton &
Finger, P.A., Wilmington, Delaware and Walter W. Davis, Esquire, Michael J.
McConnell, Esquire and Robert A. Watts, Esquire, of Jones Day, Atlanta, Georgia,
Attorneys for Respondent Jarden Corporation.
SLIGHTS, Vice Chancellor
This statutory appraisal action arises from a merger whereby Newell
Rubbermaid, Inc. (“Newell”) acquired Jarden Corporation (“Jarden” or the
“Company”) (the “Merger”) for cash and stock totaling $59.21 per share
(the “Merger Price”). Petitioners, Verition Partners Master Fund Ltd., Verition
Multi-Strategy Master Fund Ltd., Fir Tree Value Master Fund, LP and Fir Tree
Capital Opportunity Master Fund, LP (together “Petitioners”), were Jarden
stockholders on the Merger’s effective date and seek a judicial appraisal of the fair
value of their Jarden shares as of that date.
At the close of the trial, I observed, “[w]e are in the classic case where . . .
very-well credentialed experts are miles apart. . . . There’s some explaining that is
required here to understand how it is that two very well-credentialed, I think, well-
intended experts view this company so fundamentally differently.”1 This
observation was prompted by the all-too-frequently encountered disparity in the
experts’ opinions regarding Jarden’s fair value. Jarden’s expert, Dr. Glenn Hubbard,
applying a discounted cash flow (“DCF”) analysis, opines that Jarden’s fair value as
of the Merger was $48.01 per share. Petitioners’ expert, Dr. Mark Zmijewski,
applying a comparable companies analysis, contends that Jarden’s fair value as of
1
Trial Tr. 1315:21–1316:5.
1
the Merger was $71.35 per share. To put the disparity in context, Dr. Zmijewski’s
valuation implies that the market mispriced Jarden by over $5 billion.
In a statutory appraisal action, the trial court’s function is to appraise the
“fair value” of the dissenting stockholder’s “shares of stock” by “tak[ing] into
account all relevant factors.”2 The statute does not define “fair value” but our courts
understand the term to mean the petitioner’s “pro rata share of the appraised
company’s value as a going concern.”3 This definition of fair value “is a
jurisprudential, rather than purely economic, construct.”4 Even so, the remarkably
broad “all relevant factors” mandate necessarily leads the court deep into the weeds
of economics and corporate finance. These are places law-trained judges should not
go without the guidance of experts trained in these disciplines. In other words,
corporate finance is not law. The appraisal exercise is, at bottom, a fact-finding
exercise, and our courts must appreciate that, by functional imperative, the evidence,
including expert evidence, in one appraisal case will be different from the evidence
2
8 Del. C. § 262(h).
3
DFC Global Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346, 367 (Del. 2017). DFC
explained that the statutory definition of fair value has been distilled further to require the
court “to value the company on its stand-alone value.” Id. at 368.
4
Id. at 367 (citing Cavalier Oil Corp. v. Hartnett, 564 A.2d 1137 (Del. 1989)). As the
Court further explained, “the definition of fair value used in appraisal cases is a
jurisprudential concept that has certain nuances that neither an economist nor market
participant would usually consider when either valuing a minority block of shares or a
public company as a whole.” Id.2
presented in any other appraisal case. Different evidence, of course, can lead to
different decision paths and different outcomes. After all, the appraisal exercise
prescribed by the governing statute contemplates a trial—a good, old-fashioned
trial—where the parties carry burdens of proof, present their evidence in hopes of
meeting that burden and subject their adversary’s evidence to the “crucible of cross-
examination” in keeping with the traditions of our adversarial process of civil
justice.5
Our Supreme Court has had several opportunities recently to provide direction
with regard to certain frames of reference this court should consider while
5
Gilbert v. M.P.M. Enters., Inc., 1998 WL 229439, at *3 (Del. Ch. Apr. 24, 1998) (noting
that while certain approaches to a DCF valuation might be endorsed in other cases, the
experts endorsing those approaches had not been “subject to the crucible of cross-
examination” in the appraisal trial conducted by the court and the court would not consider
their testimony from other cases). See also Merion Capital L.P. v. Lender Processing
Servs., Inc., 2016 WL 7324170, at *16 (Del. Ch. Dec. 16, 2016) (noting that the “relevant
factors” informing the fair value determination will “vary from case to case depending on
the nature of the [acquired] company”); DFC, 172 A.3d at 388 (observing: “[i]n some
cases, it may be that a single valuation metric is the most reliable evidence of fair value
and that giving weight to another factor will do nothing but distort that best estimate.
In other cases, it may be necessary to consider two or more factors.”); D.R.E. 702
(recognizing that lay fact-finders may rely upon expert testimony when the expert’s
“scientific, technical or other specialized knowledge will assist the trier of fact to
understand the evidence or to determine a fact in issue”). In this regard, it is worth noting
that submitting the fair value determination to a “court-appointed ‘appraiser’” was
“essentially required practice under the appraisal statute before 1976.” Lawrence A.
Hammermesh & Michael L. Wachter, Finding the Right Balance in Appraisal Litigation:
Deal Price, Deal Process, and Synergies, 73 Bus. Law 961, 976 (2018). Now that expert
“appraisers” have been “eliminated as a statutory requirement,” it is for the court to decide
fair value based on its assessment of the factual evidence presented at trial, including expert
evidence, using traditional fact-finding methods. Id.
3
performing the statutory appraisal function.6 I will not recount those holdings here
as they are well known. Suffice it to say, as I approached my deliberation of the
evidence in this case, my “takeaway” from the Supreme Court’s recent direction
reduced to this: “What is necessary in any particular [appraisal] case [] is for the
Court of Chancery to explain its [fair value calculus] in a manner that is grounded
in the record before it.”7 That is what this court endeavors to do after every trial and
what I have endeavored to do here.8
6
See DFC, 172 A.3d 346; Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd.,
177 A.3d 1 (Del. 2017); Verition P’rs Master Fund Ltd. v. Aruba Networks, Inc., 2019
WL 1614026 (Del. Apr. 16, 2019).
7
DFC, 172 A.3d at 388.
8
In this regard, I reiterate with renewed appreciation then-Chancellor Chandler’s astute
observation in the Technicolor, Inc. appraisal saga:
[V]aluation decisions are impossible to make with anything approaching
complete confidence. Valuing an entity is a difficult intellectual exercise,
especially when business and financial experts are able to organize data in
support of wildly divergent valuations for the same entity. For a judge who
is not expert in corporate finance, one can do little more than try to detect
gross distortions in the experts’ opinions. This effort should, therefore, not
be understood, as a matter of intellectual honesty, as resulting in the fair value
of a corporation on a given date. The value of a corporation is not a point on
a line, but a range of reasonable values, and the judge’s task is to assign one
particular value within this range as the most reasonable value in light of all
the relevant evidence and based on the considerations of fairness.
Cede & Co. v. Technicolor, Inc., 2003 WL 23700218, at *2 (Del. Ch. Dec. 31, 2003), aff’d
in part, rev’d in part on other grounds, 875 A.2d 602 (Del. 2005), withdrawn from bound
volume, opinion amended and superseded, 884 A.2d 26 (Del. 2005).
4
The parties have reveled in the statutory mandate that the court consider
“all relevant factors.” Indeed, they have joined issue on nearly every possible
indicator of fair value imaginable, including market indicators (unaffected market
price, deal price less synergies, Jarden stock offerings shortly before the Merger)
and traditional valuation methodologies (comparable companies and DCF
analyses).9 The result: an unfortunately long opinion, made so by a sense that I
needed to traverse every road the parties waived me down right to the bitter end,
even if that road did not lead to the desired fair value destination. Appraisal litigation
can be unwieldy. This is one of those cases. Apologies in advance to those who
read on.
I begin my fair value analysis where I believe I must—with the market
evidence.10 As explained below, I have found Jarden’s unaffected market price of
$48.31 per share is a reliable indicator of its fair value at the time of the Merger.
This finding is supported by credible, unrebutted expert testimony from
Dr. Hubbard, including an event study that analyzed the market’s response to
9
Respondent’s expert undertook a precedent transactions analysis as well but the parties
did not engage on this valuation approach at trial, so I will not address it here. See JX 1816
at ¶11.
10
DFC, 172 A.3d at 369–70 (observing that “[m]arket prices are typically viewed [as]
superior to other valuation techniques because, unlike, e.g., a single person’s [DCF] model,
the market price should distill the collective judgment of the many based on all the publicly
available information about a given company and the value of its shares.”).
5
earnings and other material announcements. Dr. Hubbard’s expert analysis of the
Unaffected Market Price is corroborated by credible evidence, including that Jarden
had no controlling stockholder, its public float was 93.9%, it was well covered by
numerous professional stock analysts, its stock was heavily traded and it enjoyed a
narrow bid-ask spread. As important, there was no credible evidence that material
information bearing on Jarden’s fair value was withheld from the market as of the
Merger. This market evidence was persuasive and I have given it substantial weight
in my fair value determination.
As noted, the Merger consideration, or “deal price,” was $59.21 per share.
Respondent proffers this evidence as a reliable indicator fair value, particularly when
synergies are “backed out” as required by our law.11 Petitioners respond that the sale
process leading to the Merger was highly flawed because Jarden’s lead negotiator
was willing to sell Jarden on the cheap and the Jarden board of directors
(the “Board”) failed to test the market before agreeing to sell the Company to
Newell. After considering the evidence, I agree with Petitioners that the sale process
left much to be desired. Jarden’s lead negotiator acted with little to no oversight by
the Board and, in doing so, got way out in front of the Board and Jarden’s financial
11
See ACP Master, Ltd. v. Sprint Corp., 2017 WL 3421142, at *31 (Del. Ch. July 21, 2017)
(collecting cases and noting that if the court were to rely upon “deal price, it would have
to determine the value of synergies and back them out.”).
6
advisors in suggesting to Newell a price range the Board would accept to sell the
Company before negotiations began in earnest. There was no pre-signing or post-
signing market check. Moreover, the contemporaneous evidence regarding deal
synergies was conflicting and the parties’ experts acknowledged that valuing the
synergies and assessing which party took that value in the Merger was especially
difficult in this case. For these reasons, I have placed little weight on the deal price
less synergies beyond considering that evidence as a “reality check” on my final fair
value determination.
As additional market evidence of Jarden’s fair value, Respondent points to
Jarden’s decision to finance a sizeable acquisition just prior to the Merger (in the
midst of negotiations) with an equity offering valued at $49.00 per share. When the
market reacted poorly to the acquisition, Jarden announced that it would buy back
up to $50 million in Jarden shares at prices up to $49.00 per share as a signal of
confidence to the market. This contemporaneous evidence of Jarden management’s
internal valuation of the Company, performed to facilitate Jarden’s acquisition
strategy in furtherance of its standalone operations, is relevant market evidence of
fair value. While far from dispositive, Jarden’s internal efforts to value itself as a
going concern for business, not litigation, purposes provides a useful input.
In keeping with their theme that the market evidence is not reliable, Petitioners
have focused on “traditional valuation methodologies” to carry their burden of
7
proving Jarden’s fair value as of the Merger. Their valuation expert opines that a
comparable company/market multiples analysis provides the best evidence of fair
value, and that methodology supports his conclusion that Jarden’s fair value at the
Merger was $71.35 per share. The credibility, or not, of this methodology depends
in large measure on the quality of the comparables. And then the appraiser must
select an appropriate multiple. After considering the evidence, I am satisfied that
Petitioners’ comparable companies analysis is not credible because Jarden had no
reliable comparables. Consequently, I give no weight to the results derived from
this valuation approach.
Not surprisingly, both parties proffered expert evidence regarding Jarden’s
fair value based on DCF and, not surprisingly, the experts’ DCF analyses yielded
results that were solar systems apart. After carefully reviewing the evidence,
including the valuation treatises submitted as evidence in support of the experts’
conclusions, I am satisfied that both experts utilized inputs in their DCF models that
were not justified and that skewed the results.12 Accordingly, I have utilized the
12
To the extent the parties sought to rely upon valuation texts or articles addressing
valuation methodologies, they were directed to submit these sources as evidence in the
case. Unlike a law review article cited by a party in support of a legal proposition, a text
or scholarly article addressing economic or valuation principles contains factual matter, the
admissibility of which must be tested under Delaware’s Uniform Rules of Evidence. In my
view, it is not proper for parties to an appraisal case, or any other case for that matter, to
refer to, or expect the court sua sponte to refer to, a scholarly work addressing a matter that
has been the subject of expert testimony without first having the work received as evidence
in the case or at least tested under evidentiary standards. Nor is it proper, in my view, for
parties to an appraisal case to cite to decisions of this court, or our Supreme Court, for the
8
most credible components of both expert’s analyses to conduct my own DCF
valuation, in my best effort to obey our appraisal statute’s “command that the Court
of Chancery undertake an ‘independent’ assessment of fair value” when performing
its mandated appraisal function.13 As explained below, my DCF analysis reveals a
valuation of $48.13 per share.
After considering all relevant factors, I have appraised Jarden’s fair value as
of the Merger at $48.31 per share. This value, derived from the unaffected market
price, is consistent with Jarden’s DCF value and the less reliable, but still relevant,
deal price less synergies value.
I. FACTUAL BACKGROUND
I recite the facts as I find them by a preponderance of the evidence after a
four-day trial beginning in June 2018. That evidence consisted of testimony from
twenty-eight witnesses (twenty-five fact witnesses, some presented live and some
proposition that a particular valuation methodology should be applied to value the target
company. While legal authority may support the contention that a valuation methodology
has been accepted by Delaware courts as generally reliable, I see no value in referring to
the factual conclusions of another court in another case while appraising the fair value of
another company when attempting to fulfill the statutory mandate that I determine the fair
value of this Company.
13
Dell, 177 A.3d at 21 (quoting Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214, 218
(Del. 2010) (emphasis in original)); see also Gholl v. eMachines, Inc., 2004 WL 2847865,
at *5 (Del. Ch. Nov. 24, 2004) (noting that both parties bear a burden of proof in a statutory
appraisal trial and holding that, “[i]f neither party satisfies its burden . . . the court must
then use its own independent business judgment to determine fair value.”).
9
by deposition, and three live expert witnesses) along with more than 2,000 exhibits.
To the extent I have relied upon evidence to which an objection was raised but not
resolved at trial, I will explain the bases for my decision to admit the evidence at the
time I first discuss it.
A. Parties and Relevant Non-Parties
Prior to its acquisition by Newell on April 15, 2016 (the “Merger Date”),
Jarden was a consumer products company that held a diversified portfolio of over
120 quality brands.14 This portfolio included well-known goods like Ball jars,
Coleman sporting goods, Crock-Pot appliances and Yankee Candle candles.15
Jarden was incorporated in Delaware with headquarters in Boca Raton, Florida, and
corporate offices in Norwalk, Connecticut and Miami, Florida.16 Prior to the
Merger, Jarden traded on the New York Stock Exchange.17 Following the Merger,
the combined company was re-named Newell Brands, Inc. (“Newell Brands”).18
14
Stip. Joint Pre-Trial Order (“PTO”) ¶¶1, 6, 36.
15
PTO ¶41. Trial Tr. 49:20–50:10 (Lillie). Because consumable household staples
primarily comprised Jarden’s product offerings, Jarden’s growth correlated to Gross
Domestic Product (“GDP”) growth. JX 860 at 1 (“As we suspected [Jarden] is a GDP
growth business”).
16
PTO ¶36.
17
Id. ¶39.
18
Id. ¶1.
10
Petitioners are Verition Partners Master Fund Ltd., Verition Multi-Strategy
Master Fund Ltd., Fir Tree Value Master Fund, LP and Fir Tree Capital Opportunity
Master Fund, LP.19 Petitioners acquired their Jarden shares after the announcement
of the Merger and were stockholders as of the Merger Date. They collectively hold
2,435,971 shares of Jarden common stock.
B. The Company
Jarden traces its origins to Alltrista Corporation, a company that was spun off
in 1993 from Ball Corporation’s canning business.20 In 2000, Martin Franklin and
Ian Ashken acquired Alltrista after having initiated a stockholder campaign to unseat
Alltrista’s board and senior management.21 By 2001, Franklin and Ashken served
as Alltrista’s Chief Executive Officer and Chief Financial Officer, respectively, and
renamed the company Jarden.22 In August 2003, James Lillie joined the Jarden team
as Chief Operating Officer.23 Their shared goal was to create the “best consumer
products company in the world.”24
19
Id. ¶¶14–35.
20
JX 1780 (Franklin Dep.) at 5:14–18.
21
JX 1778 (Ashken Dep.) at 77:11–17.
22
JX 1778 (Ashken Dep.) at 9:3–5; JX 1780 (Franklin Dep.) at 5:20–25.
23
PTO ¶62.
24
JX 1777 (Lillie Dep.) at 195:17–23.
11
Franklin served as CEO and Chairman of the Board until 2011,25 when Jarden
reorganized its management structure. The Company created the “Office of the
Chairman,” comprising Franklin as Executive Chairman, Ashken as Vice Chairman
and CFO,26 and Lillie as CEO.27 As a result of this reorganization, Franklin
surrendered direct control of Jarden’s day-to-day operations, but remained chiefly in
charge of capital distribution and M&A activity.28 Lillie and Ashken took over the
day-to-day operation of the Company.29 Ashken also maintained a dominant role in
Jarden’s financial planning and acquisitions.30
As a holding company,31 Jarden maintained a unique, decentralized structure.
Its various businesses functioned autonomously, allowing them to pursue outside
opportunities and synergies.32 The respective business unit heads exercised full
control over the development of their individual strategic plans.33 Even so, the
25
PTO ¶54.
26
JX 1778 (Ashken Dep.) at 8:24–11:5.
27
Trial Tr. 368:3–19 (Franklin).
28
Trial Tr. 367:15–22, 467:20–22 (Franklin).
29
JX 1778 (Ashken Dep.) at 11:9–10, 15:20–22.
30
Id. at 10:20–11:10.
31
PTO ¶38.
32
JX 1777 (Lillie Dep.) at 11:5–12:24, 49:6–50:13.
33
JX 502 at 5; JX 1804 (Polk Dep.) at 17:15–21.
12
businesses stayed in constant communication with Jarden senior management
regarding operations.34
C. Jarden Experiences Strong Growth from 2001–2015
Jarden pursued a two-pronged growth strategy, focusing on internal growth
and growth via acquisitions.35 In this regard, management set a goal of 3 to 5%
annual internal revenue growth,36 10 to 15% earnings per share (“EPS”) growth, 3 to
5% organic top-line growth, 7 to 10% EBITDA growth and 20 to 50 basis points of
gross margin growth.37 These targets produced laudable results. From 2010 through
2015, Jarden saw average organic yearly revenue growth of 4.8%, the top of its
targeted range.38 In fact, Jarden was regarded as “best in class by any measure in
terms of shareholder returns over 15 years, 10 years, 5 years, 3 years, 1 year.”39
Jarden’s margins experienced continued expansion and it met or exceeded its
34
Id.
35
JX 502 at 6.
36
Id. at 21.
37
JX 1192 at 11; JX 1777 (Lillie Dep.) at 11:5–14; JX 1775 (Sansone Dep.) at 101:5–20,
146:21–147:3.
38
JX 786 at 17.
39
Trial Tr. 423:1–9 (Franklin).
13
guidance in all but one quarter of its existence.40 By 2015, Jarden generated over
$1.2 billion in segment earnings and revenues of almost $9 billion.41 This reflected
an increase in revenue of 4.8% year over year in fiscal year 2015.42
Given its impressive results, it is not surprising that Jarden’s stock performed
well and traded efficiently. In 2012, Jarden joined the “S&P 400.”43 By the end of
2015, Jarden’s market capitalization topped $10.2 billion, placing it among the top
20% of all US publicly traded firms.44 More than twenty professional financial
analysts followed Jarden, reporting regularly on the Company’s business operations
and forecasts.45 In addition to its high average trading volume, Jarden’s “bid-ask
spread” was just 0.02% and its public float was approximately 94% of its outstanding
stock.46 Jarden’s stock trading price historically responded to the announcement of
value-relevant information as one would expect in a semi-strong efficient market.47
40
Trial Tr. 451:14–18, 451:19–21(Franklin); Trial Tr. 81:10–11 (Lillie) (“Q. That was one
quarter miss in 13 years? A. Yes.”); JX 1779 (Tarchetti Dep.) at 265:16–266:7.
41
Trial Tr. 53:12–24 (Lillie); JX 1459 (“Consistent with its guidance, the Company expects
that net sales for 2015 will be approximately $8.6 billion”).
42
JX 1519 at 47.
43
See JX 1816 at ¶47. The S&P 400 refers to the Standard & Poor’s MidCap 400 index.
44
Id.
45
Id. at ¶¶46–48 and Figure 11; JX 1439.
46
JX 1816 at ¶¶45–48.
47
Id. at ¶¶48–50; see also Trial Tr. 1019:24–1020:23 (Hubbard).
14
M&A drove Jarden’s growth.48 With Franklin at the helm, Jarden acquired
over 40 companies and brands, its stock grew over 5,000% and its sales progressed
from approximately $305 million in 2001 to over $8.6 billion in 2015.49 Franklin
and his team were not only well-known “deal-makers” in the public markets,50 they
were among “the best performers in the sector.”51
Under Franklin’s leadership, Jarden management constructed a well-
conceived convention for singling-out and completing acquisitions.52 Jarden
avoided acquisitions that would insert it in spaces where major pure-play
competitors, like Proctor & Gamble, operated.53 Jarden, instead, concentrated on
acquiring top brands in niche markets.54 This strategy developed secure trenches
48
Trial Tr. 370:17–18 (Franklin) (“We were building a business, both organically and by
acquisition.”); JX 578 at 33.
49
JX 1519 at 40, 44; JX 30 at 36; JX 502 at 19; JX 1459.
50
JX 1519 at 40.
51
Trial Tr. 125:12–22 (Gross); JX 502 at 25; JX 1773 (Talwar Dep.) at 21:19–22:3, 27:6–
10.
52
The strategy included targeting: (i) category-leading positions in niche consumer
markets; (ii) with recurring revenue and margin growth channels; (iii) robust cash flow
characteristics, including substantial EBITDA multiples; (iv) a successful management
team; and (v) strong transaction valuations, with value-generating presynergies.
JX 502 at 25.
53
JX 1778 (Ashken Dep.) at 24:25–25:21; JX 1773 (Talwar Dep.) at 28:4–13.
54
Id.
15
that presented barriers to others who might look to compete with Jarden’s niche
product lines.55 It also enabled Jarden globally to expand its brands.56
D. Jarden Shifts Its Strategic Focus
Jarden’s businesses sold their products across a vast spread of distribution
channels, including business-to-business, direct-to-consumer (“DTC”), e-commerce
retailers, and club, department store, drug, grocery and sporting goods retailers.57
In 2014, Jarden committed to expanding its DTC operations by promoting then-
Vice President of International Development, Leo Trautwein, to Vice President of
Direct to Consumer and Revenue Development. Trautwein, along with Jarden
management, developed a DTC Council that comprised of representatives from
Jarden and each of its individual business units.58 The DTC Council aimed to detect
55
JX 1777 (Lillie Dep.) at 133:2–21; JX 1773 (Talwar Dep.) at 27:11–24.
56
JX 502 at 11.
[We] . . . looked at everything. Again, it goes back to being professional
opportunists, in terms of building a business. You’ve got to––you know, we
were a fairly unusual group. We started from a $200 million business
15 years prior, to becoming a 10-plus billion dollar business 15 years later.
It wasn’t done from sitting behind a desk. We were building a business, both
organically and by acquisition.
Trial Tr. 370:11–18 (Franklin).
57
PTO ¶40.
58
JX 763 at 25.
16
DTC best practices and put in place DTC initiatives.59 It set meaningful benchmarks
to enhance DTC sales.60 In their July 2015 Board presentation, Jarden management
expected online sales to represent 13% of Jarden’s total sales by 2019, equating to
15.9% of total EBITDA.61 The DTC initiative, on the other hand, was expected to
yield a 55–60% return on investment.62 As it turned out, from 2012 through 2016,
Jarden’s DTC e-commerce sales (i.e., not including brick and mortar DTC sales)
experienced a more than 270% increase in five years—expanding from roughly
$237 million to $643 million.63
E. Jarden Makes Two Major Acquisitions Just Prior to the Merger
Jarden completed two of the largest acquisitions in its history in 2015. In July
2015, Jarden acquired the Waddington Group, Inc. for approximately $1.35 billion.64
Waddington manufactures plastic consumables for the $14 billion U.S. food sector
59
JX 514 at 10.
60
JX 1393.
61
JX 763 at 22.
62
Id. at 17.
63
JX 1795 at 21.
64
PTO ¶110.
17
market.65 The acquisition was projected to yield revenue of $840 million in 2016
with an approximately 20% EBITDA margin.66
In November 2015, Jarden acquired the parent company of Jostens, Inc. for
$1.5 billion.67 Jostens was a market leader in manufacturing and marketing
yearbooks, rings, caps and gowns, diplomas, regalia and varsity jackets, mainly
selling to schools, universities and professional sports leagues.68 Jarden predicted
the Jostens acquisition would not only offer Jarden “unique access to the difficult-
to-enter academic market,”69 but also would allow Jarden to grow a number of its
existing distribution channels and develop new ones, intensifying Jarden’s DTC
impact.70 Jostens provided superior market positions, steady financial performance,
strong margins and attractive cash flow to Jarden’s portfolio.71 Indeed, Jostens’
65
JX 527 at 23, 26.
66
Id. at 23; JX 606 at 3–4.
67
PTO ¶113.
68
JX 726 at 15.
69
Id.
70
Trial Tr. 455:3–9 (Franklin) (“Q. And in 2015, you were spending real money on direct-
to-consumer and expanding your distribution channels. Correct? A. Well, we bought a
business that expanded our distribution capabilities. We bought Jostens for the same kind
of reason. It gave us a different access into schools.”).
71
JX 726 at 11; JX 823 at 3–4.
18
gross margins were anticipated to better Jarden’s overall margins and, in fact, the
transaction was instantly accretive.72
Overall, Jarden anticipated that these two acquisitions would push Jarden’s
total annual revenues over the $10 billion threshold. At the same time, however,
they simultaneously would increase Jarden’s debt to a point where Jarden would be
unable to make another substantial acquisition for at least another year.73
F. Franklin Considers a Sale of Jarden
Jarden was not Franklin’s only business interest. In 2013, Franklin founded
Platform Specialty Products Corporation (“Platform”), a specialty chemicals
production company, with financial backing from Bill Ackman.74 In 2014, Franklin
founded Nomad Foods Ltd. (“Nomad”), a frozen foods company headquartered in
the U.K.75 Franklin also ran a “family investment vehicle” called Mariposa
Capital.76 Mariposa entities often acquired orphan brands, like its acquisition of
72
JX 726 at 12.
73
JX 1816 at ¶¶46–48, Figure 11; JX 1439.
74
PTO ¶234. As of the Merger Date, Ashken was a director of Platform. Id. ¶61; JX 576
at 2.
75
PTO ¶235. As of the Merger Date, Lillie was a director of Nomad. Id. ¶63.
76
JX 1780 (Franklin Dep.) at 359:15–16; PTO ¶97. Lillie and Ashken were also investors
in Mariposa. Trial Tr. 527:11–13 (Franklin).
19
Royal Oak in 2016.77 In 2017, after the Merger, Franklin created a special purpose
acquisition vehicle, J2 Acquisition Limited (“J2”), that raised more than $1 billion
in order to buy consumer-focused brands.78 Franklin also looked forward to
pursuing business ventures with his sons, as his father did with him.79
In early July 2015, during a meeting between Franklin and Roland Phillips of
Centerview Partners relating to Nomad, Phillips mentioned that Newell’s CEO,
Michael Polk, wanted to meet Franklin.80 As discussed below, Newell had
previously retained Centerview to assist with Newell’s search for transformative
M&A opportunities.81 Understanding that Polk would likely want to talk about a
Newell/Jarden transaction, Franklin told Phillips he would take the meeting, he
77
PTO ¶282. But for the Merger, Franklin would have pursued the Royal Oak transaction
for Jarden. Trial Tr. 559:4–560:5 (Franklin). Jarden’s lead independent director, Michael
Gross, also participated in the Royal Oak acquisition. Id.; JX 1807 (Gross Dep.) at 14:22–
15:10. Gross and Franklin have been close personal friends for 30 years. JX 1807
(Gross Dep.) at 15:14–18.
78
PTO ¶249; JX 1807 (Gross Dep.) at 93:7–8. Ashken and Lillie were also investors in J2.
JX 1770.
79
JX 765; JX 1804 (Polk Dep.) at 71:20–72:12; JX 1779 (Tarchetti Dep.) at 164:14–165:3.
80
JX 533; JX 490; PTO ¶125; Trial Tr. 584:12–585:24 (Polk). Phillips previously worked
opposite Franklin in a transaction with Nomad. Trial Tr. 585:14–18 (Polk);
Trial Tr. 373:6–18 (Franklin).
81
Trial Tr. 576:5–13 (Polk); JX 490; JX 524; PTO ¶123.
20
“would gladly take equity, [and he] ha[d] no issue with someone else running the
combined business.”82
Later that month, Franklin met with Bill Ackman, his Platform partner, and
expressed his willingness to sell Jarden so he could devote more energy to Platform
and Nomad.83 Ackman emailed Warren Buffett the following day and indicated that
Franklin would entertain a negotiated sale of Jarden to Berkshire Hathaway.84
Franklin was not authorized by the Board to entertain discussions regarding a
sale of Jarden nor did he disclose to the Board his discussions with Phillips or
Ackman.85
G. Newell and Franklin Meet
Like Jarden, Newell was a major consumer products company with a vast
portfolio of products sold under brands like Sharpie, Paper Mate, Elmer’s,
Rubbermaid, Lenox, Graco and Baby Jogger.86 In 2011, Newell implemented a
82
JX 533; PTO ¶125.
83
JX 576 at 2.
84
Id.
85
JX 1807 (Gross Dep.) at 28:9–19; JX 1788 (L’Esperance Dep.) at 121:10–122:3;
JX 1786 (Wood Dep.) at 157:25–158:14.
86
PTO ¶79. Newell was a member of the NYSE and the S&P 500. PTO ¶84. It was
followed by at least 16 financial analysts and, like Jarden, its stock exhibited the attributes
of a narrow “bid-ask spread,” a high average trading volume and a large public float.
JX 1816 at ¶57, Figure 15.
21
strategic roadmap known as the “Growth Game Plan” under the direction of its new
CEO, Polk.87 This plan incorporated an initiative known as “Project Renewal” to
streamline the Company’s business structure and decrease costs.88
For many years, Newell operated as a traditional holding company, much as
Jarden did, owning several portfolio businesses that essentially functioned as
independent companies.89 In 2010, Newell retooled by implementing an integrated
operating company model as contemplated by Project Renewal.90 Newell
“delayered the structure of the company, . . . releas[ing] a whole bunch of money”
that was invested back into Newell’s brands.91 As a result, Newell doubled its brand
expenditures, creating fast-tracked growth and amplified margins for its business.92
By the fall of 2014, Newell realized that the “investment firepower” Project Renewal
generated “was going to wane” by late 2018.93 It needed a new growth plan.
87
Trial Tr. 566:21–567:8 (Polk).
88
Trial Tr. 567:9–569:3 (Polk); see also Trial Tr. 721:22–722:5 (Torres).
89
PTO ¶80. Trial Tr. 566:11–20 (Polk).
90
Trial Tr. 566:11–20 (Polk).
91
Trial Tr. 567:20–569:3 (Polk).
92
Trial Tr. 571:2–7 (Polk).
93
Trial Tr. 571:20–572:2 (Polk).
22
In late 2014, Newell initiated a strategy of pursuing “transformational M&A”
opportunities that would generate larger scale and market share in its central
businesses, in addition to new prospects for growth.94 This new strategy prompted
Newell to engage Centerview to produce a list of possible targets for Newell and to
arrange “get-to-know-you meetings” as requested.95 While Jarden was included on
Centerview’s list, it was the target “least familiar” to Newell since it “had been built
[steadily] through acquisitions from 2001 onward” and was, therefore, in Newell’s
eyes, a “relatively new company.”96 Polk had reservations about Jarden because it
was seen as a “company of diversified niche categories,” when Polk was “looking
for scaled brands and big, global categories.”97 Even so, Polk asked Centerview to
arrange the “get-to-know-you meeting” with Franklin.98 As noted, Franklin agreed
to take the meeting.99
94
Trial Tr. 572:6–574:19 (Polk).
95
Trial Tr. 576:12–582:1 (Polk). See JX 655; JX 860.
96
Trial Tr. 581:10–17 (Polk).
97
Trial Tr. 581:18–582:1 (Polk).
98
Trial Tr. 584:12–24 (Polk); Tr. 373:19–24 (Franklin).
Trial Tr. 375:5–14 (Franklin). As Franklin explained, “[i]f a CEO wants to meet with
99
me, I’ll always want to meet with him.” Trial Tr. 376:17–20 (Franklin).
23
Franklin and Polk’s first meeting took place at the Barclays’ investor “Back-
to-School” conference on September 9, 2015 (the “Back-to-School Meeting”).100
The conversation exposed their different perspectives regarding the roles they played
at their respective companies—Franklin defined his role at Jarden as creating value
and “[t]hat’s it,” while Polk defined his role at Newell as building stronger brands
and a stronger company.101 In other words, Franklin focused on M&A, while Polk
concentrated on organic growth.102 Near the meeting’s end, Franklin directed the
conversation to where he believed Polk wanted it to go by confirming that his team
was open to “strategically connecting” with Newell.103 The meeting closed with
both Franklin and Polk agreeing to continue the conversation about a potential
deal.104
Polk reported back to the Newell board that Franklin “cut straight to the chase
about being willing to sell his company and offered a deeper discussion over the next
few weeks.”105 At this point, however, Franklin still had not informed Jarden’s
100
JX 902; PTO ¶¶127, 129.
101
Trial Tr. 588:3–13 (Polk).
102
Trial Tr. 586:14–21 (Polk).
103
Trial Tr. 376:13–20 (Franklin); Tr. 588:22–589:7 (Polk).
104
JX 902 at 2.
105
Id.
24
Board that he was entertaining Newell’s overture.106 Indeed, it was not until several
days after the Back-to-School meeting that Franklin made individual calls to
members of the Board to let them know about his discussions with Polk.107
For his part, Polk warmed quickly to the idea of acquiring Jarden, believing
that Jarden would provide scale and immediate cost synergies once Newell
consolidated Jarden’s operations per Project Renewal.108 As Polk explained,
“we believed we had the potential, based on what we could see through the public
data, to apply the playbook we’d just run on Newell Rubbermaid to a broader set of
categories that looked very similar to the categories that we were managing as part
of [Newell].”109
On October 5, 2015, Franklin and Polk met again, this time on Franklin’s
yacht in Miami, along with Ashken, Lillie and Mark Tarchetti, Newell’s then-Chief
106
JX 1788 (L’Esperance Dep.) at 54:13–22; JX 1786 (Wood Dep.) at 25:2–7, 26:10–19.
The Board met on September 28, 2015, but the minutes do not reflect any discussion of a
potential transaction with Newell or Franklin’s September 9th meeting with Polk.
See JX 691; PTO ¶131.
107
Trial Tr. 378:24–380:18, 480:16–17 (Franklin); JX 1788 (L’Esperance Dep.) at 57:2–
23, 58:22–59:3 (Franklin called board members to advise them on meeting); JX 1807
(Gross Dep.) at 26:24–27:12 (same); JX 1786 (Wood Dep.) at 28:20–29:8, 33:20–34:4
(same).
108
Trial Tr. 566:9–20 (Polk).
109
Trial Tr. 598:10–16 (Polk); JX 1779 (Tarchetti Dep.) at 29:18–30:9, 32:10–33:9
(explaining Jarden “was by far the most likely [acquisition] candidate to reapply the Newell
Rubbermaid business model” of consolidation, which “could release a large amount of
value”).
25
Development Officer (the “Boat Meeting”).110 While Franklin informally provided
some advance notice of the Boat Meeting to certain members of the Board, he did
not obtain Board approval to meet with Newell and certainly did not have Board
approval to discuss the financial parameters of a deal.111 But that is precisely what
he did.
Franklin advised Newell’s team that Newell’s offer for Jarden would have to
“start with a six” and would have to include a significant cash component if Newell’s
goal was to gain control of the combined company.112 According to Franklin, he
arrived at this number based, in part, on his understanding of Jarden’s value as
determined in connection with the Jostens acquisition which was underway as of the
110
JX 685 at 2; JX 902 at 2; PTO ¶132. Trial Tr. 383:23–384:8 (Franklin). Following the
Merger, Tarchetti became the President of the combined entity. JX 1779 (Tarchetti Dep.)
at 14:17–21.
111
JX 1788 (L’Esperance Dep.) at 58:9–21; JX 1786 (Wood Dep.) at 31:12–25; PTO ¶133.
I note that Franklin’s testimony that he did not intend to negotiate definitive deal
parameters during the Boat Meeting was credible. Trial Tr. 486:11–16 (Franklin).
It appears, instead, that Franklin intended to lay out certain expectations and then “tell[]
[the] Newell [team that] if they had different expectations, they shouldn’t bother spending
time, effort, and money.” Trial Tr. 489:14–17 (Franklin). As Franklin explained, “I didn’t
want to go down the path of having any real substantive conversations unless they
understood that we were looking for a real premium.” Trial Tr. 469:2–22 (Franklin);
see also Trial Tr. 384:21–385:2 (Franklin); JX 1778 (Ashken Dep.) at 64:4–9 (explaining
“we sort of made it very clear that Jarden wasn’t for sale; but if we got an extraordinary
offer our job was to create value for our shareholders, so we would always listen to
whatever Mike had to say”).
112
JX 1794 (Christian Dep.) at 159:9–160:14; JX 1780 (Franklin Dep.) at 72:2–3; JX 1804
(Polk Dep.) at 85:24–86:7; JX 1779 (Tarchetti Dep.) at 305:24–306:10; PTO ¶134.
26
Boat Meeting.113 He also wanted to state a number he believed Newell had the
“ability to pay,”114 and he assumed a price of $70.00 or higher was “laughable.”115
At the time of the Boat Meeting, Jarden’s stock was trading in the high $40s.116
Therefore, by this metric, a price “starting with a six,” by any measure, would be a
premium for Jarden’s stockholders.117 According to Franklin, even if $60 per share
undervalued Jarden,118 Franklin believed Jarden stockholders would reap additional
value by sharing in the upside of the Merger with stock in the combined company.119
On the other side of the table, Polk expressed Newell’s hope that a merger
would open substantial synergies given the Newell team’s demonstrated ability to
113
JX 2502; JX 1778 (Ashken Dep.) at 64:17–65:4, 97:14–98:2; JX 1785 (LeConey Dep.)
at 27:10–21; Trial Tr. 369:22–370:2, 471:11–472:16 (Franklin). While Jarden had asked
Barclays to prepare some preliminary combination models and to do some “rough math”
prior to the Boat Meeting (Trial Tr. 472:7–8 (Franklin); JX 688), Jarden had no formal
analysis of its standalone value, nor had it retained a financial advisor when Franklin set
the range for a transaction at $60–$69 per share. JX 1789 (Welsh Dep.) at 135:14–136:3;
Trial Tr. 470:18–471:8 (Franklin).
114
JX 1780 (Franklin Dep.) at 95:15–19. See also Trial Tr. 473:24–475:1 (Franklin)
(explaining his sense of Newell’s financial limits).
115
Trial Tr. 391:24–392:10 (Franklin).
116
Trial Tr. 385:10–14 (Franklin).
117
Trial Tr. 385:24–386:4 (Franklin); Trial Tr. 666:6–7 (Polk) (“And I interpreted that to
be between 60 and 69, which is a very wide range.”); see also JX 1778 (Ashken Dep.)
at 65:21–23 (referring to a price in the $60s as “a very, very, very, very full price”).
118
Trial Tr. 474:14–475:1 (Franklin); JX 1780 (Franklin Dep.) at 103:3–13.
119
Trial Tr. 475:18–476:22 (Franklin).
27
consolidate business functions and utilize the resulting cost savings to produce
growth.120 Jarden’s team had a more modest outlook on possible synergies in the
early stages of the discussions, but became progressively more “excited” by the
opportunity to unlock significant transaction synergies as the negotiations
advanced.121
Although he had not sought Board approval to meet with Newell, Franklin
briefed the Board on the Boat Meeting within a matter of days, including his
admonition to Newell that an offer would need to “start with a six.”122 The Board
was supportive and encouraged Franklin and his team to continue the discussions
with Newell within Franklin’s outlined parameters.123
Jarden did not formally engage Barclays until November 2015. Even so,
Franklin contacted Welsh, his personal Barclays banker, on October 16, 2015, after
the Boat Meeting.124 Franklin told Welsh he already signaled to Newell that Jarden
120
Trial Tr. 598:3–16 (Polk) (explaining that “the logic for the deal” was the expectation
of synergies by recreating the success of Project Renewal); see also JX 674 at 2
(Polk noting that “there are tons of synergies because they have not done what we have
done with Renewal (they are a holding company)”) (emphasis in original).
121
Trial Tr. 387:13–388:23 (Franklin); see also Trial Tr. 664:3–665:8 (Polk).
122
Trial Tr. 391:24–392:10 (Franklin).
123
JX 1788 (L’Esperance Dep.) at 60:5–13 (discussing Franklin’s view that any offer
“needed to start with a 6 handle” and explaining that “[g]iven where the stock was trading,
that made a lot of sense”); see also JX 1786 (Wood Dep.) at 49:3–11.
124
Trial Tr. 548:22–549:4 (Franklin); JX 1789 (Welsh Dep.) at 135:14–136:3.
28
would agree to sell at $60 per share and instructed him to start developing an analysis
supporting a transaction in the range of $60–$69 per share.125
H. The Ebb and Flow of the Negotiations
On October 9, 2015, Newell distributed a press release revealing that Tarchetti
and another executive would leave Newell at the end of the year.126 Franklin was
“very upset” Polk had not informed him that “his chief lieutenant” was on his way
out of Newell.127 Franklin was so upset, in fact, that he entertained the idea of
“stopping the conversations at that point” because he “didn’t want to look stupid in
front of [the Jarden] board . . . [by] having a conversation with someone that wasn’t
serious.”128 Within days of the announcement, Franklin and Polk had a “tough
conversation” where Polk explained that Tarchetti would stay with Newell if the
parties agreed to a deal.129 After this, Franklin “got over it” and negotiations
continued.130
125
JX 769; JX 785; JX 915; JX 977; JX 1073; JX 1203; JX 1862; Trial Tr. 550:16–20
(Franklin); JX 1789 (Welsh Dep.) at 137:22–138:18.
126
Trial Tr. 392:8–15 (Franklin); see also JX 1778 (Ashken Dep.) at 62:23–63:2.
127
Trial Tr. 392:16–393:6 (Franklin).
128
Id.
129
Trial Tr. 393:7–394:2 (Franklin).
130
Id.
29
As the parties were discussing a Jarden/Newell combination, Jarden was
closing the Jostens deal. On October 14, 2015, Jarden announced it would acquire
Jostens and finance the acquisition through an equity offering priced at $49.00 per
share and additional debt.131 The next day, Jarden presented five-year projections to
potential financing sources that reflected net sales growth of 3.1% (the “Lender
Presentation”).132
The market reacted negatively to the Jostens acquisition.133 Jarden’s stock
price dropped approximately 12% over the following two weeks and analysts’
reduced their Jarden price targets accordingly.134 The Board determined that Jarden
needed to project confidence to the market. Accordingly, in early November 2015,
it approved a stock buy-back up to $50 million at prices capped at $49.00 per
share.135 Jarden ultimately repurchased 276,417 shares on November 2, 2015, at an
131
JX 2502 at 2, 10.
132
JX 775.
133
JX 871 at 1; JX 1779 (Tarchetti Dep.) at 259:14–261:13.
134
On October 13, 2015, the day prior to the Jostens announcement, Jarden’s stock price
was $50.69. Jarden’s stock price fell to $44.80 by the end of October 2015. PTO Ex. A;
see also JX 1816 at ¶¶66–68.
135
Trial Tr. 404:1–9 (Franklin). Franklin testified, “we were buyers up to [$]49, which we
considered full value at the time.” Trial Tr. 404:16–18 (Franklin).
30
average price of $45.96 per share, and repurchased an additional 775,685 shares on
November 3, 2015, at an average price of $48.05 per share.136
On October 15, 2015, Franklin caused Jarden to enter into a mutual
confidentiality and standstill agreement with Newell, and the parties began
preliminary due diligence.137 True to form, Franklin did not seek Board
authorization to begin diligence on Jarden’s behalf.138 The next day, also without
the Board’s authorization, Franklin and Polk spoke on the phone to continue
negotiations on the cash and stock components of a deal, and Franklin introduced
the concept of Jarden taking seats on the combined company’s board.139
On October 22, 2015, Franklin, Ashken and Lillie met with Newell
representatives at Jarden’s offices in Norwalk, Connecticut (the “Norwalk Meeting”)
and shared non-public information, including a set of three-year financial
projections.140 The three-year projections, apparently created in connection with the
negotiations, incorporated financials for both the Waddington and Jostens
136
JX 900 at 2.
137
JX 1565 at 85; PTO ¶135. Trial Tr. 394:23–395:4 (Franklin).
138
JX 1780 (Franklin Dep.) at 136:12–15; JX 1565 at 85. See Trial Tr. 492:5–10 (Franklin)
(explaining Jarden’s Board learned of the confidentiality agreement).
139
PTO ¶136.
140
JX 786 at 110; PTO ¶138; Trial Tr. 396:17–397:2 (Franklin); Trial Tr. 602:24–603:15
(Polk).
31
acquisitions,141 and forecast 5% revenue growth, i.e., growth at the high end of
Jarden’s historic guidance range of 3% to 5%.142
Entering into negotiations with Newell, Jarden had set the market standard for
average annual revenue growth within the 3% to 5% range.143 These growth figures
were meant to reflect Jarden’s “organic growth” range, but they included revenue
from “tuck-in” acquisitions, where a Jarden portfolio company would acquire a
target.144 Other public companies operating as holding companies typically do not
include tuck-in acquisitions when projecting “organic growth.”145 Nevertheless,
even when tuck-in acquisitions are excluded, Jarden generally performed in line with
its target growth range.146
At trial, Lillie justified giving Newell projections at the very top of the
Company’s 3%–5% guidance range by explaining that 5% was a “round
141
JX 786 at 110; JX 1777 (Lillie Dep.) at 131:7–12, 148:6–149:5.
142
JX 786 at 111; see also Trial Tr. 827:19–828:11 (Waldron).
143
JX 1777 (Lillie Dep.) at 24:16–25:8.
144
Tuck-in acquisitions usually amounted to less than 1% of Jarden’s yearly revenue.
See, e.g., JX 380 at 11; JX 1778 (Ashken Dep.) at 20:6–16; JX 432 at 5; JX 380 at 3, 11.
145
Trial Tr. 929:9–930:9 (Zenner).
146
JX 1816 at ¶30; JX 1831, Ex. 5A. Jarden achieved “organic growth” of 4% (including
tuck-in acquisitions) and adjusted organic growth of 3.2% (excluding all acquisitions),
from 2011 to 2015. Id.
32
number[].”147 He went on to explain that, while the projections given to Newell were
not “wildly optimistic,” Jarden internally projected growth “in the fours.”148 Polk
took notice of Jarden’s “really aggressive” projections.149 He and his team
determined that it was best to stick with the 3.1% growth projections as stated in the
Lender Presentation when evaluating the transaction.150
In November 2015, Jarden’s financial advisor, Barclays, asked Jarden
management for projections extended to 2020.151 In response, Lillie told Barclays
to “extrapolate out” the three-year forecast at a continuing growth rate of 5%
(the “November Projections”).152 Barclays used these five-year projections in its
analyses of the potential transaction and in its fairness opinion.153
147
Trial Tr. 106:13–107:3 (Lillie).
148
Trial Tr. 106:1–9 (Lillie); JX 1777 (Lillie Dep.) at 252:15–253:6.
149
Trial Tr. 604:3–12 (Polk) (explaining Newell did not use Jarden’s projections because
“I didn’t believe 6 percent and 5 percent compounded. Those were really aggressive
growth rates in the environment.”); see also id. 604:22–605:21 (Polk) (explaining that
Newell utilized more realistic projections when analyzing Jarden’s value).
150
JX 1252 at 12; JX 1247 at 29.
151
JX 927 at 1.
152
Id.
153
JX 1045 at 31; JX 1205 at 44. With only minor adjustments for 2015 year-end actuals,
the November Projections were also included in the Company’s proxy statement regarding
the Merger.
33
In addition to negotiating price terms during the Norwalk Meeting, Newell
and Franklin began to discuss specifics regarding change-in-control payments that
would be due to Franklin, Ashken and Lillie in the event of a merger.154 And, again,
Franklin did not seek Board approval before undertaking these discussions.155
Following the Norwalk Meeting, Franklin, Ashken, Lillie and John Welsh of
Barclays on behalf of Jarden, and Polk and Tarchetti on behalf of Newell, met for
dinner.156 Franklin believed whether the transaction would be consummated
depended on whether Tarchetti stayed at Newell.157 Accordingly, he asked Tarchetti
to share his thoughts on the potential transaction.158 Tarchetti declined to respond,
explaining he believed Newell still lacked adequate information to evaluate the
transaction.159 Franklin was not happy.
154
JX 791 (Tarchetti told a colleague that “Martin change of control” was on a list of
discussion points Franklin brought to the meeting on October 22); JX 1807 (Gross Dep.)
at 33:20–35:4.
155
JX 1807 (Gross Dep.) at 38:12–16, 67:13–25; JX 1788 (L’Esperance Dep.) at 89:6–8;
JX 1786 (Wood Dep.) at 67:12–15, 68:11–13.
156
Trial Tr. 397:8–10, 399:6–10 (Franklin); see also JX 1789 (Welsh Dep.) at 154:4–10.
157
Trial Tr. 397:15–398:4 (Franklin) (“I thought it was a little odd that, you know, a
potential $20 billion transaction would all hinge on the whims of the guy who is not the
CEO, who is not even on the board . . . .”).
158
Id.
159
Trial Tr. 398:5–20 (Franklin); JX 1779 (Tarchetti Dep.) at 201:6–202:7.
34
After this “difficult dinner” among the negotiators, Franklin told Ashken and
Lillie, “I’m done. I don’t want to deal with this.”160 Likewise, Polk said he thought
about “pull[ing] the plug” on the negotiations.161 After a “conciliatory” call between
Lillie and Tarchetti, however, the parties decided not to “let a bad dinner get in the
way of looking at whether this makes sense[,]” and negotiations continued.162
The Board held its first formal meeting to discuss a potential Newell
transaction on October 28, 2015.163 There was no discussion of a pre-signing market
check.164 Instead, the Board focused its attention on Newell and directed that
negotiations continue.165
In the meantime, Newell retained both Goldman Sachs (“Goldman”) and
Bain & Company (“Bain”) as additional financial advisors to assist in evaluating a
possible acquisition of Jarden.166 Tasked with performing a thorough evaluation of
160
Trial Tr. 398:16–20 (Franklin).
161
Trial Tr. 615:5–14 (Polk); see also JX 799 at 2.
162
JX 1779 (Tarchetti Dep.) at 221:24–222:9; Trial Tr. 398:21–399:5 (Franklin).
163
JX 815; PTO ¶140; JX 1807 (Gross Dep.) at 35:9–36:17; JX 1786 (Wood Dep.) at 58:9–
14.
164
JX 1786 (Wood Dep.) at 94:22–95:6; JX 1807 (Gross Dep.) at 46:17–20; JX 1785
(LeConey Dep.) at 87:2–13; JX 1789 (Welsh Dep.) at 162:20–163:9.
165
JX 815.
166
JX 1779 (Tarchetti Dep.) at 246:17–247:7; Trial Tr. 725:7–14 (Torres).
35
Jarden’s product categories, Bain’s initial assessment was that Jarden’s portfolio
demonstrated strong performance across many promising product segments, 167 but
its historic organic growth rate, once “tuck-in” acquisitions were separated, was at
most 3.5%.168 Early in the process, Centerview had projected that potential
synergies of $500 million to $900 million would result from a combination with
Jarden.169 By the end of October 2015, Bain was estimating that the combination
had the “potential to create $700M–$800M in cost synergies.”170 Bain’s assessment
encompassed “annualized savings” that would recur annually.171
Through due diligence, Newell discovered “almost every deal Jarden had
done, which were profound in number, had been left standalone with almost no cost
synergies or revenue synergies realized.”172 As a result of this holding company
167
Trial Tr. 734:12–14 (Torres). Bain continued to analyze Jarden’s category growth rates
through closing. It eventually determined that Jarden’s categories “were relatively weak
and were actually losing market share,” like the Coleman brand that lost distribution to
dominant outlets such as WalMart. This prompted Bain to downgrade its category growth
rate for Jarden to 2.5% as of closing. Trial Tr. 737:16–738:8 (Torres). When additional
information became available post-closing, Bain further decreased Jarden’s category
growth rate to 2.2%. Trial Tr. 739:2–8 (Torres).
168
Trial Tr. 753:1–7 (Torres).
169
Trial Tr. 600:16–601:7 (Polk); see also JX 1309 at 80.
170
JX 706 at 3; Trial Tr. 746:22–23 (Torres).
171
Trial Tr. 741:4–742:2 (Torres).
172
JX 1779 (Tarchetti Dep.) at 251:9–14; Trial Tr. 722:8–16 (Torres).
36
structure, Newell and its advisors believed that Jarden presented a substantial
opportunity to replicate Newell’s Project Renewal success by combining Jarden’s
businesses into Newell’s operating company structure.173
I. Newell Makes an Offer and Jarden Negotiates
On November 10–11, 2015, the Newell board met to discuss, among other
things, whether to make an offer to acquire Jarden.174 On the first day, Tarchetti
presented the results of the diligence efforts so far, in addition to management’s
perspective on the benefits of a merger with Jarden.175 On the second day, Bain and
Goldman presented their analysis of potential synergies.176 Bain opined that the
potential Newell/Jarden “combination would enable ~$600M in cost savings
opportunities, with potential upside to ~$700M.”177 Goldman appraised cost
synergies based on comparable transactions ranging from 2.1% to 14.0% of revenue,
173
Trial Tr. 598:10–16, 686:17–687:13 (Polk) (the “logic for the deal” was to apply the
Newell integration playbook to Jarden’s businesses); see also id. 699:6–9 (Polk) (“the costs
associated with [Jarden’s] decentralized model, that’s where the synergies were”).
174
JX 957 at 1.
175
Id. at 1–2.
176
Id. at 3 (Bain “highlighted three key benefits of the deal: transformational scale; high
cost synergies; and likely above average revenue synergies due to channel overlap and the
ability to apply the Growth Game Plan to selected categories at [Jarden]”).
177
JX 973 at 42; Trial Tr. 767:2–24 (Torres).
37
with a median of 10.0%, translating to roughly $850 million of annual cost synergies
resulting from the acquisition.178
Despite Bain and Goldman’s synergies estimates, Newell and its advisors
structured their deal model on an estimate of $500 million in annual cost
synergies.179 With this estimate, Newell’s model priced Jarden at $57.00 to $61.00
per share.180 Within these parameters, the Newell board understood that if its
management team did not realize the $500 million synergies estimate, then Newell
shareholders would not receive any increase in EPS.181 After the advisors’
presentations, the Newell board authorized management to negotiate an acquisition
of Jarden at a price between $57.00 and $60.00 per share, with cash consideration
up to $21.00 per share.182
On November 12, 2015, Polk sent Franklin an offer whereby Newell would
acquire Jarden in a cash-and-stock transaction consisting of $20.00 cash plus a fixed
exchange ratio of 0.823 Newell shares for each share of Jarden common stock,
178
JX 943 at 11.
179
Trial Tr. 614:4–18, 678:12–16 (Polk).
180
Id.
181
Trial Tr. 678:12–16 (Polk) (“The deal architecture assumed $500 million of gross
synergies. If we didn’t deliver $500 million of gross synergies, we would not have
delivered the operating margin outcomes, and we would not have delivered accretive
EPS.”).
182
Trial Tr. 616:12–23 (Polk); JX 957 at 9.
38
representing total per share consideration of $57.00.183 The offer reflected an 18%
premium over Jarden’s then-current share price ($48.19) and a 19% premium to
Jarden’s 30-day volume-weighted average share price ($47.89). Newell arrived at
the cash and stock mix to preserve Newell’s investment grade credit rating and
dividend policy.184 Polk’s offer letter made clear that Newell “expect[ed] that
Mr. Franklin would join the Newell Brands Board of Directors given the role he has
played in Jarden’s performance and strategy to date,” and allowed that Newell was
“open to adjusting the size of our board and taking on a limited number of
[additional] members from Jarden’s board.”185
The Board met that day to discuss Newell’s offer.186 Barclays made a
presentation regarding the adequacy of Newell’s $57.00 offer in which it provided a
preliminary valuation of Jarden based on Jarden’s historic market price as well as
comparable companies, precedent transactions and DCF analyses.187
While the $57.00 per share offer was higher than Jarden’s stock had ever
traded, the Board unanimously decided “it was not inclined to engage in discussions
183
JX 986; PTO ¶142.
184
JX 986 at 2.
185
Id.
186
JX 976 at 1–2; PTO ¶143.
187
JX 977.
39
and possible negotiation with [Newell] on the economic terms set forth in the [offer]
[l]etter,” and authorized management to “seek to obtain a revised proposal with more
favorable proposed terms.”188 The Board “emphasized that the Company was not
for sale and that it would consider a potential business combination with [Newell]
only on terms that appropriately valued the relative contribution (including revenue
and EBITDA) of each standalone company to the pro forma combined company.”189
The Board authorized Franklin to continue negotiations with Newell, but did
not authorize him to make a counteroffer because, as director Robert Wood testified,
doing so would “tie their hands.”190 Franklin, however, recalled, “the board basically
authorized [him] to go back and have further discussions and . . . push the envelope
to try to come back to them with an enhanced offer from Newell.”191
During the November 12 Board meeting, Franklin suggested that the Board
formally engage Barclays as the lead banker for the Company and UBS Group AG
as “co-investment banker.”192 Jarden thought a transaction of this magnitude
188
JX 976 at 2–3; Trial Tr. 405:12–16 (Franklin).
189
JX 976 at 2; PTO ¶145.
190
JX 1786 (Wood Dep.) at 91:22–25; see also JX 1807 (Gross Dep.) at 48:3–8 (“Q. Did
Jarden to your knowledge ever make a counteroffer to Newell? A. Not that I’m aware of.
Q. Did the Board ever discuss parameters of the counteroffer? A. Not that I’m aware of.”).
191
Trial Tr. 406:2–5 (Franklin).
192
JX 976 at 3.
40
justified having two banks on board to guide the Company through the process.193
Barclays, in particular, had a longstanding, fruitful relationship with Franklin and it
knew Jarden well.194 Accordingly, Franklin believed Barclays was positioned to
provide Jarden with “genuine good advice” on the potential merger.195 And he
believed UBS would serve as a well-informed source for “second opinions.”196 The
retention of UBS, however, did cause Jarden director Ros L’Esperance to recuse
Trial Tr. 562:4–5 (Franklin) (“The board wanted a second advisor.”); see also JX 1778
193
(Ashken Dep.) at 100:12–101:6.
194
Trial Tr. 407:2–15 (Franklin). Barclays earned about $180 million from all of Franklin’s
businesses, including nearly $70 million from Platform alone in the four years between
Platform’s founding and the Merger Date. JX 1805; Trial Tr. 546:11–17 (Franklin).
Barclays’ history with Franklin and his businesses earned Franklin “Platinum client” status.
JX 438; JX 1789 (Welsh Dep.) at 50:25–54:4. The Board made no inquiry regarding the
thickness of Franklin’s relationship with Barclays and there is no indication that either
Franklin or Barclays made any effort to disclose their past relationships to the Board.
See JX 976; JX 1070.
195
Trial Tr. 407:16–408:3 (Franklin).
196
Trial Tr. 560:22–24 (Franklin). Franklin explained to the Board that UBS had done
work for the Company in the past for free, and described the UBS engagement in
connection with the Newell transaction as giving UBS a “kiss.” Trial Tr. 561:19–562:12
(Franklin) (“I described it at one point as giving them a kiss. It was a way of saying thanks
for all the work that you’ve done that you didn’t get compensated for. We—you know,
you’re on par with a couple of other firms to do this advisory work for us for the board,
and we’re happy to have you do that work.”). Petitioners argue that this means UBS was
paid for doing no work and that the payment diverted value from stockholders. This is not
a fair characterization of UBS’s role. The record reflects that UBS prepared Board decks,
led discussions at Board meetings and was generally available to the Board as a sounding
board. Trial Tr. 560:22–24 (Franklin); JX 1785 (LeConey Dep.) at 35:23–36:10. Whether
UBS’s compensation was fully earned is beyond the scope of this appraisal proceeding.
41
herself from all deliberations and votes of the Board, as she led UBS’s Client
Corporate Solutions Group.197
On November 16, 2015, Jarden and Newell, along with their financial
advisors, met to continue negotiations over the potential transaction.198 In advance
of the meeting with Newell, the Jarden management team scheduled an evening
Board dinner anticipating there would be new developments in the negotiations that
would require the Board’s prompt attention.199 In yet another demonstration of
Franklin getting ahead of his Board, Franklin announced to the Newell team at the
outset of the meeting that their $57.00 offer was too low and then made a
counteroffer of $63.00 per share––$21.00 in cash with the balance in stock of the
combined company.200 The Newell team balked. Not only did they decline the
197
Trial Tr. 408:4–15 (Franklin); JX 1807 (Gross Dep.) at 44:10–14; JX 976 at 3;
PTO ¶146. See JX 1565 at 89 (“With respect to UBS, it was noted that
Ms. Ros L’Esperance is the Head of Client Corporate Solutions of UBS, and as such she
would be recused from all deliberations and votes of the Jarden board, if any, in respect of
the possible business combination with Newell Rubbermaid.”).
198
Trial Tr. 408:24–409:8 (Franklin); JX 1001 at 1.
199
Trial Tr. 411:4–10 (Franklin).
200
Trial Tr. 409:1–8 (Franklin); Trial Tr. 618:24–619:3 (Polk); JX 1789 (Welsh Dep.)
at 214:2–9; JX 1779 (Tarchetti Dep.) at 297:3–12, 300:8–16; JX 1807 (Gross Dep.)
at 48:3–8; JX 1016 at 3; JX 1786 (Wood Dep.) at 91:15–92:2; PTO ¶148.
42
counteroffer on the spot, they also refused to raise their $57.00 offer.201 Discussions
turned “acrimonious” and the meeting abruptly adjourned.202
After the meeting, Ashken emailed the Board to advise that the parties were
at impasse and there was no need for the scheduled Board dinner.203 According to
Ashken, “[a]s far as we were concerned the deal was dead.”204
J. Newell Increases Its Offer
On November 21, 2015, Newell submitted a revised offer to acquire Jarden
for $21.00 in cash plus a floating exchange ratio between 0.85 to 0.92 Newell shares
for each Jarden share to be determined based on Newell’s trailing 10-day unaffected
volume weighted average price (“VWAP”) at the time of signing, with a target price
of $60.00 per share.205 This revised proposal was a 30% premium over Jarden’s
201
Trial Tr. 410:2–7 (Franklin).
202
JX 1778 (Ashken Dep.) at 116:22–119:20 (“[A]s we explained to them, we were not
sellers. If you want to buy it, buy it. But don’t waste our time. And it was a pretty
acrimonious meeting. And it didn’t make any difference to us whether we bought or
sold.”); see also Trial Tr. 410:8–24 (Franklin).
203
JX 1778 (Ashken Dep.) at 116:13–21.
204
JX 1778 (Ashken Dep.) at 119:6–9. Franklin similarly explained: “I went back to the
board and said, This deal is dead. We tried to get a better offer out of them, and they
refused.” Trial Tr. 504:23–505:1 (Franklin).
205
JX 1069; JX 1066 at 2; JX 1149; PTO ¶153; JX 1064 at 2; see also Trial Tr. 619:18–
620:5 (Polk) ($21.00 was “the limit to what we could afford” in cash consideration).
According to Franklin, Newell “blinked” and agreed to increase its offer. Trial Tr. 412:19–
413:2 (Franklin).
43
then-current stock price ($46.33) and a 27% premium over Jarden’s 30-day VWAP
($47.43). Newell reiterated that it expected the potential merger to produce annual
cost synergies of approximately $500 million.206 It also renewed its offer for
Franklin, Ashken, Lillie and a new independent director to join the board of the
combined company.207
The Board convened the following day to discuss the $60.00 per share offer.
After discussions with its financial advisers, the Board determined that the offer
would be accepted and that Newell would be granted exclusivity during a period of
confirmatory due diligence.208 Outside director Robert Wood testified that the Board
viewed the revised offer “much more favorably,”209 and explained that while the
Board thought Jarden’s forecast of 5% growth over the next three years was
achievable, “the [B]oard’s level of concern [regarding future growth] was higher”
206
JX 1064 at 3; see also JX 1779 (Tarchetti Dep.) at 307:4–8 (“So by this stage, we’d
obviously recommended to the board that we should try to consummate the transaction
because we believed the synergies would create a lot of value for both parties.”).
207
JX 1064 at 3.
208
JX 1070 at 2; PTO ¶¶155, 157. Franklin went over the terms of the revised offer,
discussing the increased proposed cash consideration from $20.00 to $21.00 per share and
the formula for determining the exchange ratio. JX 1070 at 1. Barclays also presented its
analysis of the updated offer, including a revised valuation analysis of Jarden as a
standalone company. JX 1079 at 27–28.
209
JX 1786 (Wood Dep.) at 112:5–6.
44
following recent acquisitions.210 Specifically, the Board had come to appreciate that
Jarden could not sustain historic growth without pursuing “bigger and bigger
acquisitions,” a strategy the Company had found was increasingly difficult to
execute.211 As a result, Wood and the other directors believed the $60.00 offer
provided more value for shareholders than Jarden could deliver as a standalone
company.212
Franklin believed the $60.00 offer represented a 13.5x EBITDA multiple,
“a high multiple, by any standard, for our business . . . [and] the highest multiple, by
far, our company would have ever traded or been valued.”213 By way of comparison,
just a few weeks before Newell delivered its revised offer, Jarden had acquired
Jostens for $1.5 billion, representing a 7.5x EBITDA multiple.214 The Board also
concluded that Jarden stockholders stood to benefit from any synergies on top of the
210
Id. at 55:7–15.
211
Id. at 55:10–56:9.
212
Id. at 49:3–11. See also JX 1778 (Ashken Dep.) at 68:19–23, 69:23–70:4 (“When we
looked at it and we thought, you know, if we can realize something that begins with a 6 for
our shareholders is that more than we could expect if we continue to run the operations and
did all the stuff? And we felt the answer was yes.”).
213
Trial Tr. 415:2–11 (Franklin).
214
Trial Tr. 415:19–23 (Franklin).
45
$500 million estimate baked into the purchase price, by remaining invested in the
combined company following the Merger.215
As noted, the Board agreed to mutual exclusivity.216 This, of course, disabled
any market check prior to consummation of the Merger.217 The Board thought
“Newell was the best and most likely acquirer of our business” and there were no
other “companies that had the same fit in terms of synergies and ability to pay as
Newell.”218 From the Board’s perspective, Jarden was a “very diverse business”
operating in siloed industries that were not of interest to other large consumer
product companies.219 Accordingly, the Board and management understood that
215
Trial Tr. 684:13–685:22 (Polk) (explaining that $500 million in synergies was assumed
in the deal model, but “if there’s future value to be created, more synergies, more growth,
then any equity owner benefits from that”); see also Trial Tr. 415:2–15 (Franklin).
Franklin described the $60.00 offer as “a full and fair price by any measure.”
Trial Tr. 444:5–10 (Franklin).
216
JX 1070 at 2–3; PTO ¶¶155, 157. During the exclusivity period, Franklin and Ashken
continued to negotiate the terms of the Merger Agreement, but also negotiated for Franklin,
Ashken, and Lillie to continue with the combined company as paid consultants through
Mariposa. See JX 906; JX 1061; JX 1074.
217
JX 1786 (Wood Dep.) at 102:6–8 (explaining the Board’s view that “it would not be
value enhancing and perhaps very distracting to management to run an auction”).
Respondent acknowledges that the Board never considered authorizing its bankers to reach
out to other potential strategic buyers or financial sponsors. Id. at 94:22–95:6.
218
Id. at 100:13–23.
219
Trial Tr. 419:21–420:5 (Franklin); see also Trial Tr. 918:10–921:11 (Zenner)
(explaining that other large consumer product companies had targeted businesses and were
probably not interested in a diversified company like Jarden). Until Newell surfaced, no
potential acquirer had expressed interest in Jarden during its entire 15-year history.
Trial Tr. 425:10–13 (Franklin).
46
Jarden would likely continue standalone unless a unique opportunity for a business
combination came along.220 Newell provided that opportunity.
K. Jarden and Newell Finalize Deal Documents
Over November 29 and 30, 2015, Jarden and Newell convened at Jarden’s
Norwalk, Connecticut offices, where the Newell team continued its diligence and
presented its strategic plan for the combined company.221 Both Newell and Jarden
knew from the outset that a deal could only be done if a substantial portion of the
consideration was Newell stock.222 Because Newell understood this and appreciated
the magnitude and significance of Jarden’s assets to the combined company, Newell
committed that certain Jarden directors would be offered a seat on the Newell board
post-closing.223 Newell specifically wanted Franklin to sit on the combined board
to provide a positive signal to the market of his confidence in the future of the
combined company.224
220
JX 1786 (Wood Dep.) at 129:2–130:14; JX 1778 (Ashken Dep.) at 65:5–10.
221
JX 1565 at 90; JX 1116 at 194–242.
222
Trial Tr. 475:2–7 (Franklin); Trial Tr. 617:5–18 (Polk).
223
Trial Tr. 621:9–13 (Polk).
224
Trial Tr. 620:17–20 (Polk); Trial Tr. 406:24–407:1 (Franklin) (“[I]t would almost look
odd if I didn’t agree to serve as a director in the go-forward company.”); JX 1779
(Tarchetti Dep.) at 120:3–16, 124:6–18 (discussing Franklin’s role as the “face of Jarden”
and the importance of having Franklin on the board of the combined entity, which would
serve as an endorsement of the Merger); JX 1803 (Cowhig Dep.) at 153:24–154:3.
47
The parties understood that Newell’s management team would lead the
combined company since capturing synergies through the implementation of Project
Renewal was the “logic for the deal.”225 Franklin, Ashken and Lillie each were
subject to two-year non-competition covenants in event they were terminated
following a change of control.226 Newell wanted to draw out these non-competition
covenants to four years.227 It also wanted to have access to Franklin, Ashken and
Lillie as consultants post-closing if needed.228 Accordingly, Newell, Franklin,
Ashken and Lillie negotiated an “Advisory Services Agreement” that extended their
non-competes but also provided for Mariposa (on behalf of the three executives) to
be paid an annual consulting fee of $4 million for three years ($12 million in total).229
The Advisory Services Agreement provided that Mariposa “shall, upon the request
of [Newell], devote up to an average of 120 hours per fiscal quarter” to Newell, and
225
Trial Tr. 686:17–687:13 (Polk) (“We wanted as part of––the deal terms, to get control
of the company. Because there was no way that, without our leadership of the change
agenda, those synergies were going to be realized.”); JX 1778 (Ashken Dep.) at 153:15–
19.
226
JX 1778 (Ashken Dep.) at 163:13–14.
227
Id. at 163:14–19 (explaining Newell was “very keen to have [the noncompete period]
be four years” because Newell “had had a bad experience” before with competition from a
past executive); see also JX 1807 (Gross Dep.) at 58:16–59:9 (noting Newell was
“requiring that the management team extend their non-compete agreements from two to
four years,” which was a “big ask” since management was in the prime of their careers).
228
Trial Tr. 526:18–20 (Franklin); JX 1779 (Tarchetti Dep.) at 347:15–349:7.
229
JX 1233 at 2–3.
48
that Franklin and Ashken waived “any and all fees and compensation” they would
have ordinarily received as directors of Newell during the term of the agreement.230
L. The Leak
On December 7, 2015, The Wall Street Journal reported that Newell and
Jarden were discussing a potential business combination, though the article did not
reveal the specifics of who would be buying whom or the transaction
consideration.231 In reaction to this news, Newell’s shares traded up 7.4%, closing
at $48.16 and Jarden’s shares traded up 3.7%, closing at $50.09.232
Following the leak, and resulting impact on the companies’ stock prices, the
parties agreed that it no longer made sense to calculate the final exchange ratio based
upon the 10-day trailing VWAP as of the day of signing.233 Ashken contacted
Tarchetti to re-negotiate and the parties ultimately settled on a fixed ratio of 0.862,234
230
Id.
231
JX 1150 at 1–2; JX 1148; PTO ¶164. According to one witness, Newell’s counsel
leaked news of the Merger to a reporter. JX 1779 (Tarchetti Dep.) at 322:23–323:9.
232
PTO, Exs. A, B.
233
Trial Tr. 424:1–5 (Franklin); Trial Tr. 658:16–659:2 (Polk) (explaining that after the
leak, Newell “had to” negotiate a fixed exchange rate because “we would have had
exposure, potentially, if the stock had run one way or the other”); JX 1779 (Tarchetti Dep.)
at 325:17–23 (fixing the exchange ratio was “in the interest of both parties because the
stock prices were very volatile, and it was against the spirit of the agreement to not reflect
the fact that there had been a leak”); JX 1778 (Ashken Dep.) at 136:12–17 (same).
234
JX 1195 at 1.
49
resulting in total merger consideration at that time of $60.03 based upon Newell’s
closing stock price on December 11, 2015.235
The 10-day trailing VWAP through the last unaffected day prior to the leak,
was $44.60.236 If Jarden held firm to the original agreement, on top of the $21.00 in
cash, Jarden stockholders would have received 0.874 shares of Newell stock for
every share of Jarden stock they owned.237 In other words, Jarden stockholders
would have received $120 million more in consideration if not for the renegotiation.
M. Jarden and Newell Stockholders Approve the Merger
On December 10, 2015, the Board met to discuss the status of negotiations
and to assess whether the transaction continued to make sense. Lillie opened the
meeting by presenting the 2015 estimated financial results that demonstrated 4.4%
growth in organic net sales over 2014.238 Barclays also presented a summary of the
transaction’s proposed terms and an analysis of Jarden’s standalone value.239 The
meeting minutes emphasize that “the Company has not been and is not currently for
sale and that remaining independent (as a standalone entity) is the sole alternative to
235
JX 1241 at 5; Trial Tr. 507:1–19 (Franklin).
236
JX 1218 at 2. Had Jarden negotiated for a 0.90 exchange ratio, Jarden stockholders
would have received $380 million in additional equity. Id.
237
Id.
238
JX 1207 at 3.
239
JX 1205.
50
the proposed business combination with Newell, which offers unique revenue and
cost synergies and long-term value accretion opportunities for the Company’s
stockholders.”240
Jarden’s negotiating team had been discussing change of control payments
with Newell for several weeks but raised the subject with the Board for the first time
at the December 10 meeting.241 Ashken recommended to the Board that he, Franklin
and Lillie receive their 2017 and 2018 Restricted Stock Awards (“RSAs”) should
the transaction with Newell be approved.242 The RSAs would not have been due
under the existing employment agreements but Franklin’s team instructed Barclays
to include the RSAs in the shares outstanding calculation used for its valuation
analyses of the transaction and they had already presented that share calculation to
Newell.243 John Capps, Jarden’s General Counsel, advised the Board that Jarden
was legally obligated to grant the RSAs even though the agreements themselves
240
JX 1202 at 1.
241
Id.
242
Id.
243
JX 906 at rows 15–17; JX 1057; JX 1072 at 1–2.
51
were, at best, ambiguous on the point.244 Ultimately, the Board’s Compensation
Committee recommended that the Board award the 2017 and 2018 RSAs.245
The Board met next on December 13, 2015. Barclays presented the revised
proposed deal terms and its revised valuation of Jarden as a standalone company.246
Barclays also orally presented its opinion that the proposed merger was fair from a
financial point of view to Jarden and its stockholders.247 After hearing from Barclays
and reviewing the final deal terms, the Board approved the Merger.248 The Board
also approved the separation agreements and amendments to the employment
agreements with Franklin, Ashken and Lillie.249 The final Merger Agreement
244
JX 1786 (Wood Dep.) at 158:15–159:5. In addition to his work as Jarden’s General
Counsel, Capps has served as General Counsel for Platform since 2016. S&P Global
Market Intelligence, Platform Specialty Products (ESI:NYSE) (2019). Capps was also to
be a beneficiary of any grant of 2017 and 2018 RSAs. JX 1565 at 146–147.
245
JX 1231 at 18. There is no evidence the Compensation Committee ever looked at the
employment agreements. JX 1231 at 16; JX 1807 (Gross Dep.) at 66:12–22, 81:15–82:2
(“I don’t even know if I’ve seen it before.”).
246
JX 1232; JX 1231 at 2.
247
JX 1231 at 2; see JX 1255. Barclays delivered its written fairness opinion the following
day. JX 1255.
248
JX 1231 at 4. The Jarden board reiterated “its belief that the combined company’s long-
term value, prospects and benefits from the merger would exceed the value that could be
realized by Jarden’s stockholders were Jarden to continue operating on a stand-alone
(independent) basis.” Id. at 3.
249
Id. at 4, 9. The amended employment agreements for Franklin, Ashken and Lillie
extended the term of their non-competes upon termination from two years to four years.
JX 1326 at 15. They also confirmed the acceleration of certain RSAs in connection with
the transaction. JX 1326 at 15; see also Trial Tr. 638:11–16 (Polk) (explaining that the
negotiations concerning the RSAs were between the Jarden executives and the Jarden
52
provided that Jarden stockholders would receive 0.862 shares of Newell stock plus
$21.00 in cash for each Jarden share, representing a value as of signing of $60.03.250
The Newell board also met on December 13 to consider the final transaction
terms and to receive Goldman and Centerview’s final presentations.251 In their
analyses, both Goldman and Centerview used five-year projections for Jarden,
assuming 3.1% revenue growth during FY18–20, consistent with the Lender
Presentation and below the 5% revenue growth forecast in the November
Projections.252 Goldman maintained its estimate of $500 million in annual cost
synergies.253 Centerview estimated $500–$700 million in synergies.254 After the
board). Franklin, Ashken and Lillie had three-year “evergreen” employment agreements.
Under those agreements, they each were guaranteed their 2017 and 2018 RSAs, which the
Board agreed to grant prior to the Merger. JX 1778 (Ashken Dep.) at 142:23–143:4,
146:4–7; Trial Tr. 517:9–19 (Franklin). Using Newell’s stock price as of the Merger Date
to determine the exchange ratio cash equivalent, Franklin received a total of $71.04 per
share in Merger-related consideration, Ashken received a total of $76.11 per share and
Lillie received an equivalent of $81.69 per share. JX 1818 at ¶40.
250
JX 1231 at 2. The final Merger consideration represented a premium of 24.3% over the
unaffected market price of $48.31 on December 4, 2015 (the last day of trading before the
leak) and a premium of 24% over the VWAP of $48.35 for the 30-day period prior to
December 11, 2015. Id.
251
JX 1251 at 1–2.
252
JX 1252 at 12; JX 1247 at 29; see also JX 775 at 5. Newell also used numbers in line
with the Lender Presentation projections in its internal modeling and in the presentation
made to rating agencies on December 7, 2015. JX 1154 at 41.
253
JX 1230 at 10.
254
JX 1228 at 7. Bain’s report in advance of the meeting estimated total annual synergies
ranging from $585 million to $1 billion, comprised of $500–$700 million in cost synergies
and $85–$320 million in revenue synergies. JX 1139 at 50. Bain was “very comfortable”
53
presentations by its advisors, the Newell board approved the terms of the final
Merger Agreement and the parties announced the Merger.255
N. The Market Reacts
The Merger announcement, released on December 14, 2015, stated “[Newell]
anticipates incremental annualized cost synergies of approximately $500 million
over four years.”256 In response to the announcement, Jarden’s stock price closed at
$54.09, roughly 12% above the unaffected trading price of $48.31 from December 4,
2015.257 The delta between Jarden’s stock price and the implied Merger Price
(i.e., the merger arbitrage spread) slowly narrowed following the announcement and
ultimately converged in the days leading up to the closing.258
Newell’s stock price rose 7.4% on December 7, 2015, when financial media
outlets first reported the parties were negotiating.259 When the final terms of the
transaction were made public on December 14, 2015, however, Newell’s stock price
Newell would meet at least the low end of its estimate range. Trial Tr. 773:14–22, 774:17–
775:6 (Torres).
255
PTO ¶¶179, 181.
256
JX 1269 at 3.
257
PTO, Ex. A.
258
JX 1816 at ¶53. Jarden’s stock price never closed above the implied Merger price prior
to closing. Id. at ¶54.
259
Id. at ¶58.
54
declined by 6.9% to $42.15.260 After accounting for market fluctuations, Newell’s
stock price after the announcement of the Merger terms reflected, at best, a neutral
market response.261
On February 26, 2016, Jarden reported its 2015 year-end results, including a
considerable loss in operating income and net income as compared to the prior two
years.262 A few days later, on February 29, 2016, Lillie shared weak results for the
first quarter of 2016 with the Board.263 Lillie also shared the final 2016 budget,
which was adjusted downward to reflect year-end revenue of $9.79 billion
(as compared to the $10.15 billion in the November Projections).264
During March and April 2016, before the Merger closed, Jarden management
prepared updated multi-year projections for the period 2016 to 2020 (the “April
260
Id. at ¶59.
261
Id. at ¶¶59–60.
262
JX 1519 at 68. Net income fell by nearly 40% as compared to 2014 year-end. Id. Jarden
also adjusted its guidance downward twice during 2015. JX 454 at 4, 17, 41. And, in
November 2015, Lillie advised investors that Q4 2015 organic growth would be in the 2–
4% range, not the 3–5% range as earlier reported. JX 1034 at 1.
263
JX 1514 at 1–2; see also Trial Tr. 622:15–17 (Polk) (noting that Jarden fell below its
goals for Q1 2016).
264
Id.; Trial Tr. 440:22–441:1 (Franklin); see also JX 1510; Trial Tr. 823:13–19, 856:1–6
(Waldron). The 2016 budget assumed Jarden would remain a standalone company.
Trial Tr. 830:16–21 (Waldron).
55
Projections”).265 The original version of the April Projections reflected a “bottoms
up build” from the business units and forecast a 4.4% compound annual revenue
growth rate.266 This was well below the 5.0% forecast in the November
Projections.267
Jarden and Newell stockholders voted to approve the Merger on April 15,
2016.268 As of the closing, the mix of cash and Newell shares valued Jarden at
$59.21 per share.269
265
JX 1562 (revised multi-year plan projecting $9.816 billion in total revenue); see also
Trial Tr. 833:5–834:11 (Waldron). Newell asked for a copy of Jarden’s updated multi-year
plan in mid-March 2016, which Jarden provided. Trial Tr. 833:5–834:11 (Waldron).
Newell later asked Jarden to reevaluate the operating cash flow assumptions in the plan.
After doing this, Jarden circulated a revised version on April 1, 2016. Trial Tr. 832:24–
838:3 (Waldron). See also JX 1563; JX 1597; JX 1598. While this revision included minor
adjustments, the annual revenue and EBITDA projections remained the same as those
estimated in the unrevised plan. Id.
266
Trial Tr. 834:12–835:11 (Waldron).
267
JX 1598; JX 1565; see also JX 1826 at ¶88, Figure 16. Newell incorporated the revised
multi-year plan into its own multi-year forecast. Newell’s forecast, however, assumed
growth at 3.5%. JX 1691 at 95; Trial Tr. 626:4–627:15 (Polk).
268
PTO ¶183. Over 97% of voting Jarden stockholders approved the Merger (representing
83% of the outstanding shares). JX 1663 at 7.
269
JX 1816 at ¶10. The per share decrease in consideration from $60.03 to $59.21 reflects
the change in Newell’s stock price from signing to closing.
56
O. Post-Closing
By January 2016, Bain shortened the time Newell would realize $500 million
in recurring annual cost synergies from four years to three.270 By May 2016, Bain
raised its projection of potential cost savings to a range of $900 million to
$1 billion.271 In February 2017, Newell announced it would meet the initial estimate
of $500 million in annual cost synergies by Q3 2018, and doubled the size of its total
cost synergy target from $500 million to $1 billion, to be reached by 2021.272 Newell
also announced its intention to divest several businesses—both historical Jarden and
Newell—and to exit certain product lines.273 In early 2018, Newell announced it
would sell businesses accounting for almost 50% of its customer base and
approximately one-third of its revenue.274
The Jarden/Newell integration did not go smoothly.275 Newell Brands
(the combined company) faced an uphill battle with the divestitures of highly-
270
Trial Tr. 780:14–781:2 (Torres); see also JX 1373 at 11.
271
Trial Tr. 781:18–782:20 (Torres); JX 1691 at 7.
272
Trial Tr. 783:4–784:7 (Torres).
273
JX 1666; JX 2015; Trial Tr. 447:16–18 (Franklin); Trial Tr. 796:22–797:11, 798:20–
799:11, 800:20–801:24, 802:18–804:3 (Torres).
274
JX 1801; JX 1802; Trial Tr. 802:18–803:4 (Torres). Franklin strongly objected to this
strategy. JX 1808; JX 1809; JX 1825; JX 1807 (Gross Dep.) at 16:9–14.
275
JX 1803 (Cowhig Dep.) at 191:13–20.
57
profitable and valuable businesses.276 In early 2018, Franklin resigned from the
Newell Brands board in spectacular fashion, publicly proclaiming that Polk was
“ruining the company” and calling for Polk’s ouster.277 Ashken, L’Esperance and
long-time Newell director, Dominico De Sole, left the Newell Brands board soon
after.278
After leaving, Franklin, Ashken and Lillie united with Starboard Value LP, an
activist hedge fund, to advance a slate of directors to challenge the Newell Brands
board.279 Carl Icahn entered the mix and ultimately was successful in placing his
slate of five directors on the Newell Brands board, thereby effectively ending the
Franklin/Starboard-led challenge.280 In the fallout of the proxy contest, Tarchetti,
President of Newell Brands, resigned.281
276
Newell Brands announced an agreement to sell Waddington in April 2018 for
$2.3 billion, almost $1 billion more than the price Jarden paid less than three years prior.
Trial Tr. 450:18–451:2 (Franklin) (“Q. Okay. Waddington, you bought for 1.35 million
[sic] in July of 2015. Correct? A. Correct. Q. And Newell sold that business this year for
2.3 billion. Right? A. Correct. Q. They made almost a billion on that. Right? A. Yes.”).
277
Trial Tr. 447:2–11 (Franklin); JX 1808; JX 1809; JX 1823; JX 1834.
278
JX 1803 (Cowhig Dep.) at 184:17–188:12; JX 1809.
279
Trial Tr. 447:12–15 (Franklin); JX 1809.
280
JX 1822.
281
Newell Brands, Inc., Form 8-K at 3 (dated May 17, 2018).
58
P. Procedural Posture
Between June 14, 2016 and August 12, 2016, four petitions for appraisal were
filed in connection with the Merger.282 By order of the Court dated October 3, 2016,
the four appraisal actions were consolidated.283 On July 5, 2017, Merion Capital LP,
Merion Capital II LP and Merion Capital ERISA LP were dismissed from the
consolidated action after reaching settlement agreements with Jarden.284 On July 7,
2017, Dunham Monthly Distribution Fund, WCM Alternatives: Event-Driven Fund,
Westchester Merger Arbitrage Strategy sleeve of the JNL Multi-Manager
Alternative Fund, JNL/Westchester Capital Even Driven Fund, WCM Master Trust,
The Merger Fund, The Merger Fund VL and SCA JP Morgan Westchester were also
dismissed, again after reaching settlement agreements with Jarden.285
The Court held a four-day trial in June 2018. Three experts testified. For
Petitioners, Dr. Mark Zmijewski evaluated the standalone value of Jarden on the
Merger Date by conducting a market multiples analysis and a DCF analysis,
ultimately relying on his multiples (comparable company) analysis for his fair value
conclusion. He opined that Jarden’s fair value on the Merger Date was $71.35 per
282
PTO ¶11.
283
D.I. 13.
284
D.I. 35.
285
D.I. 37.
59
share. Dr. Zmijewski holds the Charles T. Horngren Professorship at the University
of Chicago Booth School of Business.
For Respondent, Dr. Glenn Hubbard evaluated the standalone value of Jarden
on the Merger Date by analyzing market evidence, including Jarden’s unaffected
market price and the Merger Price less synergies, and traditional valuation
methodologies, including comparable companies and DCF. Based on his DCF
analysis, which he correlated to the market evidence, Dr. Hubbard opined that
Jarden’s fair value on the Merger Date was $48.01 per share. Dr. Hubbard holds the
Russell L. Carson Professorship in Finance and Economics in the Graduate School
of Business of Columbia University, where he is also the Dean.286
Respondent also presented the testimony of Dr. Marc Zenner, a retired
investment banker. Dr. Zenner testified that the projected synergies estimates
reported in the joint proxy statement issued by Jarden and Newell in connection with
the Merger were conservative and that the synergies were taken by Jarden
stockholders. He also opined that the Board’s decision not to hold an auction for
Jarden was reasonable because Jarden’s size and diverse product portfolio made it
unlikely that a merger partner more suitable than Newell would have emerged.
286
The expert reports were submitted under seal. At the close of this case, the Court will
unseal the reports. Perhaps the legal and business academies will find interesting, and
worthy of study and classroom discussion, how two such well-credentialed experts in their
fields reached such wildly divergent conclusions regarding the fair value of the same
company as of the same date.
60
Following post-trial briefing and argument, the Court wrote to the parties, as
previewed at the conclusion of post-trial oral argument, to advise that it would
postpone the issuance of its post-trial opinion in this case until our Supreme Court
issued its decision in Aruba.287 The parties submitted brief (and unsolicited) letters
regarding Aruba on April 30 and May 1, 2019, at which time the matter was
submitted for decision.
II. ANALYSIS
Delaware’s appraisal statute, 8 Del. C. § 262(h) provides, in part:
Through [the appraisal] proceeding, the Court shall determine the fair
value of the shares exclusive of any element of value arising from the
accomplishment or expectation of the merger or consolidation, together
with interest, if any, to be paid upon the amount determined to be the
fair value. In determining such fair value, the Court shall take into
account all relevant factors.288
“Section 262(h) unambiguously calls upon the Court of Chancery to perform
an independent evaluation of ‘fair value’ at the time of a transaction . . . [and] vests
the Chancellor and Vice Chancellors with significant discretion to consider
‘all relevant factors’ and determine the going concern value of the underlying
company.”289 “By instructing the court to ‘take into account all relevant factors’ in
287
D.I. 154.
288
8 Del. C. § 262(h).
289
DFC, 172 A.3d at 364 (quoting 8 Del. C. § 262(h)).
61
determining fair value, the statute requires the Court of Chancery to give fair
consideration to ‘proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court.’”290 Since “‘[e]very company is different; [and] every merger is different,’
the appraisal endeavor is ‘by design, a flexible process.’”291
I have carefully considered all relevant factors. I have weighed those factors
according to the credible evidence in the record and applied “accepted financial
principles” as derived from that evidence.292 To follow is my independent evaluation
of Jarden’s fair value as informed by my findings of fact.
A. Merger Price Less Synergies
Respondent has proffered the Merger Price less synergies as a reliable
indicator of fair value, and for good reason. Our Supreme Court has stated, “a buyer
in possession of material nonpublic information about the seller is in a strong
position (and is uniquely incentivized) to properly value the seller when agreeing to
buy the company at a particular deal price, and that view of value should be given
considerable weight by the Court of Chancery absent deficiencies in the deal
290
Dell, 177 A.3d at 21 (quoting Weinberger v. UOP, 457 A.2d 701, 713 (Del. 1983)).
291
Id.292
Id. at 22.
62
process.”293 This court has heeded the Supreme Court’s guidance and regularly rests
its appraisal analysis on the premise that when a transaction price represents an
unhindered, informed and competitive market valuation, that price “is at least first
among equals of valuation methodologies in deciding fair value.”294
In PetSmart, I observed, “[a]fter years of striving for it, Vince Lombardi
finally arrived at the understanding that perfection in human endeavors is not
attainable.”295 “Even in the best case, a process to facilitate the sale of a company,
constructed as it must be by the humans who manage the company and their human
advisors, will not be perfect.”296 With that said, I am mindful of our Supreme Court’s
guidance in Dell, where the Court observed that certain factors, including “fair play,
293
Aruba, 2019 WL 1614026, at *6.
294
In re Appraisal of AOL Inc., 2018 WL 1037450, at *1 (Del. Ch. Feb. 23, 2018). See also
In re Appraisal of PetSmart, Inc., 2017 WL 2303599, at *27 (Del. Ch. May 26, 2017)
(collecting cases).
295
In re Appraisal of PetSmart, Inc., 2017 WL 2303599, at *27 (citing Chuck Carlson,
Game of My Life: 25 Stories of Packer Football (Sports Pub. 2004) (quoting Coach
Lombardi as opening his first Packers team meeting in 1959, after twenty years of
coaching, by saying: “Gentleman, we are going to relentlessly chase perfection, knowing
full well we will not catch it, because nothing is perfect.”)).
Id. (citing Merlin P’rs LP v. AutoInfo, Inc., 2015 WL 2069417, at *14 (Del. Ch. Apr. 30,
296
2015) (observing that no “real-world sales process” will live up to “a perfect, theoretical
model”)).
63
low barriers to entry, [and] outreach to all logical buyers,” are reflective of the kind
of “robust sale process” that will discover a company’s fair value.297
The “sale process” for Jarden, if one can call it that, raises concerns. To be
sure, there was no need for a full-blown auction of Jarden. In this regard,
Dr. Zenner’s testimony, corroborated by other evidence, was credible.298 Moreover,
there were signs of arms-length, provocative negotiating between Jarden and
Newell.299 This is not surprising given that Jarden’s negotiators owned millions of
Jarden’s shares and had every incentive to negotiate a good deal.300 But the evidence
297
Dell, Inc., 177 A.3d at 35.
298
Dr. Zenner testified that auctions are less effective as companies increase in scale and
complexity. Trial Tr. 915:3–14, 916:17–917:17 (Zenner). For sale transactions over
$5.4 billion, as here, only one in five are the product of an auction. Id.; JX 1817, App’x
C-5. See also JX 1827 at ¶¶53–54 (explaining that the most logical strategic partners were
too small to buy the Company); JX 1786 (Wood Dep.) at 101:18–102:11 (Jarden routinely
“looked at likely people we could have business combinations with or that we could
acquire . . . [and] didn’t think there was anybody out there who would come in and make a
preemptive offer to buy the company”); Trial Tr. 921:12–923:16 (Zenner); JX 1817 at ¶95
(explaining that financial sponsors were not interested in Jarden because its leverage was
too high); Trial Tr. 419:6–8 (Franklin) (“In 15 years of building the company, I haven’t
had one company come and sort of make an offer to buy Jarden.”); JX 1789 (Welsh Dep.)
at 143:5–10 (“The combination with Newell was viewed to be a highly strategic
combination that couldn’t necessarily be replicated with other counterparties. . . .”);
JX 1785 (LeConey Dep.) at 88:3–4 (“UBS was not aware of any other buyers that were
interested in acquiring all of Jarden.”).
299
Trial Tr. 504:23–505:1 (Franklin) (“I went back to the board and said, This deal is dead.
We tried to get a better offer out of them, and they refused.”); JX 1778 (Ashken Dep.)
at 119:6–9; see also JX 1807 (Gross Dep.) at 41:3–15.
300
JX 1816 at ¶169, Figure 23.
64
revealed a troubling theme. Franklin immediately took charge and, consistent with
a stereotypical “cut to the chase” CEO mentality,301 he laid Jarden’s cards on the
table before the negotiations began in earnest and before the Board and its financial
advisors had a chance to formulate a plan. Petitioners are right to complain that
Franklin’s approach may well have set an artificial ceiling on what Newell was
willing to pay.
Franklin did not inform the Board he was meeting with Polk at the Back-to-
School Meeting or the Boat Meeting, and he certainly did not receive authority from
the Board to suggest a price (“beginning with a 6”) at which the Board might agree
301
I appreciate Franklin was no longer CEO when he negotiated with Newell. With regard
to M&A, however, his role as Executive Chairman was tantamount to that of a typical
CEO. Trial Tr. 367:15–22, 467:20–22 (Franklin).
65
to sell the Company.302 Franklin made counteroffers unauthorized by the Board.303
He negotiated his change-in-control compensation with no authorization from
(or knowledge of) the Board.304 And he recommended Barclays as the lead financial
302
JX 1788 (L’Esperance Dep.) at 54:13–22, 58:9–21, 121:10–122:3; JX 1786
(Wood Dep.) at 25:2–7, 26:10–19, 31:12–25, 32:2–17, 157:25–158:14. Franklin’s
revelation at the Boat Meeting that he would like to exit from Jarden in order to have more
time to pursue business ventures with his sons also made an impression on Polk and, when
coupled with his direction regarding an acceptable offer price, likely communicated to
Newell that he was eager, maybe overly eager, to do a deal. See JX 765 (Tarchetti reporting
that Franklin revealed “his desire for an exit, which as the company figurehead is difficult.
He says he would like to inve[st] in business with his sons having taken some money off
the table (assuming he has about 0.5bn if this happened”)); Trial Tr. 71:20–72:12 (Polk);
Trial Tr. 164:14–165:3 (Tarchetti). There is other evidence in the record that Franklin was
perceived as an anxious seller. See JX 576 (Bill Ackman’s July 2015 email to Warren
Buffett, copying Franklin, attempting to interest Buffett in acquiring Jarden); JX 533;
JX 1786 (Wood Dep.) at 157:25–158:14; JX 860 (Centerview set up the first meeting
between Franklin and Polk, marketing Jarden to Newell as a “willing seller.”); JX 902 at 2
(Polk stating that Franklin “cut straight to the chase” about his willingness to sell Jarden).
303
JX 1807 (Gross Dep.) at 38:12–16, 48:3–8, 67:13–25; JX 1786 (Wood Dep.) at 72:9–
18, 91:15–92:2; JX 1788 (L’Esperance Dep.) at 89:6–8.
304
JX 1049. The Board justified the compensation awards after the fact. JX 1212 at 15;
JX 1565 at 146. Moreover, as Franklin and Ashken were telling Newell they were entitled
to the 2017 and 2018 RSAs, Jarden’s Compensation Committee had not discussed the
possibility of awarding those grants. JX 1145; JX 1202. The Board was told by in-house
counsel Capps—who was also receiving 2017 and 2018 RSAs—that Jarden was
contractually obligated to make these awards even though the agreements at issue were not
clear on the point. JX 1629 at 5; JX 1786 (Wood Dep.) at 158:15–159:5. There are other
troubling facts relating to the change-in-control payments, including that Franklin arranged
for his long-time legal counsel to advise the Board with respect to the payments and the
payments ultimately resulted in the lead negotiators for Jarden receiving substantially more
in Merger consideration than Jarden’s other stockholders. See JX 1145; JX 1234; JX 1235;
JX 1236; Trial Tr. 534:18–536:11–18 (Franklin); JX 1780 (Franklin Dep.) at 362:20–22.
Respondent argues the RSAs that made up most of the Merger consideration differential
Franklin and the other Jarden managers received were owed to them “in the regular course
absent a sale.” Resp’t Jarden Corp.’s Opening Post-Trial Br. (“ROB”) at 57. The Merger
agreement, however, terminated the employment contracts under which the RSAs were
granted. See JX 1235. Franklin and the other Jarden managers claimed they were
66
advisor for the deal without fully disclosing his prior substantial relationship with
the bank, just as he nudged the Board to hire UBS as a second banker as a “kiss” in
gratitude for its prior uncompensated work for the Company.305
As factfinder, these flaws in the sale process, coupled with the fact that there
was no effort to test the Merger Price through any post-signing market check, raise
legitimate questions regarding the usefulness of the Merger Price as an indicator of
fair value.306 As explained below, the difficulty in assessing the extent to which
Newell ceded synergies to Jarden in the Merger makes the Merger Price less
synergies an even less reliable indicator of fair value.
In Merion Capital LP v. BMC Software Inc., the court set forth a useful
framework to approach the appraisal statute’s mandate that the court appraise “the
fair value of the shares exclusive of any element of value arising from the
contractually owed the 2017 and 2018 RSAs under their employment agreements before
the separation agreements even existed. JX 906 at rows 15–17; JX 1057; JX 1072; JX 1786
(Wood Dep.) at 158:15–159:5. The Board then justified the disconnect by explaining the
2017 and 2018 RSAs served as consideration for the commitment to add two more years
to the non-compete covenants. JX 1565 at 146. Of course, when the dust settled, the
separation agreements extended the term of the non-compete covenants by only one year.
JX 1234; JX 1235; JX 1236.
305
JX 1805; Trial Tr. 546:11–17 (Franklin); JX 438; JX 1789 (Welsh Dep.) at 50:25–54:4;
JX 1780 (Franklin Dep.) at 269:6–19.
306
By so finding, I do not intend to suggest that Franklin or any Jarden fiduciary breached
any fiduciary duty. That inquiry is beyond the scope of this appraisal proceeding. See In re
Unocal Expl. Corp. S’holders Litig., 793 A.2d 329, 340 (Del. Ch. 2000) (noting that a
breach of fiduciary finding is beyond the scope of statutory appraisal).
67
accomplishment or expectation of the merger or consolidation.”307 BMC
recommends a “two-step analysis[:]” “first, were synergies realized from the deal;
and if so, were they captured by the sellers in the deal price?”308
There is no dispute here that synergies were realized in the Merger, as one
would expect when two strategic partners combine.309 Indeed, the synergies created
the “logic for the deal” from Newell’s perspective.310 The first announcement of the
Merger stated, “[Newell] anticipates incremental annualized cost synergies of
approximately $500 million over four years.”311 This remained the case through the
release of the joint proxy statement.312 Internally, Newell believed the $500 million
estimate was conservative.313 Nevertheless, the experts have focused on the
expected synergies as disclosed in the joint proxy statement ($500 million), and they
307
Merion Capital LP v. BMC Software Inc., 2015 WL 6164771 (Del. Ch. Oct. 21, 2015).
308
Id. at *17.
309
JX 1817 at ¶¶32–33, 41–43.
310
Trial Tr. 686:17–687:13 (Polk) (“We wanted as part of––the deal terms, to get control
of the company. Because there was no way that, without our leadership of the change
agenda, those synergies were going to be realized.”); JX 1778 (Ashken Dep.) at 153:15–
19.
311
JX 1269 at 3.
312
JX 1565 at 85.
313
JX 1228 at 7. Bain had estimated synergies ranging from $585 million to $1 billion,
comprised of $500–$700 million in cost synergies and $85–$320 million in revenue
synergies. JX 1139 at 50.
68
have assumed that estimate is accurate.314 In the absence of any real expert analysis
of the issue, I have no basis in the evidence to depart from that assumption.
As for whether Jarden captured the synergies in the Merger, the evidence is
less clear. There is evidence in the trial record that would suggest Newell believed
it was not paying any of the synergies at the $59.21 per share Merger Price.315
During negotiations, Polk told his board that if Newell could “get the deal done
between $60 and $65 [per share], we are basically getting the synergies with no value
ascribed to them.”316 After the Merger, Polk further suggested that the premium over
market price that Newell paid in the Merger was not for synergies but instead was
for control of the combined company.317 Polk explained, “Jarden shareholders get a
premium versus their current stock price for [Jarden]. The Newell shareholders get
ownership of [Jarden], and after the synergies are delivered, the future value creation
314
JX 1817 at ¶40; JX 1816 at ¶183;
315
JX 1100 at 18; JX 1804 (Polk Dep.) at 100:2–5, 101:15–16.
316
JX 1100 at 18.
317
Trial Tr. 649:5–8 (Polk); JX 2022 (“The premium is designed to get Newell
management control.”); JX 1804 (Polk Dep.) at 100:2–5, 101:15–16 (When asked “how
did you come to the conclusion that a modest premium to their current market valuation
would give Newell control,” Polk responded “I knew that it was a quid pro quo” and “[i]f
we were going to pay a premium for the asset, we need management control.”). Of course,
Polk clarified that control was necessary to achieve the synergies since Newell was not
satisfied that Jarden management would take the steps needed to create synergies. See Trial
Tr. 686:17–22 (Polk).
69
that comes through the new combination.”318 Even Franklin questioned whether the
premium to market price that Newell paid was for control of the combined entity.319
On the other hand, Jarden points out that there is evidence Newell was keenly
aware of synergies and that it was incorporating synergies into its value thesis for
the Merger.320 Dr. Hubbard supported Jarden’s view of the evidence that Jarden
stockholders realized the value of the synergies by conducting two separate analyses.
First, he performed a “discounted value of cash flows” analysis, in which the
expected future cash flows from the synergies (net of the costs to achieve them) were
discounted to their value as of the Merger Date, to conclude that the synergies had a
value of $4.2 billion, or $17.43 per Jarden share. This happens to line up nicely with
the delta between the unaffected market price ($48.31) and the Merger Price
($59.21), indicating that the delta, or premium, represented expected synergies.321
He then prepared a market-based analysis of the expected synergy value in which he
observed that the rise in stock price of both companies after the leak of merger
318
JX 1804 (Polk Dep.) at 115:4–9.
319
Trial Tr. 476:3–5 (Franklin).
320
Trial Tr. 598:10–21, 599:14–600:6, 614:4–18, 678:12–6 (Polk); JX 1803
(Cowhig Dep.) at 62:20–63:2; JX 1779 (Tarchetti Dep.) at 29:6–30:9; JX 674 at 2
(September 2015 Polk email, emphasizing the “tons of synergies” to be realized by
employing the Project Renewal strategy) (emphasis in original); Trial Tr. 725:7–14, 742:3–
743:19 (Torres); JX 973 at 36; JX 1139 at 50, 56; JX 1565 at 67.
321
JX 1816 at ¶¶181–83; JX 1831 at ¶4, Figure 25; Trial Tr. 1087:23–1091:9 (Hubbard).
70
negotiations revealed that the market appreciated the presence of significant
synergies. The fact that Newell’s stock price fell when Jarden’s rose after
announcement of the Merger indicates the market appreciated that the anticipated
synergies would accrue to the Jarden stockholders.322
Jarden bears the burden of demonstrating “what, if any, portion of
[the synergies] value was included in the price-per-share . . . .”323 The evidence on
this point stands in equipoise. It is difficult to square Polk’s contemporaneous
assessment of where the synergies would land with Newell’s internal valuation
exercises and Dr. Hubbard’s straightforward analysis of the issue. Given the state
of the evidence, I give little weight to the Merger Price less synergies evidence when
assessing fair value.324 Not because I believe the Merger created no synergies. And
322
JX 1816 at ¶188 (“These results indicate that the market expected nearly all of the
synergy value to accrue to Jarden shareholders, consistent with academic research finding
that most of the benefits of mergers accrue to target-firm shareholders.”); Trial Tr.
1090:18–20 (Hubbard).
323
BMC Software, 2015 WL 6164771, at *17.
324
To be clear, and as explained below, I am satisfied from the evidence that the Merger
Price exceeded fair value. It is less clear, however, what exactly justified the premium
Newell was willing to pay for Jarden. This is partially a product of the complications in
valuing synergies where the merger consideration includes stock, versus a strictly cash-for-
stock merger.
In such a transaction, shareholders of both constituent corporations remain
shareholders in the continuing combined enterprise. Thus, both groups––
acquirer shareholders and target shareholders––are able to participate pro
rata in gains arising out of the merger. Therefore, a premium to the target’s
shareholders cannot be justified, as in a cash acquisition, on the premise that
71
not because I believe that Jarden stockholders probably did not receive the value of
the synergies that were created by the deal. I place less weight on this market-based
valuation approach in this case because the sales process was not well-conceived or
well-executed and the expert analysis of the transaction synergies raised more
questions than it answered.
B. Unaffected Market Price
Jarden has proffered its unaffected stock trading price, $48.31 per share
(the “Unaffected Market Price”), as strong evidence of the Company’s fair value.325
According to Jarden, “[t]his value impounded the collective judgments of thousands
of stockholders, as well as the more than twenty professional analysts that followed
Jarden.”326 Jarden supports its position that the Unaffected Market Price is indicative
it is the only way to permit those shareholders to share in the gains arising
from the merger.
Lawrence A. Hamermesh, Premiums in Stock-for-Stock Mergers and Some Consequences
in the Law of Director Fiduciary Duties, 152 U. Pa. L. Rev. 881, 884 (2003).
325
As noted, news of the potential merger between Jarden and Newell leaked to the public
on Monday, December 7, 2015. See JX 1150 at 1–2; JX 1148; PTO ¶164; JX 1164;
Liz Hoffman, Dana Mattioli & Dana Cimilluca, Newell Rubbermaid, Jarden in Merger
Talks, The Wall Street Journal (2015), https://www.wsj.com/articles/newell-rubbermaid-
jarden-in-merger-talks-1449521419 (last visited July 19, 2019). The last day Jarden stock
was traded without being affected by news of the merger negotiations was Friday,
December 4, 2015. JX 1231 at 2. On that day, Jarden stock closed at $48.31 per share.
JX 1816 at ¶47.
326
ROB at 2.
72
of fair value with detailed analysis from Dr. Hubbard.327 Petitioners elected not to
counter that evidence with expert evidence of their own. 328 Instead, they attacked
Dr. Hubbard’s opinion as lacking in doctrinal and factual foundation. For reasons
explained below, I find Dr. Hubbard’s analysis of the reliability of Jarden’s
Unaffected Market Price as an indicator of fair value both credible and persuasive.
1. The Market for Jarden’s Stock Was Efficient
In an efficient stock market, “a company’s market price quickly reflects
publicly available information.”329 In this environment, the company’s trading price
“balances investors’ willingness to buy and sell the shares in light of [available]
information, and thus represents their consensus view as to the value of the equity
in the company.”330 Efficient markets aggregate all available information and
quickly digest new information, which is then reflected by proportionate changes in
327
Trial Tr. 1267:17–1268:5 (Hubbard) (“I’ve seen nothing in the record that would
suggest to me the unaffected stock price is not the right anchor [for fair value].”).
328
Trial Tr. 323:15–326:14 (Zmijewski). See also Trial Tr. 1021:2–9 (Hubbard) (“Does
Dr. Zmijewski in his reports dispute that either Newell or Jarden traded in an efficient
market? A. Not in his reports, no. Q. And did you hear that in his testimony? A. I did not.
I was present, and I didn’t hear that.”).
329
JX 1816 at ¶45. See also JX 2032, Jonathan Berk & Peter DeMarzo, Corporate
Finance 301 (Pearson Education Limited, 4th ed. 2017) (“Berk & DeMarzo, Corporate
Finance”); JX 2515, Aswath Damodaran, Investment Valuation: Tools and Techniques for
Determining the Value of Any Asset 4 (Wiley, 3d ed. 2012) (Damodaran, Investment
Valuation); JX 2516, Tim Koller et al., McKinsey & Co., Valuation: Measuring and
Managing the Value of Companies 37–38 (Wiley, 6th ed. 2015) (“Koller, Valuation”).
330
JX 1816 at ¶45.
73
market price.331 When the market is efficient, the trading price of a company’s stock
can be a proxy for fair value.332
As Dr. Hubbard explained, several factors support the conclusion that
Jarden’s stock traded in a semi-strong efficient market.333 The stock was traded on
the New York Stock Exchange (“NYSE”) and Jarden became a member of the S&P
400 index in 2012.334 In 2015, Jarden’s shares traded with a daily and weekly
average trading volume in the top 25% of the S&P 500.335 High trading volume
contributes to the efficiency of the market.336 Jarden’s market capitalization of
331
JX 2032, Berk & DeMarzo, Corporate Finance at 302.
332
JX 1816 at ¶45; Trial Tr. 323:15–324:4 (Zmijewski) (acknowledging that one “can look
to stock price to corroborate a fair value conclusion”); Trial Tr. 1017:11–14 (Hubbard)
(“For the unaffected stock price to be relevant, Your Honor, to your consideration,
you need to believe that it’s an unbiased indicator of the value of the firm. That’s
an efficient market.”).
333
Dr. Hubbard stated,
[t]here are tests for whether a market is efficient, tests that economists
suggest, but tests that have been widely used in courts. So I used a number
of factors that capture the scope of the firm, whether analysts follow it,
transactions cost, liquidity, and so on. I do those tests for both Jarden and
Newell and conclude that both trade in an efficient market, semi-strong form.
Trial Tr. 1017:11–14 (Hubbard).
334
Resp’t Jarden Corp.’s Pre-Trial Br. at 6.
335
JX 1816 at ¶44, Figure 10.
336
JX 242, Robert W. Holthausen & Mark E. Zmijewski, Corporate Valuation: Theory,
Evidence & Practice 301–03 (Cambridge Business Publishers, 1st ed. 2014) (“Holthausen
& Zmijewski, Corporate Valuation”).
74
approximately $10.2 billion placed it in the top 20% of all publicly traded firms.337
High market capitalization leads to greater “interest in the security being analyzed,”
which, in turn, “increases the likelihood that new information will be quickly
incorporated into the stock price.”338
Jarden had no controlling shareholder.339 In fact, Jarden had a 94% public
float.340 A high public float is another factor indicating an efficient market for
Jarden’s stock because the more holders of a security that are not insiders with access
to non-public information, the more likely the market will demand that information
be released for public consumption.341 Jarden stock exhibited a “bid-ask spread” of
only 0.02%.342 A narrow bid-ask spread indicates minimal information asymmetry
between insiders and the public markets and, as a result, higher market efficiency.343
Approximately twenty professional market analysts covered and disseminated
337
JX 1345, Duff & Phelps LLC, 2016 Valuation Handbook: Guide to Cost of Capital
(Chapter 3) 9 (John Wiley, 2016) (“Duff & Phelps, Valuation Handbook”).
338
JX 1816 at ¶46.
339
Id. at ¶48.
340
Id.
341
JX 2032, Berk & DeMarzo, Corporate Finance at 73.
342
JX 1816 at ¶¶47–48.
343
Id. at ¶47.
75
reports on Jarden in the year prior to the Merger Date.344 Jarden exhibited no serial
correlation, meaning there were no patterns detached from events or news from the
Company that would enable the market to divine future price movements based
purely on past performance.345 Additionally, Jarden’s Unaffected Market Price
aligned with options market pricing, suggesting there were no arbitrage
opportunities for Jarden stock.346
Dr. Hubbard summarized the factors allowing him to conclude that Jarden’s
stock traded in a semi-strong efficient market in a helpful chart:
344
Id. at ¶48.
345
Id.
346
Id.; JX 2032, Berk & DeMarzo, Corporate Finance at 73 (“The term efficient market is
also sometimes used to describe a market that, along with other properties, is without
arbitrage opportunities.”) (emphasis in original).
76
For context, and to illustrate that Jarden’s stock price historically reacted
appropriately to material information, Dr. Hubbard performed an event study to trace
how, in the two years prior to the Merger, Jarden’s stock price responded quickly
and appropriately to earnings announcements and other performance guidance, even
when the news was unanticipated.347 In each instance, Dr. Hubbard traced the public
disclosure of material information, the reaction of analysts to the information and
the commensurate adjustment, up or down depending upon whether the news was
positive or negative, in the trading price of the stock.348
347
JX 1816 at ¶49; JX 2514 at 8–11; Trial Tr. 1019:2–16 (Hubbard).
348
Id.
77
The evidence shows that Jarden’s stock reached a pre-Merger peak of $56.25
on July 20, 2015, and then declined gradually over the next few months in response
to poor earnings reports.349 The decline was marked by low quarterly growth and it
prompted Jarden to lower its guidance for the second and third quarters of 2015.350
Jarden’s stock price recovered somewhat in the fourth quarter and closed at $48.31
on December 4, 2015 (i.e., the Unaffected Market Price).351 After The Wall Street
Journal article reported on the merger negotiations the following Monday, Jarden’s
stock price rose and continued to rise to $54.09 on December 14, 2015, the day
Jarden and Newell officially announced the Merger.352 The steady climb continued
following the announcement and then plateaued before the calendar year ended.353
Jarden’s stock price oscillated between $59.00 and $50.00 until early March 2016.354
In March, as the negotiations finalized and the Merger Date neared, Jarden’s share
349
JX 1816 at ¶51.
350
Id.
351
Id.
352
Id. at ¶52.
353
Id. at ¶¶52–53.
354
Id.
78
price approached but never exceeded the Merger Price of $59.21.355 As Dr. Hubbard
explained:
The fact that Jarden’s stock price never closed above the Merger
Price is a strong indicator that fair value is no greater than the Merger
Price. If investors believed that the Company was worth materially
more, then one would expect to see the market price exceeding the
Merger Price in anticipation of a topping bid. In more than five
percent of M&A deals since 2001, the merger arbitrage spread the
day after the merger announcement was negative, implying that the
market expected a topping bid.356
Newell’s stock also traded in an efficient market and the market’s reaction to
the announcement of the Merger with respect to Newell’s trading price provides
further evidence that the Unaffected Market Price is reflective of Jarden’s fair
value.357 Newell’s stock price jumped after the leak of negotiations when the terms
of the deal were unknown.358 The market reacted differently, however, when the
terms of the Merger were announced. Newell’s stock price dropped significantly
(6.9%). Dr. Hubbard explained the significance: “The initial positive reaction to
the deal rumors suggests that the market was hopeful that some value would
355
Id. at ¶54.
356
Id.
357
The Merger marks the rare instance where two public companies of comparable size,
comparable capital structure and comparable stock trading patterns combine.
As Dr. Hubbard explained, for most of the reasons one can conclude that Jarden traded in
an efficient market, the same can be said for Newell. Id., Figure 15.
358
Id. at ¶58.
79
accrue to Newell, but after learning the terms of the deal and additional
information about synergies, the market reassessed and shifted the value from
Newell to Jarden.”359
After carefully reviewing the evidence, I am satisfied that Jarden’s
Unaffected Market Price is a powerful indicator of Jarden’s fair value on the
Merger Date. Petitioners’ attempts to undermine this evidence, as explained
below, were not persuasive.
2. Petitioners Did Not Persuasively Rebut Jarden’s Market Evidence
Petitioners mount three challenges to the reliability of Jarden’s Unaffected
Market Price: (a) as of the date fixed for the Unaffected Market Price (December 4,
2015), the market lacked material information concerning Jarden (i.e., information
asymmetry) that skewed the trading price; (b) the Unaffected Market Price must be
adjusted to account for a so-called “conglomerate discount” and a “minority
discount;” and (c) the Unaffected Market Price was stale by the time the Merger
closed on April 15, 2016.360 I address each in turn.
359
Id. at ¶60. See also id. at ¶62 (“According to the analysts covering Newell at the
time, consumer recession fears, merger integration risks, and the high initial leverage
resulting from the Merger were key factors affecting Newell’s stock price.”).
360
Jarden is justified in pointing out that while he raised the criticisms, Dr. Zmijewski did
“not explicitly opine on whether or not any of these factors actually depressed Jarden’s
[unaffected] market price relative to fair value.” JX 1826 at ¶98. See also JX 1828 at ¶90
(Dr. Zmijewski making observations regarding the Unaffected Market Price but not
correlating them).
80
a. Information Asymmetry
According to Dr. Zmijewski, Jarden’s market-based evidence should be
disregarded because the market lacked material information as of the date fixed for
Jarden’s Unaffected Market Price.361 Dr. Zmijewski cited the decline in the federal
risk-free rate, the rise in Jarden’s share price and the divergence between Jarden
management and market analysts’ projections for Jarden’s future performance as
reasons the Unaffected Market Price was not a reliable indicator of fair value.362
Importantly, Dr. Zmijewski also observed that Jarden stockholders had no access to
the November Projections as of the date fixed for the Unaffected Market Price. The
evidence supports the factual predicates for these observations, but it does not
support a conclusion that the absent facts resulted in the kind of information
asymmetry that would render the Unaffected Market Price unreliable.
As for the decline in the federal risk-free rate, Dr. Zmijewski states that, “[a]ll
else equal, the decline in the risk-free rate results in an increase in Jarden’s Fair
Value,” and goes on to argue that because the federal risk-free rate declined from
December 2015 to April 2016, Jarden’s fair value must be higher than the Unaffected
Market Price.363 Interest rates on U.S. Treasury 20-year constant maturity bills
361
JX 1828 at ¶90; JX 1826 at ¶98.
362
Id.
363
JX 1818 at ¶30.
81
declined 19%, from 2.65% to 2.14%, between December 4, 2015 and April 15,
2016.364 Dr. Hubbard conceded that, if “all else” were, in fact, “equal,” as
Dr. Zmijewski posited, then Jarden’s fair value would increase as the risk-free rate
decreased.365 But then Dr. Hubbard exposed the flaw in Dr. Zmijewski’s elephant-
sized assumption that “all else” remained “equal.” Specifically, Dr. Hubbard
referred directly to market data showing that, as the interest rate on 20-Year Treasury
Bonds declined between December 2015 and April 2016, stock prices in general,
represented by the S&P 500 Market Index, did not increase in response.366 Contrary
to Dr. Zmijewski’s “all else equal” assumption, the evidence shows that the stock
market declined just as the risk-free rate declined.367 In other words, the correlation
that supports the supposed information asymmetry is no correlation at all.
Regarding the lack of consensus between Jarden management and third-party
analysts’ projections, Dr. Hubbard emphasized the qualitative difference between
unvarnished raw information tracking Jarden’s performance and well-reasoned
opinions about Jarden’s prospects.368 Jarden’s revenue projections for 2016, 2017,
364
Id. at ¶¶29–31.
365
JX 1826 at ¶¶99–100.
366
Id., Figure 17.
367
Id.
368
Id. at ¶¶101–04.
82
and 2018 were 1.0%, 1.7% and 2.6% higher, respectively, than financial analysts’
consensus forecast.369 Jarden’s EBITDA projections for 2016, 2017 and 2018 were
1.3%, 6.6% and 9.0% higher, respectively, than financial analysts’ consensus
forecasts. Jarden’s November Projections incorporated this data but were not
released to the public until March 2016, and thus would not have been incorporated
into the Unaffected Market Price.370 But is this evidence of information asymmetry?
Dr. Hubbard hypothesized the answer is no.371
To test his hypothesis, Dr. Hubbard turned to his event study. The November
Projections were disclosed in the joint proxy in March 2016. If the November
Projections revealed information not previously incorporated in Jarden’s stock price,
Hubbard reasoned, then both Jarden and Newell’s stock price should have
proportionately reflected that information. In other words, if the November
Projections justified more value (according to Dr. Zmijewski substantially more
value), then Newell’s stock price should have increased substantially to reflect that
Newell was acquiring Jarden at less than fair value.372 But, of course, that is not
369
JX 1818 at ¶31.
370
Id.
371
Trial Tr. 1022:21–1023:14 (Hubbard).
372
JX 1826 at ¶¶101–04.
83
what happened; Jarden’s stock price climbed while Newell’s stock price dropped.373
Moreover, Jarden’s April Projections lowered the Company’s financial guidance to
forecasts more in line with the analysts’ earlier projections.374 Dr. Hubbard
persuasively opined that the April Projection’s convergence with the analysts’
forecasts was a strong indication that the difference between the November
Projections (as disclosed in the joint proxy) and the analysts’ projections was not
attributable to unreasonable market pessimism, but instead showed that market
analysts had more accurately estimated Jarden’s 2016 outlook than Jarden’s
management (who may have been motivated by factors other than actual anticipated
results when making their forecasts).375
373
Id. at ¶¶103–04. I acknowledge, and understand, Petitioners’ “tethering” argument, but
I reject it as not supported by the credible evidence. The argument is that the market was
not efficient as of the Merger because, after the announcement of the Merger, “Jarden’s
stock price was tethered to Newell and to the perception of the stockholders of both
companies that there was a large risk that Jarden could not be successfully integrated.”
Pet’rs’ Post-Trial Opening Br. at 60. Newell’s stockholders may have reacted to that risk,
as reflected in the stock’s performance after the announcement, but there is no evidence
that Jarden’s stockholders, or the market, associated that risk with Jarden. See Trial Tr.
1020:12–23 (Hubbard); JX 2514 at 9; JX 1816 at ¶¶184–90.
374
JX 1826, Figures 18, 19.
375
Id. That the November Projections did not really move the needle is not surprising.
They were optimistic, to be sure, but their projected growth was consistent with prior
forecasts, albeit at the top of the range. JX 927 at 1; Trial Tr. 106:1–107:3 (Lillie). They
were also not out of line with the views of several of the many analysts that followed the
Company. See, e.g., JX 1401; JX 1407; JX 1439.
84
The credible evidence reflects no information asymmetry. The market was
well informed and the Unaffected Market Price reflects all material information.
b. The Conglomerate and Minority Discounts
Dr. Zmijewski also criticizes Dr. Hubbard’s Unaffected Market Price analysis
because it does not account for Jarden’s massively diversified portfolio of operating
companies (the conglomerate discount) and does not adjust for embedded agency
costs (the minority discount).376 Here again, Dr. Zmijewski flags the issues but
makes no attempt to quantify their impact, if any.377
As for the conglomerate discount, the evidence does not support that this is
even “a thing,” meaning it is not clear that this notion is accepted within the academy
or among valuation professionals.378 With that said, there is evidence that Jarden’s
unique structure and diversified portfolio did pose valuation challenges. Newell’s
Tarchetti described Jarden as a “fast-changing company” that was difficult to
376
JX 1818 at ¶¶37–39.
377
JX 1826 at ¶¶108–12; JX 2505 (Zmijewski Dep.) 318:23–319:4, 320:8–11.
Dr. Zmijewski’s opinion that the market had not assessed Jarden’s acquisitions of Jostens
and Waddington, as best I can tell, is nothing more than speculation. The fact that the
market reacted poorly to the Jostens acquisition does not mean it did not understand it. Nor
is there credible evidence that the market did not know, or understand, that Jarden had
leveraged up to do the Jostens and Waddington deals.
378
Trial Tr. 1029:3–9 (Hubbard) (“academics differ in opinions on whether there is or isn’t
[a conglomerate discount]”); JX 1826 at ¶111 & n.176 (citing academic commentary
rejecting the notion of a conglomerate discount).
85
appraise, in part, due to its complexity and tendency to grow and evolve at any point
in time.379 Even so, the Company’s high trading volume and the intense scrutiny
paid it by market analysts has convinced me that the market understood Jarden’s
holding company structure as an operative reality, considered the high overhead
costs associated with decentralized management and imputed those factors into
Jarden’s Unaffected Market Price.380
The minority discount, likewise, does not fit here. For a company without a
controlling stockholder, the premise is that the appraiser must consider the conflict
of interest between Company management and a diffuse stockholder base and
account for minority trading multiples.381 Setting aside that Petitioners have offered
no credible evidentiary basis to quantify any minority discount here, I see no basis
to even try given that the foundation for applying the discount has not been laid.
Jarden’s management was well known to stockholders and well known to the
market. But for the Merger, they were not going anywhere as the Company was not
for sale.382 As Dr. Hubbard explained, under these circumstances, Jarden’s agency
379
JX 1779 (Tarchetti Dep.) at 32–33.
380
JX 1826 at ¶¶108–10; Trial Tr. 1029:10-21 (Hubbard); Trial Tr. 335:9–21 (Zmijewski)
(“Q. So the holding company structure of Jarden, whatever its affects may be, were the
operative reality of Jarden. Correct? As of the merger date? A. That’s true.”).
381
JX 2505 (Zmijewski Dep.) at 319:22–320:16; JX 1818 at ¶¶37–39.
382
JX 1778 (Ashken Dep.) 117:10–17; Trial Tr. 378:14–17 (Franklin).
86
costs were embedded in its operative reality and reflected in its Unaffected Market
Price.383
c. Staleness of the Unaffected Market Price
Petitioners also argue that the Unaffected Market Price was stale as of the
Merger Date.384 I disagree. There is no evidence to suggest that Jarden gained value
from the date set for the Unaffected Market Price and the closing of the Merger, or
that the market was deprived of information that might have been perceived as
enhancing value. Indeed, following a period where Jarden had been especially
acquisitive, the Company was experiencing declines in operating income and net
income and management was giving the Board revised, more conservative
projections for 2016.385 The April Projections forecasted reduced revenue growth
and increased working capital investment for FY17–20.386 This is not a case where
the credible evidence reveals that the Unaffected Market Price was demonstrably
below Jarden’s fair value as of the Merger.
**********
383
JX 1826 at ¶¶106–07. See also JX 59, Lawrence A. Hamermesh & Michael L.
Wachter, The Short and Puzzling Life of the “Implicit Minority Discount” in Delaware
Appraisal Law, 156 U. Pa. L. Rev. 1, 2 (2007).
384
JX 1818 at ¶30.
385
JX 1519 at 68; JX 1514 at 2.
386
JX 1562; Trial Tr. 821:6–828:1, 830:7–835:11 (Waldron).
87
After carefully considering the evidence, I find that the Unaffected Market
Price is a reliable indicator of Jarden’s value as a going concern on the Merger Date.
I have given it substantial weight in my assessment of fair value.
C. The Other Market Evidence
As Jarden was negotiating with Newell, it was also pursuing an acquisition of
Jostens. To raise capital for that deal, Jarden initiated a share offering priced at
$49.00 per share.387 At the time, the stock was trading in the mid-$40s.388 When the
market reacted poorly to the Jostens acquisition, and the stock price fell, the Board
believed it needed to send a signal that the Company and its management were
optimistic about Jostens. So it authorized a $50 million stock buyback,389 and it set
the price cap again at $49.00 because, after internal assessments, it believed that
price reflected Jarden’s value.390 Ultimately, Jarden repurchased 276,417 shares on
November 2, 2015, at an average price of $45.96 per share, and another 775,685
shares on November 3, 2015, at an average price of $48.05 per share. 391 This
evidence is by no means dispositive. But it is persuasive evidence that, in the weeks
387
JX 2502.
388
JX 1780 (Franklin Dep.) 201:19–24.
389
Trial Tr. 404:1–9 (Franklin); JX 900.
390
JX 1780 (Franklin Dep.) 241:11–14.
391
JX 900 at 2.
88
leading up to the leak of the merger negotiations, uncluttered by transactional or
forensic incentives, both the Company and the market saw Jarden’s value well below
what Petitioners seek here.
D. Comparable Companies
Both parties’ experts performed comparable companies analyses to estimate
Jarden’s value relative to sets of proposed peer firms. Applying his comparable
companies analysis, Dr. Zmijewski concluded that Jarden’s fair value on the Merger
Date, based on Jarden’s 2016 forecasted EBITDA using the 90th, 75th and 50th
percentiles of his peer set, was $81.44, $70.49 and $66.30, respectively.392 Based
on Jarden’s 2017 forecasted EBITDA, the market multiples based-valuation using
the 90th, 75th and 50th percentiles of his peer set, revealed a per share value of
$77.39, $72.20 and $65.56, respectively.393 For his part, Dr. Hubbard disclaimed
the efficacy of a comparable companies valuation for Jarden, but then performed his
own comparable analysis for the sake of completeness, resulting in a value range of
$40.12 to $55.21 per share.394 Before addressing the experts’ divergent analyses and
conclusions, it is useful to review basic concepts, separated from forensics.
392
Id. at 65.
393
Id. It is not entirely clear to me that Dr. Zmijewski feels as strongly about his
comparable companies valuation of Jarden as Petitioners do. See JX 1828 at ¶8 (“I do not
consider revenue multiples to be reliable to value Jarden . . . .”).
394
JX 1816 at ¶200.
89
1. The Comparable Companies Methodology
As a threshold matter, before a comparable companies multiples analysis can
be undertaken with any measure of reliability, it is necessary to establish a suitable
peer group through appropriate empirical analysis.395 In fact, nearly every text in
the record states that the accuracy of a multiples-based valuation depends entirely
on the existence of comparable peers:
 Holthausen & Zmijewski (JX 242): “While selecting comparable
companies might not appear to be too difficult, we often quickly
conclude that not many, if any, companies are truly comparable to
the company we are valuing for purposes of a market multiple
valuation once we understand all the different dimensions of
comparability and begin to analyze the potential comparable
companies . . . simply selecting close competitors is not sufficient to
ensure the companies are comparable, as we observe a substantial
amount of variation in multiples within an industry.”396
 Koller (JX 2516): “Selecting the right peer group is critical to
coming up with a reasonable valuation using multiples.”397
 Damodaran (JX 2515): “. . . finding similar and comparable firms is
often a challenge, and frequently we have to accept firms that are
different from the firm being valued on one dimension or the other.
When this is the case, we have to either explicitly or implicitly
control for differences across firms on growth, risk, and cash flow
measures.”398
395
JX 242, Holthausen & Zmijewski, Corporate Valuation at 510, 527–30; Trial Tr.
1068:13–15 (Hubbard) (“If you use [a] comparables [analysis], you have to be sure they
are really comparable or you are introducing error yourself.”).
396
JX 242, Holthausen & Zmijewski, Corporate Valuation at 527–29.
397
JX 2516, Koller, Valuation at 345.
398
JX 2515, Damodaran, Investment Valuation at 20.
90
 Berk & DeMarzo (JX 2032): “Of course, firms are not identical.
Thus, the usefulness of a valuation multiple will depend on the
nature of the differences between firms and the sensitivity of the
multiples to these differences.”399
McKinsey recommends beginning the peer group identification process with
the Standard Industrial Classification (“SIC”) or Global Industry Classification
Standard (“GICS”) codes.400 While these codes are a good starting point for
selecting a peer group, the industry-specific company lists they produce require
significant refinement to identify truly comparable firms. 401
To isolate a relevant peer group from a larger industry data set, the appraiser
must identify firms with similar risk profiles, costs of capital, return on invested
capital and growth.402 It is better to have a smaller number of peers that truly
compete in the same markets with similar products than including aspirational or
399
JX 2032, Berk & DeMarzo, Corporate Finance at 296.
400
JX 2516, Koller, Valuation at 345–46.
401
Id. at 346; JX 242, Holthausen & Zmijewski, Corporate Valuation at 528–29.
402
JX 2516, Koller, Valuation at 346. See also JX 2032, Berk & DeMarzo, Corporate
Finance at 710; Damodaran, Investment Valuation at 462 (“A comparable firm is one with
cash flows, growth potential, and growth risk similar to the firm being valued . . . . The
implicit assumption being made here is that firms in the same sector have similar risk,
growth, and cash flow profiles and therefore can be compared with much more
legitimacy”).
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nearly comparable companies.403 In order effectively to narrow down a list of
potential comparables according to growth and risk, the analysis must consider
whether the companies have similar “value drivers” as the target.404
As Dr. Zmijewski described in his text:
[A] company’s product lines, customer types, market segments, types
of operation, and so forth are all important aspects to consider when we
identify comparable companies. Even after all these are taken into
consideration, two companies can be in the same industry yet not be
comparable on all of the characteristics that are important for a market
multiple valuation.405
In addition, the finance literature advises against relying on peers provided by
the target company’s management. This reasoning reflects common sense;
optimistic executives often provide “aspirational peers” rather than companies that
actually compete head-to-head with their firm.406
The importance of selecting a proper peer set in the performance of a proper
comparable companies analysis cannot be overstated. Because this threshold task is
so important, and yet so difficult, the valuation treatises generally view the
403
Id. Trial Tr. 1068:13–15 (Hubbard) (“I mean, it’s really just a restatement of garbage
in, garbage out. If you don’t have genuine comparables, you’re not going to get much out
of the approach.”)
404
JX 242, Holthausen & Zmijewski, Corporate Valuation at 529–30.
405
Id. at 529.
406
JX 2516, Koller, Valuation at 346.
92
comparable companies methodology as inferior to other methodologies: “a key
shortcoming of the comparables approach is that it does not take into account the
important differences among firms,” therefore “[u]sing a valuation multiple based
on comparables is best viewed as a ‘shortcut’ to the discounted cash flow methods
of valuation.”407
If, and only if, a proper peer set can be selected, the next step in the
comparable companies analysis is to select an appropriate multiple and then
determine where on the distribution of peers the target company falls.408 The
Enterprise Value to EBITDA multiples valuation (“EV/EBITDA”) is widely
accepted as the most reliable data set for a comparable companies analysis.409 In this
regard, it appears that the preference is to use forward-looking projections instead of
407
JX 2032, Berk & DeMarzo, Corporate Finance at 296–97 (emphasis supplied).
See Trial Tr. 1068:13–15 (Hubbard) (“Given the difficulty of finding comparables for this
company in particular, this is a methodology that I used for completeness and for the record
for the Court, but it would not be a principal method I would advocate that the Court center
on.”). See also JX 1826 at ¶17.
408
JX 1816 at ¶194; JX 2516, Koller, Valuation at 335 (“Empirical evidence shows that
forward-looking multiples are indeed more accurate predictors of value than historical
multiples are.”).
409
The EBITDA multiples valuation is generally considered more reliable than a revenue
multiples approach because the EBITDA approach accounts for firms’ operating efficiency
and is not affected by leverage differences between firms. JX 2032, Berk & DeMarzo,
Corporate Finance at 710.
93
a firm’s historical earnings data.410 Forward-looking multiples are deemed more
consistent with the principles of valuation, especially in the context of estimating the
present value of a company as a going concern.411 Projections generally exhibit less
variation across peer companies compared to historical data, and although long-term
earnings projections are favored, one- and two-year forecasts are reliable when they
uniformly represent the firm’s long-term prospects.412
With these generally accepted features of a proper comparable companies
valuation in mind, I turn to the experts’ comparable companies valuation of Jarden.
410
Id. at 710, 714; JX 2516, Koller, Valuation at 334–36; JX 242, Holthausen & Zmijewski,
Corporate Valuation at 532.
411
JX 2516, Koller, Valuation at 334; Trial Tr. 159:7–14 (Zmijewski) (“Well, value is
derived from what’s going to happen or what you expect to happen in the future, so looking
forward is always better than looks backward. . . . If historical information doesn’t predict
the future, it’s not useful at all. It’s only the forward-looking information that’s useful.”).
412
Id. at 335–36.
94
2. The Experts Attempt But Fail to Select a Valid Peer Set
Both experts developed their peer set by drawing from the peer set developed
by Barclays in its valuation work for the Company with regard to the Merger. They
then made adjustments based on their own sense of comparability. For his part,
Dr. Zmijewski conceded that he “did not do any qualitative assessment of any
inherent differences between the Jarden business and the business of its peers
companies.”413 Giving such deference to the peer set selected by management,
without any meaningful, independent assessment of comparability, is not useful and,
frankly, not credible.414 Dr. Zmijewski made no mention of GICS or SIC codes in
413
Trial Tr. 294:16–20 (Zmijewski); JX 1818 at ¶55 (“I base my set of comparable
companies on those companies identified by Jarden’s CEO, Mr. Lillie and the comparable
companies used by Jarden’s financial advisor, Barclays.”); JX 1828 at ¶¶68–70. I note it
is not clear that Dr. Zmijewski drew his peer set from the right Barclays list. The list
endorsed by management was prepared by Barclays’ equity analyst team while
Dr. Zmijewski drew his list from the one prepared by Barclays’ investment banking team.
Trial Tr. 264:23–268:14 (Zmijewski). Moreover, I find Dr. Zmijewski’s narrow focus on
the Barclays list as the sole basis for his comparable companies peculiar given the extent
to which he is critical of the Barclays Fairness Opinion. See JX 1818 at ¶¶1–42; JX 1826
at ¶¶46–47.
414
JX 1826 at ¶17; JX 2516, Koller, Valuation at 346; JX 242, Holthausen & Zmijewski,
Corporate Valuation at 511 (“The key issues in valuing companies using market multiples
are choosing appropriate comparable companies that would be priced similar to the
company being valued and the making adjustments to the financial numbers used so that
distortions to the valuation do not arise from accounting differences or certain events that
can affect the financial statements in ways that render the numbers less useful for a market
multiple valuation.”). Dr. Zmijewski’s decision apparently to ignore Barclays’
qualification that its peer set would have to be adjusted to account for qualitative
differences between Jarden and the peer set was never adequately explained. Trial Tr.
294:24–296:24 (Zmijewski); JX 1565 at 127–28; JX 1205 at 11, 17.
95
his report and there is no indication that he employed them, or any other objective
criteria, in his selection of a peer set.415
Failing to ground his peer set in any objective methodology is all the more
problematic given Dr. Zmijewski’s apparent willingness to adjust the
management/Barclays’ peer set when it suited him to yield a higher valuation for
Jarden. As stated in his report, Dr. Zmijewski excluded Kimberly-Clark Corporation
and Colgate-Palmolive Company, which were both included in the Barclays list,
because both companies maintain a significantly larger market capitalization than
Jarden and the other comparables.416 The notion that a company with a very large
market capitalization is not a true peer of a company with a relatively smaller market
capitalization has a certain lay appeal. But Dr. Zmijewski’s own text makes clear
that “there is no theoretical model we are aware of that includes size as a determinant
of market multiples.”417 It may well be that Kimberly-Clark and Colgate-Palmolive
are not “comparables” for Jarden, but the absence of any meaningful analysis or
415
JX 1816 at ¶¶194–96.
416
JX 1818 at ¶57.
417
JX 242, Holthausen & Zmijewski, Corporate Valuation at 525. Given his willingness
to defer to peer sets prepared by others, it is surprising that Dr. Zmijewski failed to
reconcile his exclusion of Kimberly-Clark and Colgate-Palmolive from his peer set with
the fact that those companies were included in the peer sets developed by several of the
analysts who followed Jarden. JX 1826 at ¶¶43–45.
96
explanation in Dr. Zmijewski’s report leaves the Court with no way to determine if
the exclusion was arbitrary or principled.418
Before addressing Dr. Hubbard’s peer set, it must be emphasized that
Dr. Hubbard does not sponsor the comparable companies methodology as the
appropriate means by which to assess Jarden’s fair value.419 His preferred
methodology is DCF.420 Nevertheless, Dr. Hubbard engaged with Dr. Zmijewski on
comparable companies and, not surprisingly, reached a very different conclusion
after doing so.
Dr. Hubbard assessed Jarden’s peers by using GICS codes.421 He then cited
to over a dozen industry analyst reports that corroborated his peer set, which
included companies that were larger and smaller than Jarden and companies that
418
Dr. Hubbard flagged Dr. Zmijewski’s size discrepancy in his rebuttal report.
As Dr. Hubbard noted, although the market capitalization of Kimberly-Clark and Colgate-
Palmolive were, respectively, 4.6 and 6.0 times larger relative to Jarden, three of
Dr. Zmijewski’s selected peers were correspondingly smaller than Jarden. JX 1826
at ¶¶40–43. WD-40 Company, Energizer Holdings and Helen of Troy were 7.3, 3.9 and
3.7 times smaller than Jarden, respectively, yet each of these firms remained in
Dr. Zmijewski’s peer set. Id. Dr. Zmijewski provided no credible justification for the
disparate, asymmetrical treatment of large and small companies in his peer set. Id.
See also Trial Tr. 935:6–936:17 (Zenner); JX 1827 at ¶¶45–47 (credibly addressing the
fallacy created by Dr. Zmijewski’s inconsistent approach to exclusion and inclusion of
comparables based on size).
419
JX 1826 at ¶¶15–17.
420
Trial Tr. 1103:21–24 (Hubbard).
421
JX 1816 at ¶195.
97
were not on the Barclays list.422 Once he completed his peer set, however,
Dr. Hubbard emphasized his view that Jarden’s unique and highly diversified
portfolio of businesses, its aggressively acquisitive growth strategy and its holding
company structure made the selection of a valid peer set for a comparable companies
analysis a fundamentally flawed exercise since Jarden “lack[ed] truly comparable
peers.”423
After carefully reviewing the evidence, I am convinced that Dr. Hubbard is
correct—Jarden had no comparable peers, at least not as developed in the credible
evidence presented at trial. Under these circumstances, the fact that Dr. Zmijewski
engaged in no real analysis when developing his peer set is not surprising.424
Having found that the first, and most important, element of a proper
comparable companies analysis is lacking in this record, I give the experts’
422
JX 1826 at ¶¶38–35. Dr. Hubbard’s peer set included firms with core business lines
comparable to Jarden’s core business, namely housewares, household appliances,
consumer durables, apparel and personal products industry actors. JX 1816 at ¶195.
423
JX 1826 at ¶17.
424
JX 1818 at ¶¶55–57. As noted, Dr. Zmijewski offered no empirical analysis of Jarden’s
growth, risk, or value drivers as compared to any of the firms in his peer group. Id. But see
JX 242, Holthausen & Zmijewski, Corporate Valuation at 529–30 (“. . . simply selecting
close competitors is not sufficient to ensure the companies are comparable . . . . Once we
identify competitors, we analyze both the company being valued and the competitors with
respect to characteristics that determine the variation in market multiples—such as future
growth prospects, risk future profitability, and future expected investment requirements.”).
98
comparable companies conclusions no weight in my fair value determination.425
Accordingly, I move next to the parties’ competing DCF valuations.
E. Discounted Cash Flow
As I approach the parties’ fantastically divergent conclusions following their
DCF analyses, I am mindful of our Supreme Court’s admonition that, tempting as it
is to select the entirety of one expert’s analysis over the other’s, my review of the
experts’ opinions must not be presumptively binary:
425
The party sponsoring a comparable companies valuation has the burden of proving that
the target has validly assessed peers. See In re Appraisal of SWS Gp., Inc., 2017
WL 2334852, at *10 (Del. Ch. May 30, 2017). Petitioners have not met that burden.
In reaching this conclusion, I am mindful that Jarden, itself, employed a comparable
companies analysis, among other approaches, when it performed internal valuations.
But Petitioners have not proffered those valuations as evidence of Jarden’s fair value.
Instead, they have presented Dr. Zmijewski’s version of a comparable companies analysis,
which differed substantially from the Company’s valuations. Accordingly, they had the
burden of proving that the Zmijewski comparable companies valuation was a reliable
indicator of fair value. For reasons I have explained, I have determined they have not
carried that burden. In other words, the fact the Company employed comparable
companies analyses in the past to value Jarden might be evidence that the methodology can
work for Jarden, but the appraiser still has to apply the methodology in a principled way.
That principled application of the methodology is what is lacking here. As a final note, for
what it’s worth, I did find Dr. Zmijewski’s approach to selecting a proper multiple for
Jarden to be more credible than Dr. Hubbard’s approach, particularly given that he focused
his multiples analysis on Jarden’s 2016 and 2017 projected earnings, as prescribed in the
valuation texts, while Dr. Hubbard based his multiples analysis on Jarden’s historical
EBITDA and revenue data. Compare JX 1818 at ¶¶74–76 (Zmijewski) with JX 1816 at
¶¶194–200. See JX 2032, Berk & DeMarzo, Corporate Finance at 710, 714; JX 2516,
Koller, Valuation at 334–36; JX 242, Holthausen & Zmijewski, Corporate Valuation at
532 (expressing preference for using forward-looking projections over a firm’s historical
earnings data when determining a proper multiple). Of course, this observation is worth
little given the lack of credible evidence that Dr. Zmijewski created a proper peer set.
99
The role of the Court of Chancery has evolved over time to the present
requirement that the court independently determine the value of the
shares that are the subject of the appraisal action. Even though today a
Chancellor may be faced with wildly divergent values presented by the
parties’ experts, the acceptance of one expert’s value, in toto, creates
the risk that the favored expert will be accorded a status greater than
that of the now eliminated [expert appraiser]. This is not to say that the
selection of one expert to the total exclusion of another is, in itself, an
arbitrary act. The testimony of a thoroughly discredited witness, expert
or lay, is subject to rejection under the usual standards which govern
receipt of such evidence. The nub of the present appeal is not merely
that the Chancellor made an uncritical acceptance of the evidence of
SAP’s appraiser but that he announced in advance that he intended to
choose between absolutes.426
As I discuss below, in many important respects, the experts have utilized very
different inputs in their DCF models leading to a substantial delta between their
ultimate DCF valuations—Dr. Zmijewski’s DCF valuation produced a range of
$70.36 and $70.40 per share;427 Dr. Hubbard’s DCF valuation is $48.01 per share.428
The number and degree of their differences has necessitated the lengthy discussion
that follows. For reasons I explain, I have adopted some of both expert’s inputs to
426
Gonsalves v. Straight Arrow Publ’rs, Inc., 701 A.2d 357, 361 (Del. 1997). See also
M.G. Bancorp., Inc. v. Le Beau, 737 A.2d 513, 525–26 (Del. 1999) (reiterating the
Chancellor’s role “as an independent appraiser” and observing that “[i]n discharging its
statutory mandate, the Court of Chancery has the discretion to select one of the parties’
valuation models as its general framework or to fashion its own”).
427
Dr. Zmijewski made two DCF calculations: an industry-specific DCF, which
incorporated his comparable companies analyses (“Composite DCF”), and a Jarden-
specific DCF (“Jarden-Specific DCF”). JX 1818 at ¶¶70–72.
428
JX 1816 at ¶149; JX 1831 at ¶3.
100
construct my own DCF model. Based on that model, my DCF valuation is $48.13
per share.
I begin by noting where the experts agree. First, they agree that DCF is a widely
used and industry-accepted means of calculating the value of a corporation as a going
concern. Dr. Hubbard likes DCF best to value Jarden, while Dr. Zmijewski uses his
DCF valuation to corroborate his comparable companies analysis.429 Both experts
used the Weighted Average Cost of Capital (“WACC”) method to determine the
appropriate discount rate. Both agreed that the November Projections were the
appropriate cash flow forecasts upon which their DCF models should be based. Both
largely agreed on the required net investment to drive growth through the year 2020,
which is the last year included in the November Projections. And both agreed that
the Capital Asset Pricing Model (“CAPM”) was appropriate to calculate Jarden’s
Cost of Equity. Because I see no basis in the evidence to depart from these
stipulations, I adopt them without further analysis.
The bulk of the experts’ disagreements relate to how Jarden will perform in
the terminal period beyond the November Projections’ explicit forecasts.430
I address and do my best to resolve each of the disagreements below.
429
Pet’rs’ Pre-Trial Br. at 33.
430
JX 2514 at 14. Indeed, as Jarden points out, “over 83% of value in each of [Dr.]
Zmijewski’s DCFs is from the terminal period.” Resp’t Jarden Corp.’s Answering Post-
Trial Br. at 60.
101
1. Jarden’s Future Cash Flows
As noted, both experts used the November Projections for their DCF
analyses.431 Even so, both made different adjustments to the projections to calculate
Jarden’s unlevered free cash flows.432 After reviewing the adjustments, I find that
their adjustments for EBITDA, depreciation and amortization, and Dr. Zmijewski’s
adjustment for projected taxes, are appropriate.433 These adjustments yield the
following for Jarden’s Net Operating Profits after taxes (“NOPAT”):434
FY2016-E FY2017-E FY2018-E FY2019-E FY2020-E
$869 million $967 million $1,062 million $1,146 million $1,235 million
Using Jarden’s NOPAT, I have calculated Jarden’s unlevered free cash flows
for each projection year by: (1) adding back depreciation; (2) deducting Jarden’s
year-over-year change in working capital; and (3) deducting Jarden’s capital
expenditures. These adjustments track those made by Dr. Hubbard (albeit at a 35%
431
JX 1565 at 143.
432
JX 1816 at ¶¶75–78, Ex. 9; JX 1818 at ¶51, Ex. VI-7A.
433
I adopt Dr. Zmijewski’s 35.0% marginal tax rate for Jarden because Dr. Hubbard made
no effort to support his effective tax rate of 36.3%. JX 1816 at ¶¶96–97; JX 1828 at ¶¶9–
11. A 35% marginal tax rate comports with the tax rates applied by Barclays, Centerview,
Goldman Sachs and Jarden management—all of which set Jarden’s marginal tax rate
between 33% and 35%. JX 1828 at ¶¶9–10, 24.
434
JX 1816 at ¶¶75–78, Ex. 9; JX 1818 at ¶51, Ex. VI-7A.
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marginal rate),435 and yield the following as Jarden’s unlevered free cash flow in
each of the projected years:
FY2016-E FY2017-E FY2018-E FY2019-E FY2020-E
$572 million $701 million $783 million $853 million $927 million
2. Jarden’s Terminal Value
Jarden’s terminal value is the value of the Company beyond the discrete
projection period as defined in a discounted future earnings model (“Terminal
Value”).436 In the context of the experts’ DCF analyses for Jarden, Terminal Value
refers to Jarden’s estimated value taking into account all future cash flows at the end
of the November Projection’s explicit forecast period assuming a stable growth rate
in perpetuity.437
Dr. Zmijewski’s Terminal Value calculation and accompanying analysis
mostly relies on his comparable companies analysis,438 which I have found not
435
JX 1816 at ¶¶75–78, Ex. 9. I track Dr. Zmijewski’s free cash flows analysis with respect
to the tax rate because I agree with him that Dr. Hubbard’s approach to estimating Jarden’s
tax rate in the projected years is not adequately supported. JX 1828 at ¶¶9–11.
436
JX 2032, Berk & DeMarzo, Corporate Finance at 256.
437
Id. (“[W]e estimate the value of the remaining free cash flow beyond the forecast
horizon by including a[] . . . one-time cash flow at the end of the forecast horizon . . . .
[The terminal value] represents the market value (as of the last forecast period) of the free
cash flow . . . at all future dates.”).
438
Trial Tr. 300:17–24 (Zmijewski) (“I paired the comparable companies risk assessment
with a lower growth rate because the comparable companies . . . were expected to perform
103
reliable for reasons already stated. Dr. Hubbard used a formula developed by
McKinsey & Co. to calculate Jarden’s Terminal Value. The McKinsey formula
involves dividing the value of cash flow in the Terminal Period by the difference
between the Discount Rate (the rate at which future cash flows are discounted to
present) and Jarden’s Terminal Growth Rate.439 According to Dr. Hubbard, this
formula generally provides that “all else remaining equal,” a company’s terminal
value is larger when cash flow is high, and the discount rate is low or the growth rate
is high.440 The “all else remaining equal” caveat, Hubbard explains, assumes that
increased growth will be supported by increased investment which, in turn, reduces
cash flow.441 In other words, increasing investment in the Terminal Period will
proportionately reduce Jarden’s cash flow and thereby lower Jarden’s measurable
value in the Terminal Period. To calculate Jarden’s Terminal Value, it is necessary
to estimate its Terminal Growth Rate, Terminal Investment Rate and Discount Rate.
at a lower growth rate. And for the Jarden-specific risk assessment, I used the midpoint of
the expected inflation and expected GDP growth.”)
439
JX 1816 at ¶¶84–85.
440
Id.441
Id.104
a. Terminal Growth Rate
“Of all the inputs into a discounted cash flow valuation model, none creates
as much angst as estimating the [terminal] growth rate. Part of the reason for it is
that small changes in the [terminal] growth rate can change the terminal value
significantly[.]”442 The terminal growth rate (“TGR”) describes Jarden’s long-term
growth in revenue, earnings and cash flow in the Terminal Period, which includes
the years starting in 2021 and onward. Since acquisitions are typically not
considered in organic growth rate calculations,443 a key question is whether Jarden’s
several tuck-in acquisitions should be included in the TGR.444
Both experts measure Jarden’s TGR based on estimates of U.S. nominal GDP
growth and long-term economic inflation. This method makes sense and is generally
442
JX 2515, Damodaran, Investment Valuation at 308.
443
Trial Tr. 930:2–9 (Zenner) (“So it’s a little bit like saying I baked gluten-free bread for
you, but I added some wheat because the consistency is going to be better. So it’s kind of
saying I’m providing organic growth, but I’m adding some tuck-in transactions.”).
444
For Jarden, “tuck-ins” were defined as an acquisition where the target company’s last
twelve months (“LTM”) of revenue was less than 1.0% of Jarden’s LTM revenue. JX 1828
at ¶¶46–47.
105
accepted.445 The experts disagreed, however, as to what forecast sources provide the
most useful data.446
Dr. Zmijewski derived a 2.1% projected long-term inflation rate from four
estimates of U.S. economic outlooks and an expected nominal GDP growth rate of
4.3% from three projections of U.S. GDP growth.447 Based on these projections,
Dr. Zmijewski applied the midpoint of 3.2%, which he asserts is a reasonable long-
term growth rate for Jarden.448 Dr. Zmijewski’s TGR analysis included an
assessment of the Company’s acquisition-driven and organic growth, and the results
showed Jarden’s historic organic growth rate to be roughly 3.1%.449
As corroboration, Dr. Zmijewski emphasized that key players in the Merger
projected that Jarden would grow between 2.0% to 4.0% annually in perpetuity.450
445
JX 2515, Damodaran, Investment Valuation at 306–07 (“no firm can grow forever at a
rate higher than the growth rate of the economy in which it operates”); JX 2516, Koller,
Valuation at 122.
446
JX 1816 at ¶¶87–92; JX 1818 at ¶¶52–53.
447
JX 1818 at ¶¶52–53.
448
Id. at ¶¶53–54.
449
JX 1828 at ¶¶46–47.
450
JX 1818 at ¶¶52–54, Ex. VI-2. Polk estimated Jarden would grow at 3.0% (mirroring
U.S. GDP growth), while Bain forecasted Jarden’s growth to be between 2.0% and 4.0%.
Id.106
For his Composite DCF calculation, Dr. Zmijewski used the 2.1% projected
U.S. inflationary growth rate as Jarden’s TGR.451 Dr. Zmijewski explained he used
U.S. inflation as Jarden’s TGR as a “conservative” measure because the Composite
DCF relies on calculations supplemented by comparable companies data, and
Jarden’s long-term growth was estimated to be much higher than any of the
companies in Dr. Zmijewski’s peer set.452 For his Jarden-Specific DCF analysis,
Dr. Zmijewski set Jarden’s TGR at 3.2%, which he suggested conforms to the other
Jarden-only measurements and calculations in that valuation.453
Dr. Hubbard’s report set Jarden’s TGR at 2.5% based on several inflation and
nominal GDP growth forecasts for the U.S. economy and the European Union’s
Eurozone.454 He noted that his TGR comports with the TGR utilized by Goldman
Sachs and Centerview in advising Newell, both of which used a TGR of 2.0% in
their valuations of Jarden.455 He also pointed to analyst reports by Deutsche Bank
and RBC Capital that estimated Jarden’s TGR at 1.5% and 2.5%, respectively. 456
451
Id. at ¶¶67–69.
452
Id.453
Id. at ¶¶70–72.
454
JX 1816 at ¶¶86–92.
455
Id. at ¶¶89–90, Figure 20.
456
Id. at ¶¶89–92, Ex. 5A.
107
Finally, he noted that his TGR is consistent with Jarden’s historic organic growth,
which he determined to be 2.2% annually.457 With all these factors considered,
Dr. Hubbard concluded that his 2.5% TGR falls squarely between his estimated
range of inflation and nominal GDP and aligns well with Jarden’s historic organic
growth when fairly adjusted for “tuck-in” acquisitions.458
Dr. Zmijewski took issue with Dr. Hubbard’s adjustments for “tuck-ins”
because the adjustments result in double counting certain companies that did not fit
Jarden’s definition of a “tuck-in.”459 Dr. Hubbard conceded this error, revised his
analysis and found Jarden’s organic, non-acquisitive growth rate to be 3.2%
annually.460 Despite his upward revision to Jarden’s historic organic growth,
Dr. Hubbard did not change his 2.5% TGR estimate.461
Jarden’s “tuck-in” acquisitions, although relatively small in scale, are
acquisition-driven growth, not organic growth.462 Accordingly, Dr. Hubbard’s
457
JX 1826 at ¶¶32–34, Figure 6. Dr. Hubbard maintains that the Company’s 3.0% to 5.0%
growth projections in the years following 2015 do not agree with its 2.2% historic organic
growth because management incorrectly failed to account for “tuck-in” acquisitions. Id.;
JX 1816 at ¶¶90–92.
458
JX 1816 at ¶¶90–92, Ex. 5A; JX 1826 at ¶¶32–34, Figure 6.
459
JX 1828 at ¶¶46–48.
460
Trial Tr. at 1116–18 (Hubbard); JX 1831 at ¶8.
461
JX 1831 at ¶8.
462
JX 1826 at ¶32 (“[I]n recent history, tuck-ins contributed approximately 1.8 percentage
points to the “organic” growth reported by management, indicating that Jarden would need
108
attempt to account for “tuck-in” acquisitions when estimating Jarden’s TGR is well
taken. Dr. Hubbard’s reluctance, however, to acknowledge the impact of his organic
growth rate miscalculation on his estimate of Jarden’s TGR is not. 463 Moreover,
considering Dr. Hubbard’s revised 3.2% historic organic growth rate in light of his
economic research supporting long-run inflation in the range of 2.0% annually, and
nominal GDP growth in the range of 4.07% annually, with a midpoint of roughly
3.04%,464 Dr. Hubbard’s 2.5% TGR is not supported.
Dr. Zmijewski calculated Jarden’s historic organic growth rate to be 3.1%.465
His economic research supported U.S. long-run inflation at 2.1% annually and
nominal GDP growth at 4.3% annually.466 And his estimates are within one- or two-
tenths of a percentage point of Dr. Hubbard’s. The midpoint of each experts’
inflation and GDP estimates is approximately 3.1%, which aligns with
Dr. Hubbard’s 3.2% revised historic organic growth rate and Dr. Zmijewski’s 3.2%
midpoint TGR in his Jarden-Specific DCF.467 The literature recommends a
to continue tuck-in acquisitions in order to achieve the five percent growth in the Proxy
Projections.”).
463
Trial Tr. at 1116–18 (Hubbard); JX 1831 at ¶8.
464
JX 1816 at ¶¶86–90.
465
JX 1828 at ¶¶46–48.
466
JX 1818 at ¶¶52–53.
467
I note that the literature cautions against relying on comparable companies when
estimating terminal value because inconsistencies in projected growth rates between the
109
conservative approach to estimating long-term growth rates for a DCF valuation, in
recognition that many companies experience cyclical growth in relation to the
overall economy.468 Jarden was considered a GDP growth business.469
Based on these factors, and the credible evidence in the trial record, I apply a
3.1% TGR. In my view, this reflects the most credible aspects of the experts’
analyses and comports with the most persuasive view of Jarden’s historic growth.
b. Terminal Investment Rate
The experts’ disagreement over the terminal investment rate (“TIR”) accounts
for 87% of the disparity in their DCF valuations.470 In other words, of the $22.39
difference between Dr. Hubbard’s DCF per share value of $48.01 and
Dr. Zmijewski’s DCF per share value of $70.40, $19.56 is attributable to the
disagreement over Jarden’s TIR. After carefully considering the experts’ analyses
of TIR, and exposing what I believe to be flaws in both, I have determined that an
appropriate TIR for Jarden is 27.75%.
target company and those of the peer group can either overvalue or undervalue the target
business. JX 242, Holthausen & Zmijewski, Corporate Valuation at 212.
468
Trial Tr. 215:20–216:17 (Zmijewski); JX 242, Holthausen & Zmijewski, Corporate
Valuation at 216–17.
469
JX 1818 at ¶¶52–53.
470
JX 1816 at ¶¶149–150; JX 1818 at ¶¶70–72; JX 1831 at ¶3.
110
The disagreement between the experts boils down to whether Dr. Hubbard
improperly relied upon accounting theory when calculating TIR.471 Dr. Zmijewski’s
approach to Jarden’s TIR aligns, in concept, with the Bradley-Jarrell Plowback
Formula, which provides, in broad terms, that the rate of reinvestment must be
measured by what is realistically required to drive real growth.472 Real growth,
under the plowback paradigm, is measured by the delta between the company’s
growth rate and inflationary growth, which is driven by the greater economy and not
cash reinvestment.473 In other words, as Jarden’s growth slowed over time and
became steadier, the Company required less capital expenditure to drive real growth
because a greater percentage of its overall growth was driven by inflation and
broader economic factors. According to Dr. Zmijewski, because Jarden was a
steady-growth company that expected lower growth in the Terminal Period, it
required a much lower TIR, which he calculated at only 4.9%.474
471
Trial Tr. 195:18–20 (Zmijewski) (“He’s using accounting data as if it were economic
concepts. That doesn’t work. And so that’s my major disagreement with him.”); Trial
Tr. 197:14–17 (Zmijewski) (“These are all economic concepts. They’re not––you can’t
sort of say here’s an accounting number and it matches this. These are economic concepts,
not accounting concepts”).
472
JX 63; JX 242, Holthausen & Zmijewski, Corporate Valuation at 235–37.
473
Id.; JX 1828 at ¶¶37–38.
474
JX 1828 at ¶¶34–35, 45. Dr. Zmijewski never expressly sets his TIR at 4.9%, but
implicitly determines that net investment in 2021 and onward will equal $60 million, or
approximately 4.9% of operating profits. JX 1826 at ¶¶54–55, 62, 66–67, Figure 14.
Dr. Zmijewski also assumed that depreciation will equal capital expenditures in the
Terminal Period, and that Jarden’s cash investment required to drive terminal growth will
111
Dr. Hubbard calculated TIR by applying a formula from McKinsey & Co.475
The McKinsey formula posits that a company’s return on invested capital (“ROIC”)
should converge towards its WACC over time.476 The formula rests on the premise
that a company operating in a competitive industry will not “have both high and
rising forever returns on invested capital.”477 Applying the McKinsey formula,478
Dr. Hubbard used 2.5% as his TGR and 7.38% as his WACC/ROIC, yielding a TIR
of 33.9%.479
Dr. Zmijewski expressed four principal criticisms of Dr. Hubbard’s
application of the McKinsey formula.480 First, according to Dr. Zmijewski,
Dr. Hubbard incorrectly assumes that any new investment Jarden made starting in
grow coequally with Jarden’s other financial metrics. JX 1818, Ex. VI-6A (Dr. Zmijewski
made some adjustments to the historical financial data such that normalized depreciation
is equal to normalized capital expenditures of $308 million).
475
Trial Tr. 1045:21–1046:2 (Hubbard).
476
JX 1816 at ¶94.
477
Trial Tr. 1055:16–18 (Hubbard).
478
IR = g/RONIC, where g is the terminal growth rate and RONIC is the return on new
invested capital. JX 1816 at ¶94; JX 2516, Koller, Valuation at 31; JX 2515, Damodaran,
Investment Valuation at 312–14.
479
JX 1816 at ¶94. As discussed in more detail below, Dr. Hubbard calculates WACC as
follows: Jarden’s capital structure weights 36.1% debt and 63.9% equity, coupled with a
cost of debt (after tax) of 3.20% and a cost of equity of 9.74%, results in a WACC of 7.38%.
JX 1816 at ¶128, Ex. 15.
480
Trial Tr. 196:9 (Zmijewski) (“Well, I have four issues.”).
112
2021 would not create any value.481 Second, Dr. Zmijewski believes Dr. Hubbard
improperly defined investments to include only working capital and capital
expenditures, which, according to Dr. Zmijewski, is the accounting definition of
investments (meaning “what you put on a balance sheet”) that does not account for
real world economics.482 In other words, Dr. Hubbard’s definition of investment
excludes research and development, advertising and human capital expenditures that
would create value for Jarden in years beyond 2021.483 Third, Dr. Hubbard’s
definition of net investment as investment above depreciation is, again, an
accounting definition that does not fit when calculating TIR.484 Fourth, Dr. Hubbard
improperly calculated WACC by “using accounting rates of return” instead of
“economic rates of return,” which do “not measure the same thing.”485
Dr. Hubbard’s testimony that, in competitive industries, the return on new
invested capital should equal the company’s WACC was credible, and it is supported
by the valuation treatises.486 Although I found credible Dr. Hubbard’s well-reasoned
481
Trial Tr. 196:11–16 (Zmijewski).
482
Trial Tr. 197:19–198:17 (Zmijewski).
483
Trial Tr. 198:7–15 (Zmijewski).
484
Trial Tr. 198:18–199:6 (Zmijewski).
485
Trial Tr. 199:7–11 (Zmijewski).
486
Trial Tr. 1046:11–1049:23 (Hubbard); JX 2516, Koller, Valuation at 102, 250–56;
JX 2515, Damodaran, Investment Valuation at 291, 299–300.
113
premise that companies like Jarden cannot maintain growth without sufficient
investment to drive growth above inflation over time, his relatively high TIR raises
at least yellow flags. At first glance, the empirical analysis Dr. Hubbard undertook
to support his 33.9% TIR appears reasonable, particularly given Jarden’s historic
investment rates, which averaged roughly 26.9% of comparable growth over six
years.487 But why study six years here when Dr. Hubbard’s TGR estimation was
premised on five years of Jarden’s historic growth?488 By including the sixth year,
2010, in his calculation, Dr. Hubbard was able to reach a significantly higher number
for Jarden’s historical average growth. After excluding the 2010 investment rate of
64.3%, Jarden’s five-year average investment rate is 21.6%.
In view of Jarden’s five-year 21.6% average historic investment rate,
Dr. Zmijewski’s 4.6% TIR is too low; it unreasonably assumes rising ROIC for more
than 40 years into the Terminal Period, unreasonably assumes all new investment in
the Terminal Period will be comprised entirely of working capital, and is based on a
methodology that conflicts with the valuation goal of striking a balance between
investment and growth.489 The November Projection’s forecast of net investment in
487
JX 1816 at ¶¶93–95, Ex. 10A; JX 1826 at ¶¶54–61.
488
JX 1816, Exs. 5A–5D (compare Ex. 10A starting at FY10 with Exs. 5A, C, D starting
at FY11).
489
Trial Tr. 1055:14–18 (Hubbard) (“I just don’t know of firms and industries that have
both high and rising forever returns on invested capital.”); Trial Tr. 1051:12–16 (Hubbard)
(“you can’t simply change your growth, particularly your real growth, which is what is
114
2021 at 9.8%, likewise, stands out as low relative to Jarden’s five-year average
investment rate. The midpoint of Dr. Hubbard’s 33.9% TIR and Jarden
management’s projected 9.8% TIR is roughly 21.8%. With a calculated TGR of
3.1%, which coincides with Jarden’s historic organic growth rate, the appropriate
TIR should reflect Jarden’s historic investment rate but account for a slight increase
to accommodate sustained growth in the Terminal Period. The credible evidence, in
my view, supports a TIR for Jarden of 27.75%.490
c. Jarden’s Weighted Average Cost of Capital/Discount Rate
As previously stated, both experts’ DCF models used Jarden’s WACC as the
input for the Discount Rate in the DCF formula.491 The Discount Rate converts
Jarden’s future cash flows from the November Projections to present value as of the
Merger Date.492 WACC reflects Jarden’s cost of equity and debt financing and the
being done in this experiment, and not have any additional investment”); JX 2514 at 21
(a graph depicting the dramatically outsized ROIC implicated by Dr. Zmijewski’s TIR);
JX 2516, Koller, Valuation at 19; JX 2515, Damodaran, Investment Valuation at 302;
JX 2032, Berk & DeMarzo, Corporate Finance at 711.
490
This sets the TIR at the midpoint between Dr. Hubbard’s TIR of 33.9% and Jarden’s
historic average investment rate of 21.6%. It also assumes a ROIC for Jarden of 11.2%,
which is reasonable given Jarden’s innovative and highly acquisitive growth strategy and
a WACC of 6.94% (as discussed below). JX 1828 at ¶39.
491
Trial Tr. 1066:21–23 (Hubbard) (“Q. And if we could, did you estimate the weighted
average cost of capital for purposes of your DCF analysis? A. I did. Both Professor
Zmijewski and I tendered estimates of the weighted average cost of capital.”); JX 1816
at ¶¶98–129; JX 1818 at ¶¶65–66.
492
JX 1816 at ¶¶98–99.
115
relative weight of each in Jarden’s capital structure.493 Given that a DCF valuation
is meant to calculate Jarden’s value as a going concern, the components relied upon
to calculate WACC should represent Jarden’s prospective outlook.494 The experts
agreed on one of the relevant inputs to calculate Jarden’s WACC, the risk-free rate
of return. They differed, however, in their respective estimates of Jarden’s capital
structure, beta, equity risk premium, and whether a size premium was appropriate.495
I address each issue below.
The application of a discount rate to financial projections converts the target
company’s future income stream at its expected opportunity cost of capital to its
present value.496 A company’s WACC represents the cost (to the company) of
financing its business operations; it comprises the weighted average of the
company’s cost of debt and equity:497
493
Id.; JX 1818 at ¶¶46–49; Trial Tr. 190:1–3 (Zmijewski) (“[WACC] is a standard
calculation. You calculate the equity costs of capital, the after-tax debt cost of capital. You
weight those two.”).
494
Id.; JX 2516, Koller, Valuation at 295–97.
495
Trial Tr. 244:2–6 (Zmijewski) (“[W]e have the same risk-free rate. We have a different
equity risk premium, a slightly different beta. He doesn’t use a size premium. I do. So
we have some differences in our calculations here.”).
496
JX 1818 at ¶68; JX 1816 at ¶98; JX 2516, Koller, Valuation at 269.
497
JX 1818 at ¶49; JX 2516, Koller, Valuation at 269–72.
116
E D
WACC = (requity × ) + (rdebt × × (1 - t))
V V
where:
requity = cost of equity capital
E = market value of the company’s equity
rdebt = cost of debt capital
D = value of the company’s debt
V=E+D = total value of the company’s equity and debt
t = marginal tax rate
i. Jarden’s Capital Structure
A company’s capital structure indicates what percentage of its activities is
financed by debt and what percentage is financed by equity.498 Determining the
correct capital structure is essential to WACC because without a clear picture of a
company’s debt-to-equity ratio, the cost of financing future operations will be
improperly weighted.499
Both experts recognized the impact of the substantial amount of convertible
debt in Jarden’s capital structure.500 Jarden’s convertible debt conceptually existed
as both debt and equity components in its capital structure, and both experts valued
the debt and equity components of Jarden’s convertible notes separately.501
498
JX 1816 at ¶99; JX 2516, Koller, Valuation at 215–19.
499
See Trial Tr. 1070:2–6 (Hubbard).
500
JX 1816 at ¶¶100–03; JX 1818 at ¶63.
501
Id.117
Dr. Zmijewski calculated Jarden’s capital structure based on Jarden’s median
capital structure ratios in the last four quarters before December 4, 2015.502
According to the previous year’s ratios, Dr. Zmijewski selected a Jarden
capitalization ratio of 69% combined equity and 31% debt.503
For his part, Dr. Hubbard examined Jarden’s capital structure ratio for the five
years prior to the Merger.504 He noted that Jarden maintained a debt level of roughly
50% from the last quarter of 2010 through 2011, but beginning in 2012, Jarden’s
debt to equity ratio began shifting due to Jarden’s increased acquisition activity. 505
As Jarden stepped up acquisitions between 2012 and 2015, its total debt nearly
doubled but its equity value expanded in even greater proportions.506 By the third
quarter of 2015, Jarden’s market capitalization nearly tripled and its capital structure
had shifted from nearly a 50:50 ratio to 37.5% debt and 62.5% equity.507 Following
502
JX 1818 at ¶64.
503
Id.504
JX 1816 at ¶98.
505
Id. at ¶¶100–04, Figure 21.
506
Id.507
Id.118
the Yankee Candle acquisition in 2013, Jarden’s goal was to de-lever itself to three
times its bank leverage-to-EBITDA ratio.508
Dr. Hubbard observed that, in order to capture Jarden’s value as a going
concern, the capital structure ratio used in the WACC analysis should reflect
Jarden’s long-run target capital structure.509 He concluded that, because Jarden was
on a trajectory of lower debt leading up to the Merger, and its long-term goal was to
achieve an even lower debt-to-equity ratio, Jarden’s average debt in the one-year
period before the Merger was the best estimate of Jarden’s target capital structure
for WACC.510 Based on that judgment, Dr. Hubbard calculated a capital structure
equal to Jarden’s one-year average ratios of 36.1% debt and 63.9% equity.511
The valuation literature suggests that because of the increased use of
convertible securities, assessing the debt-to-EBITDA ratio alongside capital
structure helps build a more comprehensive picture of a company’s leverage risk.512
Both experts were cognizant of the effect of Jarden’s convertible securities on its
508
Id. at ¶¶100–07, Figure 21; JX 1777 (Lillie Dep.) at 86–87.
509
JX 1816 at ¶¶98–99.
510
Id. at ¶¶104–05.
511
Id.512
JX 2516, Koller, Valuation at 217.
119
capital structure, and Dr. Hubbard went on to consider changes in Jarden’s debt-to-
EBITDA ratio and the corresponding effect on Jarden’s future leverage risk.513
The two experts relied on one year of debt-to-equity information to calculate
their capital structure estimates. Dr. Zmijewski calculated Jarden’s capital structure
according to its median debt-to-equity ratios prior to the unaffected trading date of
December 4, 2015.514 That is where Dr. Zmijewski’s analysis ended. Dr. Hubbard
made a similar assessment of Jarden’s capital structure as it stood just prior to the
unaffected trading date, but did not end his analysis there. Instead, Dr. Hubbard
assessed Jarden’s target debt-to-EBITDA ratios, which reflected the capital structure
Jarden set as a forward-looking goal well before merger negotiations began.515
This further analysis makes sense. The cost of capital analysis should be
based on target debt-to-equity ratios instead of current ratios.516 Target capital
structure represents the ratios expected to prevail over the life of the business and
the literature stresses that relying solely on current capital structure can distort the
cost of capital analysis.517 Overly optimistic capital structure targets must be
513
JX 1816 at ¶¶100–07, Figure 21; JX 1818 at ¶63. See also Trial Tr. 161 (Zmijewski)
(explaining how he accounted for convertible securities).
514
JX 1818 at ¶64.
515
JX 1816 at ¶¶103–07, Figure 21.
516
JX 1816 at ¶105; JX 2516, Koller, Valuation at 295–97.
517
JX 2516, Koller, Valuation at 295–97.
120
accounted for if they are expected to take many years to be realized.518 Jarden’s
target capital structure and debt-to-EBITDA ratio was not overly optimistic under
the circumstances. As of 2015’s third quarter, Jarden’s leverage had shifted
downward to 37.5% as its market capitalization grew,519 and Jarden planned to
continue its deleveraging strategy until it reached a debt-to-EBITDA ratio of 3.0x.520
Adjusting Jarden’s 37.5% debt as of September 30, 2015, to conform to its target
leverage ratio would lower Jarden’s debt ratio to 33.3%.521 Based on the dramatic
swings in Jarden’s capital structure in the five years prior to the Merger, a 4.2%
deleveraging was well within Jarden’s ability to achieve in the short term.
Because Dr. Hubbard’s analysis conservatively includes Jarden’s forward-
looking target capital structure in his capitalization analysis, I adopt Dr. Hubbard’s
capital structure of 63.9% equity and 36.1% debt.522 Accordingly, I adopt Hubbard’s
estimated equity and debt values for Jarden at $10,596,000,000 and $5,043,000,000,
respectively.523
518
Id. at 295; JX 1816.
519
JX 1816.
520
Id. at ¶¶100–07, Figure 21; JX 1777 (Lillie Dep.) at 86–87.
521
JX 1816 at ¶¶103–07, Figure 21.
522
Id. at ¶105.
523
Id., Ex. 11A.
121
ii. Jarden’s Cost of Debt
A company’s cost of debt reflects “the current cost to the firm of borrowing
funds to finance projects.”524 Generally, it is derived from three variables: (1) the
riskless rate, (2) the default risk (and associated default spread) of the company and
(3) the tax advantage associated with debt.525
Dr. Zmijewski estimated Jarden’s after-tax Cost of Debt at 2.8%.526 He
arrived at this figure by calculating a Debt Beta of 0.36 based on Moody’s Long-
Term Corporate Family Rating of Ba3 for Jarden as of December 4, 2015, and the
Duff & Phelps debt beta estimate for Ba debt as of March 2016.527
Dr. Hubbard estimated Jarden’s Cost of Debt based on a tax adjusted yield to
maturity rate of 5.30%.528 This yielded a Cost of Debt of 3.2%.529
524
JX 2515, Damodaran, Investment Valuation at 211. See also JX 1816 at ¶106; JX 1818
at ¶63.
525
Id.
526
JX 1818, Ex. VI-5.
527
Id. at ¶64.
528
JX 1816 at ¶¶108–09. Trial Tr. 1218:11–13 (Hubbard) (Q. “You measured Jarden’s
cost of debt by using yield to maturity. Correct? A. I did.”).
529
Id.
122
I agree with Dr. Zmijewski that calculating the cost of below-investment-
grade debt by using yield to maturity sets the cost of debt too high.530 I adopt his
Cost of Debt of 2.8%
iii. Jarden’s Tax Rate
Jarden’s tax rate is 35%, which is the top marginal corporate tax rate for U.S.
companies at the time of the Merger.531
iv. Jarden’s Cost of Equity
Establishing an accurate Cost of Equity is an essential subcomponent of
Jarden’s WACC. Both experts used the Capital Asset Pricing Model (“CAPM”) to
calculate Jarden’s cost of equity capital.532 This approach calculates Jarden’s risk
separately from systematic risk to produce a reliable estimate of Jarden’s Cost of
Equity.533 CAPM has four components: the risk-free rate, equity beta, equity risk
530
JX 1828 at ¶20; JX 2032, Berk & DeMarzo, Corporate Finance at 412 (“When the
firm’s debt is risky, however, the debt yield will overestimate the debt cost of capital, with
the magnitude of the error increasing with the riskiness of the debt.”).
531
Trial Tr. 1213:16–18 (Hubbard).
532
JX 1818 at ¶64; JX 1816 at ¶110.
533
Id.
123
premium, and if necessary, a size premium.534 Following CAPM, a company’s cost
of equity is calculated as follows:535
where:
rno-risk = risk-free rate of return
 = beta coefficient of the subject company
ERP = equity risk premium
SS = size premium
 The Risk-Free Rate
The only point of agreement between the experts in the WACC analysis is the
risk-free rate of return. Both experts set their analyses’ risk-free rate at the 20-year
constant maturity U.S. Treasury Bonds return as of the Merger.536 That rate was
2.14%.537 Relying on 20-year U.S. Treasury Bonds for the risk-free rate is
universally accepted practice in corporate valuation.538
534
JX 1816 at ¶110; JX 2516, Koller, Valuation at 278–87; JX 2032, Berk & DeMarzo,
Corporate Finance at 385–92.
535
JX 1818 at ¶64; JX 2516, Koller, Valuation at 279; JX 2515, Damodaran, Investment
Valuation at 208; JX 2032, Berk & DeMarzo, Corporate Finance at 387.
536
JX 1816 at ¶111; JX 1818 at ¶64.
537
Id.
538
JX 2515, Damodaran, Investment Valuation at 155; JX 2516, Koller, Valuation at 275–
76; JX 2032, Berk & DeMarzo, Corporate Finance at 411–12.
124
 Beta
Beta, in short, is a measurement of the systemic risk that a particular security
adds to a market portfolio.539 The consensus from the corporate finance literature in
the record is that the conventional approach for estimating equity beta for a publicly
traded company, like Jarden, is through a regression analysis of the historical returns
of its stock against the returns of a market index.540 In other words, equity beta is
derived by assessing a stock’s sensitivity to and correlation with changes in the
aggregate market. A beta regression analysis requires three parameter-setting
choices. First, the time period for measuring returns must be established. 541 Second,
the return interval at which measurements will be taken over the duration of the
designated time period must be specified.542 Third, an appropriate market index
must be identified that will represent the cumulative market over time as a control
to measure the target company’s market price.543
539
JX 1818 at ¶58; JX 1816 at ¶112; JX 2516, Koller, Valuation at 279; JX 1345, Duff &
Phelps, Valuation Handbook at 2–14; JX 2515, Damodaran, Investment Valuation at 183;
JX 2032, Berk & DeMarzo, Corporate Finance at 413. See Trial Tr. 187:10–13
(Zmijewski) (“beta is a measure of risk of a company or an asset that you––that you can
measure statistically using a statistical model.”).
540
JX 2515, Damodaran, Investment Valuation at 183. See also JX 1816 at ¶¶113–20.
541
Id.
542
Id.
543
Id.
125
The experts disagreed on the relevant time periods and return intervals to use
in their regression analyses. From the evidence, it appears the most appropriate
(and commonly used) parameters are two- or five-year time periods and weekly or
monthly return intervals.544
The control market index should be one developed from the exchange where
the target company’s stock trades.545 For companies traded on the NYSE, like
Jarden, it is reasonable to use either the NYSE Composite or the S&P 500 Index.546
The experts agreed that the S&P 500 is an appropriate market index and both used
the S&P 500 as their control to measure Jarden.547
In addition, both experts relied on Jarden’s historical market returns data and
estimated Jarden-specific betas. Yet, they disputed whether it was necessary to
balance Jarden’s beta with betas estimated from historical returns of comparable
companies.
In his report, Dr. Zmijewski calculated two equity betas to use in his Jarden-
Specific DCF and Composite DCF analyses. To estimate Jarden’s beta as of the
Merger Date, Dr. Zmijewski measured the equity beta for Jarden and for each of a
544
JX 2516, Koller, Valuation at 283–84. See JX 1816 at ¶114.
545
JX 2515, Damodaran, Investment Valuation at 188.
546
Id.; JX 2032, Berk & DeMarzo, Corporate Finance at 413. See JX 1816 at ¶115.
547
JX 1816 at ¶¶111–20; JX 1818 at ¶¶58–61.
126
list of comparable companies based on five years of weekly returns ending on the
Merger Date.548 He then performed a regression analysis for each company against
the S&P 500 for the same period that showed Jarden’s unlevered beta was 1.04 and
that the unlevered beta for his comparable companies (plus Jarden) was 0.86.549
Finally, he made adjustments to account for Jarden’s cash and other financial assets
and relevered each beta to produce a Jarden-specific equity beta of 1.24 (the “Jarden-
Specific Beta”) and a combined equity beta for his comparable companies
(plus Jarden) of 1.01 (the “Composite Beta”).550
Dr. Hubbard’s regression analysis yielded an equity beta of 1.18 (the
“Hubbard Beta”) that was based on Jarden’s daily returns for one year ending on
December 4, 2015.551 Unlike Dr. Zmijewski, Dr. Hubbard did not balance his
Jarden-specific beta regression analysis with beta estimates of comparable
companies. Instead, he regressed Jarden’s single year daily returns against the
S&P 500 during the one-year period and calculated an unlevered beta of 0.771.552
548
JX 1818 at ¶¶58–61.
549
Id. at ¶¶60–61, Ex. VI-4.
550
Id. at ¶¶59–61, Ex. VI-5; JX 1828 at ¶16. Dr. Zmijewski explained that the Jarden-
Specific Beta was higher due to a “lack of precision relative to the precision [of] using a
set of comparable companies” and because of Jarden’s higher long-term growth relative to
that of his comparable companies. JX 1818 at ¶¶60–61.
551
JX 1816 at ¶¶114–16.
552
Id. at ¶¶117–20.
127
Like Dr. Zmijewski, he then adjusted for cash and financial assets and re-levered the
beta to produce a Jarden equity beta of 1.18.553 Dr. Hubbard also calculated Jarden-
specific betas from two years of weekly returns and five years of monthly returns,
but ultimately decided to use the single year daily returns beta to mitigate the
potential confounding effects of several large acquisitions Jarden completed in the
five years prior to the Merger.554 Dr. Hubbard explained that he chose the year
ending on December 4, 2015, in order to avoid contaminating his regression analysis
with news of the possible merger.555
The literature in the record supports the use of comparable companies in a
beta regression because companies in the same industry face similar “operating
risks” and therefore should have similar operating betas.556 This, of course, assumes
that “truly” comparable peers exist that can meaningfully be compared to the target
company.557 Here again, Dr. Zmijewski failed convincingly to demonstrate that his
553
Id.
554
Id. at ¶¶114–16. Dr. Hubbard noted that the single year daily beta of 1.18 was “not
substantially different” from his two-year weekly beta of 1.22. Id. at ¶¶117–20.
555
Id. at ¶¶114–16.
556
JX 2516, Koller, Valuation at 286.
557
Id. at 283–85; JX 242, Holthausen & Zmijewski, Corporate Valuation at 306 (“. . . if
we have a set of truly comparable companies, we feel we can gain precision in our estimate
of the cost of capital by using multiple companies.”) (emphasis supplied).
128
comparable companies shared similar risk profiles with Jarden.558 As Dr. Hubbard
persuasively testified, Dr. Zmijewski provided no analysis or discussion to support
this assumption.559 Without a thorough explanation and corroborating evidence of
how Dr. Zmijewski’s comparable companies had risk profiles comparable to
Jarden’s “complex”560 and “unique”561 structure and business model, I am
disinclined to consider on Dr. Zmijewski’s Composite Beta.
Jarden’s stock consistently traded in the upper quartile of market volume on
the NYSE from 2011 to 2015.562 And its share price had a positive correlation with
the market, as defined by the S&P 500, throughout the same time period.563 With
this in mind, I am persuaded that Dr. Hubbard’s decision to use daily interval
measurements is reasonable, and his opinion that Jarden’s market returns data
558
JX 1828 at ¶¶12–16.
559
Trial Tr. 1068:13–1069:15 (Hubbard); JX 1826 at ¶¶72–75.
560
JX 1818 at ¶29 (“More specifically, I discuss . . . complexity of Jarden’s information
and holding company (or platform) business model strategy”).
561
Trial Tr. 104:7–105:18 (Lillie), 262:19–263:23 (Zmijewski) (“None of those companies
is an apple-to-apple comparison to Jarden or each other. Comparable Companies––there
just isn’t any such thing as a twin company. It doesn’t exist.”).
562
JX 1816 at ¶¶45–50. In addition, both experts’ beta estimates are positive, which
indicates a parallel correlation with changes in the overall market.
563
JX 1816 at ¶¶112–20.
129
provide a reliable measurement of Jarden’s beta is supported by the literature in the
record.564
Dr. Hubbard corroborated his calculated beta with a second regression using
two-year weekly returns that yielded a Jarden-specific beta of 1.22.565
Dr. Zmijewski’s beta estimates were derived from a five-year period of weekly
returns, and his Jarden-specific analysis produced a beta of 1.24 for Jarden alone.566
The spread between Dr. Hubbard’s beta and Dr. Zmijewski’s Jarden-specific beta is
0.06, which, according to the literature, suggests that the Jarden-specific beta
estimates have a low error rate across different time and interval measurements.567
A narrow error rate between firm-specific beta estimates of different intervals and
time periods indicates the estimates are converging on the company’s true beta.568
Moreover, it is important to note that, when estimating beta, the goal is to
evaluate Jarden’s future beta, and by extension, the sensitivity of Jarden’s share price
564
Id.; JX 2516, Koller, Valuation at 284; JX 2515, Damodaran, Investment Valuation 183,
187–95.
565
Id.
566
JX 1818 at ¶¶58–61.
567
JX 2515, Damodaran, Investment Valuation at 192–95; JX 1816, Ex. 22F; JX 1818 at
¶¶60–61.
568
JX 2516, Koller, Valuation at 286; JX 2515, Damodaran, Investment Valuation at 192–
93.
130
to future market risk as predicted by its historical performance.569 Because betas
generally converge on the general market beta (1.0) over time,570 and Jarden, by all
indicators, was a mature, highly traded company, I am satisfied that Dr. Hubbard’s
beta (1.18) is a reasonable estimate of Jarden’s share price sensitivity to future
market risk.
 Equity Risk Premium
Equity Risk Premium (“ERP”) “captures the compensation per unit of risk
that investors demand in order to hold risky investments rather than riskless
investments.”571 The experts’ disagreement over the proper methodology for
estimating Jarden’s ERP reflects the lack of consensus regarding this issue within
the valuation community at large.572 One aspect of the broader debate that has
played out here is whether to approach ERP as Long-Term Historical ERP, Supply-
Side ERP, or an adjusted hybrid ERP derived from the available data. As explained
by Dr. Hubbard, when appraisers estimate ERP from Long-Term Historical ERP,
they consult historical data regarding stock premiums, in his case from 1926 through
569
JX 2516, Koller, Valuation at 281; JX 2032, Berk & DeMarzo, Corporate Finance at
413; JX 241, Holthausen & Zmijewski, Corporate Valuation at 295.
570
JX 2515, Damodaran, Investment Valuation at 187.
571
JX 1816 at ¶121.
See Trial Tr. 1072:2–4 (Hubbard) (“So the question is, what is the equity risk premium.
572
And this is one where economists have a range of views.”).
131
2015.573 As explained by Dr. Zmijewski, Supply-Side ERP incorporates adjustments
to the Long-Term Historical ERP to account for a long-term decline in risk
premiums that upwardly bias the Long-Term Historical rate in order more
effectively to represent recent market conditions.574
Dr. Zmijewski set Jarden’s ERP at the Supply-Side ERP estimate of 6.03%.575
Dr. Hubbard determined the proper ERP to be 6.47%, which is the mid-point
between the Long-Term Historical ERP and Supply-Side ERP.576 After considering
the evidence, I am satisfied that Dr. Zmijewski’s estimate of ERP reflects a more
principled approach. First, there is strong support for the use of the forward-looking
573
JX 1816 at ¶¶122–24. See Trial Tr. 1072:5–8 (Hubbard) (“My own view in my own
work and in the work I’m tendering here is that the so-called historical risk premium is the
best measure of the equity risk premium.”). See also JX 2515, Damodaran, Investment
Valuation at 161 (“In practice, we usually estimate the risk premium by looking at the
historical premium earned by stocks over default-free securities over long time periods.”).
574
JX 1828 at ¶18. See Trial Tr. 1072:8–15 (Hubbard) (“There is an alternative view . . .
a so-called supply-side risk premium. I’m not quite sure why that word, because it’s not
about supply and demand, it’s really about whether you include price earnings multiples
expansion. That number is lower.”) See also JX 1345, Duff & Phelps, Valuation
Handbook at 11.
575
JX 1828 at ¶17.
576
JX 1816 at ¶126. Dr. Hubbard took the mid-point of the Long-Term Historical ERP at
6.9% and Supply-Side ERP at 6.03% to produce his 6.47% ERP estimate for Jarden. Trial
Tr. 1072:16–19 (Hubbard) (“I prefer the historical risk premium. I’m cognizant of the fact
Delaware courts have also paid attention to the supply-side risk premium. So I picked the
midpoint of the two.”).
132
Supply-Side ERP in the valuation literature.577 Second, as Dr. Zmijewski
persuasively observes, Dr. Hubbard’s “mid-point” ERP estimate is unexplained and
appears to lack any methodological foundation.578
 Size Premium
Dr. Zmijewski opined that a size premium must be incorporated in the
calculation of Jarden’s equity cost of capital given that, according to the Duff &
Phelps classification, Jarden is within the second decile of public companies, which
justifies a size premium of 0.57%.579 Dr. Hubbard implied that a Size Premium was
not necessary but provided no credible explanation for that position.580
The valuation texts in the record make the point that beta captures some, but not all
of a company’s size premium and that a size premium is an empirically observed
577
JX 1345, Duff & Phelps, Valuation Handbook at 5.
578
JX 1828 at ¶18. The lower Supply-Side ERP is supported by Duff & Phelps’ later
recommended estimates of adjusted Long-Term ERP of 5.0% as of March 31, 2018.
See Trial Tr. 1073:1–4 (Hubbard) (“But if one’s view is your interest in supply side is
governed by Duff & Phelps' recommendation, Duff & Phelps has, indeed, changed its
recommended approach.”).
579
JX 1818 at ¶64.
580
JX 1826 at ¶78; Trial Tr. at 1078:4–9 (Hubbard) (“I don’t have a size premium.
He does. My quibble is more the way he’s estimated it, given the data source he has. But,
again, for the Court’s consideration in the interest of the Court’s time, I don’t think these
are super important.”).
133
correction to the CAPM.581 I agree with Dr. Zmijewski and the literature that the
CAPM should include a size premium when appropriate, as here, and adopt his size
premium of 0.57% for Jarden.
**********
Dr. Zmijewski calculated a Composite Cost of Equity, but for reasons
previously stated, I have disregarded estimates based on Jarden’s so-called
comparable companies. Dr. Zmijewski calculated a Jarden-specific Cost of Equity
at 10.21%.582 Dr. Hubbard calculated Jarden’s Cost of Equity at 9.74%.583 In my
view, for reasons stated, neither view lines up entirely with the credible evidence.
Accordingly, I have calculated Jarden’s Cost of Equity with the following CAPM
inputs that reflect what I deem proven by a preponderance of the evidence:
Dr. Hubbard’s Beta of 1.18, Dr. Zmijewski’s Equity-Risk Premium of 6.03%,
Dr. Zmijewski’s Size Premium of 0.57% and both experts’ risk-free rate of 2.14%.
With these inputs, I have calculated Jarden’s Cost of Equity to be 9.83%.
581
JX 242, Holthausen & Zmijewski, Corporate Valuation at 320–21 (discussing the
“empirical evidence that the CAPM overstates the returns to large firms and understates
the returns to small firms”).
582
JX 1818, Ex. VI-5.
583
JX 1816 at ¶127.
134
Jarden’s Calculated WACC: Dr. Zmijewski calculated a Jarden-Specific
WACC of 7.88%.584 Dr. Hubbard calculated a WACC of 7.38%.585 Once again, for
reasons stated, I have found that neither experts’ calculated WACC is supported
entirely by the credible evidence. Instead, I calculate WACC with the following
inputs: a 9.83% Cost of Equity, a 2.8% Cost of Debt, a 35% marginal tax rate and a
capital structure of 63.9% equity and 36.1% debt. These inputs yield a WACC of
6.94% for Jarden.586 Thus, I adopt a Discount Rate of 6.94%.587
3. The Final Calculation of Terminal Value
Based on the credible evidence, I calculate Jarden’s terminal value to be
$17.7 billion, using the following equation:588
584
JX 1818 at ¶66.
585
JX 1816 at ¶11.
586
I note that this WACC is within the range calculated by Centerview but below the
WACC calculated by Goldman Sachs, Deutsche Bank, RBC and Barclays.
587
JX 2516, Koller, Valuation at 295–97.
588
JX 1816 at ¶95; JX 2515, Damodaran, Investment Valuation at 313.
135
𝑔∞
𝑁𝑂𝑃𝐿𝐴𝑇𝑃𝐴𝑇+1 (1 − )
𝑇𝑉𝑡 = 𝑅𝑂𝐼𝐶
𝑊𝐴𝐶𝐶 − 𝑔∞
where:
𝑇𝑉𝑡 = terminal value (at time T)
𝑁𝑂𝑃𝐿𝐴𝑇𝑃𝐴 𝑇+1 = unlevered free cash flow (at time T + 1).
𝑅𝑂𝐼𝐶 = incremental return on new invested capital
𝑔∞ = terminal growth rate
𝑊𝐴𝐶𝐶 = Weighted Average Cost of Capital
In order to arrive at the unlevered free cash flow for year 2021, I subtracted the
predicted revenue for 2021 from the predicted capital expenditures for 2021.589 The
predicted revenue for 2021 is $12.9 billion, 4.964% higher than the 2020 revenue.590
The predicted capital expenditure for 2021 is $334 million, 2.6% higher than the
2020 capital expenditure.591
4. The DCF Calculation of Fair Value
Using 6.94% as the Discount Rate, I calculate Jarden’s enterprise value using
the following formula:592
589
See JX 1818 at ¶51.
590
I took the average of the revenue growth rates for the provided fiscal years of 2017–20
to determine the percentage increase.
591
I took the average of the capital expenditure growth rates for the provided fiscal years
of 2017–20 to determine the percentage increase.
592
JX 2515, Damodaran, Investment Valuation at 585. See JX 1818 at ¶60.
136
𝑡=∞
𝐹𝐶𝐹𝑡
𝐸𝑉 = ∑
(1 + 𝑊𝐴𝐶𝐶)𝑡
𝑡=1
where:
𝐹𝐶𝐹𝑡 = unlevered cash flow in period t, terminal value in the final period
𝑊𝐴𝐶𝐶 = Weighted Average Cost of Capital
The final adjusted enterprise value is $16.6 billion.593
5. Jarden-Specific Adjustments to the DCF Valuation
In order to determine the final share price under a DCF approach, the appraiser
must account for Jarden’s excess cash and debt in its enterprise value.594
Dr. Hubbard additionally adjusts for tax effects related to future profits not captured
by tax rates, liability from net unrecognized tax benefits and pensions. 595 I do not
find any of Dr. Hubbard’s arguments for these additional adjustments persuasive
and, in any event, his proposed further adjustments have a marginal impact on the
final share value.596
593
In other words, I added the discounted cash flows from each time period in the FY16–
FY21 range––$558 million, $646 million, $675 million, $687 million, $698 million,
$13.3 billion respectively––to arrive at the total enterprise value.
594
JX 1818 at ¶¶69–72; JX 1816 at ¶¶130–47.
595
JX 1816 at ¶¶143–47.
596
See Trial Tr. 1079:17–21 (Hubbard) (“Maybe I should start with the bottom line. If you
were to look at all of these [enterprise value adjustments], they’re a little over a dollar a
share, and I think $1.06 altogether, because they go in different directions.”).
137
a. Excess Cash
Companies commonly keep liquid cash in order to conduct their operations.597
If the company holds more cash than necessary, the surplus is a source of value to
the equity holders and must be added to the DCF valuation.598 Jarden held
$799 million of cash and cash equivalents at the end of the first quarter of 2016.599
As of the Merger, Jarden required $50 million in cash for working capital
purposes.600 The excess cash balance, or the difference between the total cash and
the required cash, is $749 million, which I add to the enterprise value.
b. Nonconvertible Debt
As of March 31, 2016, Jarden’s non-convertible debt totaled $5.04 billion.601
Debt is a claim on the assets of the firm and must, therefore, be subtracted from the
DCF enterprise value.602
597
JX 1816 at ¶139.
598
Trial Tr. 1081:17–20 (Hubbard) (“[E]ssentially you want to add back excess cash that
the company has. And we both agree on that, and we both agree on what the total cash
was. It was $799 million.”).
599
JX 1816 at ¶140.
600
Id.
601
Id. at ¶141.
602
Id.; JX 2516, Koller, Valuation at 309; JX 2515, Damodaran, Investment Valuation at
440.
138
c. Convertible Debt
To measure the value of Jarden’s unconverted convertible notes at the Merger
Date, Dr. Hubbard uses a standard options pricing methodology to estimate the
embedded warrants value since they are economically analogous to an option on
Jarden’s common stock.603 This formula relies on various inputs for each series of
notes, including the time remaining until maturity, the conversion price, the current
value of Jarden’s stock, the risk-free rate and the expected volatility of Jarden’s stock
returns.604 Using these inputs, Dr. Hubbard estimated the equity components of the
convertible notes to be $0.71 billion in total at the Merger Date.605 He further valued
the debt component of the convertible notes by discounting the remaining coupons
and principal value of each note at Jarden’s 5.3% cost of debt. In total, the value of
the debt component of the convertible notes is $1.00 billion. The total value of
Jarden’s convertible securities is the sum of the debt and equity components. At the
Merger Date, the value of Jarden’s convertible debt totaled $1.71 billion.606
Dr. Hubbard’s approach was conservative, made sense and I adopt it here.
603
JX 1816 at ¶142.
604
Id., Ex. 18C.
605
Id., Ex. 18A.
606
Id.
139
6. Number of Shares
I calculate the shares outstanding, following Dr. Zmijewski’s calculation,607
by subtracting the Jarden stock awards issuable to executives in connection with the
merger transactions and the Jarden common stock expected to be issued upon
assumed conversion of outstanding Jarden convertible notes from the total estimated
shares of Jarden’s common stock entitled to the Merger consideration. With these
inputs, the total amount of outstanding shares and restricted stock units as of the
Merger was 219.9 million common shares.608
7. Equity Value per Share from DCF Analysis
After adding non-operating assets to the enterprise value, and subtracting non-
operating liabilities, Jarden’s equity value as of the Merger Date was $10.59 billion.
On a per share basis, the DCF valuation is $48.13.
REMAINDER OF PAGE INTENTIALLY LEFT BLANK
607
JX 1818 at ¶70. Dr. Hubbard adjusted his final share count number to align with
Dr. Zmijewski’s number after double counting Jarden’s restricted stock. JX 1831.
608
JX 1565 at 242.
140
Discounted Cash Flow Analysis609
($ in Millions, except per FY16 FY17 FY18 FY19 FY20 FY21
share value)
Revenue610 $10,147 $10,640 $11,172 $11,731 $12,317 $12,928
Growth Rate – 4.9% 5.0% 5.0% 5.0% 5.0%
Unlevered Cash Flow from $869.05 $966.55 $1,062 $1,145.95 $1,235 $1,273
Operations
Capital Expenditures611 $297 $266 $279 $293 $308 $334
As % of Revenue 2.9% 2.5% 2.5% 2.5% 2.5% 2.6%
Unlevered Free Cash Flow $572 $701 $783 $853 $927 $939
Terminal Value $17,688
Time Period612 0.36 1.21 2.22 3.22 4.22 4.22
Discounted Cash Flows $558 $646 $675 $687 $698 $13,326
Enterprise Value $16,591
Non-Convertible Debt ($5,043)
Value of Convertible Debt ($1,712)
Cash $749
Equity Value $10,585
Shares 219.9
Share Price $48.13
609
As explained above, the DCF Analysis makes the following assumptions: WACC equals
6.9%; Terminal Growth equals 3.1%; ROIC equals 11.2%; FY21 Revenue Growth equals
5%; FY21 Capital Expenditure as a percent of Revenue equals 2.6%; Fully Diluted Share
Count equals 219.9 million.
610
Drs. Hubbard and Zmijewski both agree on Jarden’s Revenue numbers for FY16–FY20
reported in Standard and Poor’s Capital IQ. See JX 1816, Ex. 9; JX 1818, Ex. VI-7A.
611
Drs. Hubbard and Zmijewski both agree on Jarden’s Capital Expenditure numbers for
FY16–FY20 as derived from Standard and Poor’s Capital IQ and Jarden’s FY10-15 10K.
See JX 1816, Ex. 9; JX 1818, Ex. VI-1.
612
Time Period is calculated based on the mid-year convention used by Dr. Hubbard.
JX 1816, Ex. 16. I note, for 2016, the mid-point uses the period from April 15, 2016 to
December 31, 2016. Id.
141
8. The DCF Valuation Comports With the Market Evidence
As indicated above, I have determined that the Unaffected Market Price,
$48.31, is a reliable indicator of Jarden’s fair value as of the Merger Date. While
I have questioned the reliability of the Merger price less synergies approach,
I recognize that the most reliable estimate of fair value under that approach is
approximately $46.21. My DCF valuation yields a fair value of $48.13. What stands
out here, of course, is that Petitioners’ proffered estimate of fair value for Jarden of
$71.35 is, to put it mildly, an outlier.
Based on the preponderance of evidence, I am satisfied that the Unaffected
Market Price is the best evidence of Jarden’s fair value on the Merger Date. Insofar
as I am obliged to articulate a principled, evidence-based explanation for the delta
between the Unaffected Market Price and the DCF valuation (here, $0.18 per share),
I am satisfied the difference reflects the subjective imperfections of the DCF
methodology. The DCF valuation corroborates the most persuasive market evidence
and provides comfort that I have appraised Jarden as best as the credible evidence
allows.
III. CONCLUSION
For the foregoing reasons, I have found the fair value of Jarden shares as of
the Merger was $48.31 per share. The legal rate of interest, compounded quarterly,
142
shall accrue from the date of closing to the date of payment. The parties shall confer
and submit an implementing order and final judgment within ten days.
143