Prescott Group Small Cap v. Coleman Company, Inc.

Full title: PRESCOTT GROUP SMALL CAP, L.P., PHIL JANA FROHLICH, PHIL FOHLICH, IRA…

Court: Court of Chancery of Delaware, New Castle County

Date published: Sep 8, 2004

Civil Action No. 17802 (Del. Ch. Sep. 8, 2004)

Opinion

Civil Action No. 17802.

Date Submitted: June 9, 2003. Supplemental Briefs Submitted: July 16, 2004.

Date Decided: September 8, 2004.

Stephen E. Jenkins, Steven T. Margolin, and Lauren E. Haley, Esquires, of ASHBY GEDDES, Wilmington, Delaware; Attorneys for Petitioners.

Thomas J. Allingham II, Robert S. Saunders, and Edward B. Micheletti, Esquires, of SKADDEN, ARPS, SLATE, MEAGHER FLOM LLP, Wilmington, Delaware; Attorneys for Respondent.

OPINION

JACOBS, Justice.[fn1] [fn1] Sitting by designation as Vice Chancellor under DEL. CONST., ART. IV, § 13(2).

This appraisal proceeding, brought under 8 Del. C. § 262, arises out of a "going private" merger of The Coleman Company, Inc. ("Coleman") into its majority stockholder-parent, Sunbeam Corporation ("Sunbeam"), on January 6, 2000. The transaction, which occurred in two mergers separated in time by almost two years, was documented in a February 1998 agreement between MacAndrews Forbes ("MF") and Sunbeam. Under that Agreement, Sunbeam would acquire Coleman in two steps for a combination of cash and Sunbeam stock valued at $27.50 per Coleman share. In the first ("front end") merger, which occurred on March 30, 1998, Sunbeam acquired MF's 79% majority interest in Coleman. In exchange for its majority Coleman stock interest, MF received a package of Sunbeam stock, cash and assumption of debt, at that time all worth about $32 per share.

Had the second ("back end") merger taken place shortly after the "front end" merger, Coleman's minority stockholders would have received value equivalent to that received by MF. Unfortunately, not long after the front-end merger took place, it was discovered that the financial statements of Coleman's new majority stockholder, Sunbeam, had fraudulently overstated Sunbeam's earnings and financial condition. As a result, the Securities and Exchange Commission ("SEC") prevented Sunbeam from completing the back-end merger until January 2000. By that time, the price of Sunbeam's stock (which represented most of the merger consideration originally agreed to in February 1998) had declined dramatically. As a result, the Coleman minority stockholders received consideration worth only $9.31 per share on the January 6, 2000 back-end merger date.²

2 Petitioners' Exhibit ("PX") 21, Ex. D, p. 2.

The Petitioners, who are former minority shareholders of Coleman, commenced this appraisal proceeding on February 22, 2000. They claim that the fair value of Coleman on the merger date was $31.94 per share.³ The respondent, Coleman, contends that its fair value on the merger date was $5.83 per share. The case was tried beginning January 27, 2003. After the filing of post-trial briefs, post-trial argument took place on June 9, 2003. Thereafter, while the matter was under submission, the Court resolved certain post-trial motions, and also directed the parties to file supplemental briefs on the Petitioner's application for attorneys' fees. Supplemental briefing was completed on July 16, 2004.

3 Petitioners actually claim that Coleman's fair value was $33.10 per share but that claim assumes that the number of Coleman shares outstanding was 55.8 million. This Court finds, however, that the correct number of shares outstanding on the merger date was 58.8 million. See Part IIA(1), infra of this Opinion. As a result, all of the Petitioners' valuations that are predicated on 55.8 million shares have been adjusted accordingly.

This is the Opinion of the Court on the merits of the Petitioners' appraisal claim. For the reasons set forth below, the Court concludes that the fair value of Coleman on the merger date was $32.35 per share.

I. FACTS

A. Coleman's Business

Before and on the merger date,⁴ Coleman was a manufacturer of camping gear and sporting goods. From 1992 until March 30, 1998, approximately 80% of Coleman's voting stock was owned by MF, an investment entity controlled by Ronald O. Perelman. Between March 30, 1998 and the January 6, 2000 merger date, Coleman's controlling shareholder was Sunbeam.

4 Unless otherwise indicated, the term "merger" means the "back end" merger that took place on January 6, 2000.

As of January 6, 2000, Coleman operated in essentially three different business groups that were divided into four distinct "Strategic Business Units" ("SBUs"). Those SBUs were:

1. Coleman Outdoor Recreation. This segment represented the historic Coleman business, which manufactured and sold the traditional Coleman camping and outdoor recreation products such as lanterns, portable stoves, coolers, sleeping bags, tents and outdoor furniture.

2. Powermate. This business segment was Coleman's second largest SBU. It manufactured and sold portable electric generators (for use as standby power supplies), as well as portable and stationary air compressors. These products were sold under Coleman's "Powermate" brand name in many of the same retail outlets that carried Coleman outdoor recreation products.

3. Eastpak. The Eastpak business segment manufactured and sold backpacks, bookbags and related items. Those products, which were manufactured mainly in Puerto Rico, were distributed under the Coleman and Timberland brand names. At the time of the merger, Sunbeam was negotiating a sale of Eastpak to a third party.

4. International. A significant amount of Coleman's sales were made overseas, through Coleman's International business segment. That division sold and distributed Coleman products in Europe, Latin America, Japan, Canada and East Asia. The International division also manufactured Camping Gaz camping equipment products, a European business that Coleman acquired in 1996.⁵

5 The remainder of Coleman's businesses consisted of retail and licensing activities, and (since late 1997) selling discontinued, overstocked and returned products through ten company-owned retail outlet stores in the United States, under the "Camp Coleman" brand name. The vast bulk of Coleman's revenue, however, came from the four SBUs described above.

B. Historical Background Leading To Sunbeam's Purchase of Coleman

MF purchased Coleman in 1989. In 1992, MF sold a minority stake in Coleman to the public in an initial public offering (IPO). Upon acquiring Coleman, Mr. Perelman brought in Jerry Levin, a former Pillsbury executive, to be Coleman's Chairman. Two years later, Mr. Levin was transferred from Coleman to Revlon, Inc., another MF-owned company, where he served at different times in various senior executive positions. During his tenure at Revlon, Mr. Levin was also an MF Executive Vice President.

After Levin departed from Coleman in 1991, Coleman's successor CEOs caused Coleman to make acquisitions between 1992 and 1997, that turned out to be ill-fated and costly. From 1992 through 1996, Coleman's EBIT⁶ and EBITDA⁷ declined precipitately. By 1996, Coleman's debt had ballooned and its stock price had plummeted from a high of $26 at the beginning of the year to the low teens by the end. In February 1997, MF dispatched Mr. Levin back to Coleman to turn that company around.

6 An acronym for Earnings Before Interest and Taxes.

7 An acronym for Earnings Before Interest, Taxes, Depreciation and Amortization.

Upon his arrival, Mr. Levin instituted a restructuring plan designed to cut Coleman's costs, slash its debt and improve its operations. That was needed because Coleman was in danger of defaulting on its loan covenants. To avoid Coleman filing for bankruptcy, Levin sought to stabilize the company's relationship with its banks and to obtain waivers of default that Coleman needed to continue its business. At that time (as Mr. Levin testified), "[m]orale was pretty bad, as most employees knew . . . the company was in trouble. . . . They had gone into businesses through acquisitions that were really inappropriate and were diverting both the financial and managerial resources. So we needed to dispose of businesses."⁸ Accordingly, Mr. Levin closed the company's new Colorado headquarters, moved Coleman back to Wichita, Kansas, sold the corporate jet, reduced headcount, and sold or phased out lower margin operations.⁹

8 Trial Tr. at 158.

9 Id. at 49-50, 158-59.

By the end of 1997, Levin had achieved part of his goal. Coleman's EBIDTA had increased from $56.6 million in 1996 to $97 million in 1997, and during that same period, Coleman's total debt had significantly decreased.¹⁰ The markets reacted positively to Levin's restructuring: in February 1997, Coleman's shares traded at approximately $12 to $14 per share, and by December of that year, Coleman's market price had moved up to the $14 to $16 per share level.¹¹

10 Respondent's Exhibit ("RX") 1 at Ex. 7.

11 PX 21, Ex. D, p. 14, 19. During the first few weeks of 1998, the stock traded generally in the range of $15 to $16 per share.

On February 19, 1998, Coleman issued a press release reporting significant progress in reversing the dismal financial results of 1996, and indicating that the major uncertainties of the restructuring were over and that better times lay ahead.¹² To that news the market also responded positively, increasing from a closing price of $16.99 per share on February 19, 1998 to $18.63 the following day, and to $19 the day after.

12 PX 65.

While Mr. Levin was successfully turning Coleman around, Sunbeam, under the leadership of Albert "Chainsaw" Dunlap, was in deep trouble. Dunlap had been brought in as Chairman and CEO of Sunbeam in an effort to reverse that company's flagging fortunes. Although by early 1998 the stock market believed that Sunbeam's turnaround had been successful, what the public did not know was that, in fact, the basis for Dunlap's "turnaround" was a massive accounting fraud.¹³

13 See RX 31. In May 2001, the SEC formally determined that "[f]rom the last quarter of 1996 until June 1998, Sunbeam['s] senior management created the illusion of a successful restructuring in order to inflate its stock price and thus improve its value as an acquisition target. . . . When these measures did not lead to a sale of [Sunbeam], by year-end 1997, senior management took increasingly desperate measures to conceal Sunbeam's mounting financial problems, meanwhile attempting to finance the acquisition of three other public companies in part through the public sale of debt securities." The SEC further found that "Sunbeam negotiated to purchase three other companies [including Coleman] . . . to allow [Sunbeam] to conceal its accounting irregularities in another restructuring charge." RX 31 at § III.

Wanting to dispose of Sunbeam before the fraud was discovered, Dunlap hired an investment banking firm, Morgan Stanley, to explore a sale of Sunbeam. Morgan Stanley was unable to find a buyer willing to acquire Sunbeam at a premium over that company's stock market price. Accordingly, Dunlap decided to pursue an acquisition that would enable the fraud to be concealed in a "restructuring" charge. In November 1997, Morgan Stanley approached Coleman, on Sunbeam's behalf, about a possible acquisition. During the ensuing negotiations, Mr. Perelman was unwilling to accept less than $27.50 per share for MF's majority stock interest in Coleman. In February 1998, the parties reached an agreement to sell Coleman to Sunbeam for a combination of cash and Sunbeam stock that (according to Mr. Levin's testimony) was valued at a "floor" price of $27.50 per share.¹⁴

14 Levin Dep. at 89; Trial Tr. at 155-56, 187, 190-91.

C. Sunbeam's Acquisition of Coleman

On February 27, 1998, Coleman and Sunbeam entered into a Merger Agreement to acquire Coleman's publicly-owned shares. That Agreement contemplated Sunbeam and Coleman entering into a separate transaction with MF to acquire MF's controlling share interest. Those two transactions are next described.

The Front-End Merger. In the front-end merger, which took place on March 30, 1998, Sunbeam acquired MF's stock interest in Coleman (approximately 79% of Coleman's outstanding shares). In exchange, MF received $160 million in cash, 14.1 shares of Sunbeam stock, and the assumption of $172 million in holding company debt. At face value, the cash was worth $3.63 per share; the assumption of debt was worth $16.61 per share; and the stock was worth $11.88 per share, thus providing MF with total consideration valued at $32.12 per share. Under the Merger Agreement, the holders of Coleman options were entitled to cash in their options at the higher of Coleman's stock market price or $27.50 per share in cash. Thereafter, Mr. Levin cashed in his options on 500,000 Coleman shares and received over $30 per share. Shortly thereafter, he left Coleman. Mr. Perelman, however, held on to his options until December 1999, shortly before the back-end merger, but by virtue of the Merger Agreement was able to cash them out at $27.50 per share.¹⁵

15 Trial Tr. at 12-15; PX 15 at 117. Mr. Levin testified that he insisted upon these terms for himself and the other Coleman option holders "to put management on [an] equal footing with the other minority stockholders" who were able to sell their Coleman shares on the open market. Trial Tr. at 13.

Although Coleman (through Mr. Levin) now takes the position that Sunbeam (under Dunlap) "clearly overpaid for Coleman" to cover up the accounting fraud,¹⁶ that argument is a transparent effort at historical revision. In connection with the front-end merger, two fairness opinions were furnished by the investment banks for both parties — one by Credit Suisse First Boston (CSFB), which represented Coleman, and the other by Morgan Stanley, which represented Sunbeam. Both firms opined that the negotiated transaction was fair to their clients from a financial point of view. At trial and in his deposition, Mr. Levin testified that CSFB did a "responsible professional job" in preparing its report, and that he could not remember having "any material disagreements with it."¹⁷

16 Respondent's Opening Post-Trial Br. at 8-9.

17 Trial Tr. at 60-61; PX 20 at 45-46.

Mr. Levin gave orders to write off all possible goodwill after taking over the management of Sunbeam. He did not, however, cause Sunbeam to write off the over $1 billion in goodwill that was associated with the purchase of Coleman.¹⁸ Levin's decision not to write off that goodwill in 1998 is fatally inconsistent with his trial testimony (in 2003), that the $27.50 valuation of Coleman in 1998 was higher than what Coleman was fairly worth.¹⁹ The Back-End Merger. Under the February 1998 Merger Agreement, the back-end merger was to have provided consideration to Coleman's public stockholders of $6.44 in cash plus .5677 shares of Sunbeam stock for each Coleman share. That consideration package was worth $30.14 per share on February 27, 1998, and $32.34 per share on March 2, 1998.²⁰ But in January 2000, by the time the back-end merger took place, Sunbeam's stock price had declined so dramatically that the merger consideration was worth only $9.31 per share. As discussed below, during the interval between the two mergers, Dunlap was removed as Sunbeam's CEO, and, at Perelman's direction, MF installed new managers of Sunbeam (and Coleman), which included Mr. Levin. Despite the significant decline in the value of the merger consideration, Sunbeam (now under Perelman/Levin management) never reevaluated the original merger terms that were negotiated almost two years before, to ascertain whether those terms remained fair to Coleman's public minority shareholders. Instead, Sunbeam allowed the original merger terms to remain unchanged.

18 Trial Tr. at 82-87; 955-56.

19 Nor was the market's reaction to the front-end merger consistent with the Respondent's current litigating position. As earlier noted, Coleman's stock market price increased to the $30+ per share level after the announcement of the front-end merger.

20 PX 21, Ex. D, p. 13.

Respondent Coleman's position is that despite the decline in the value of the merger consideration, the back-end merger terms remained fair, because during the 18-month interval between the two mergers, Coleman's value had significantly declined. The Petitioners sharply contest that position. They maintain that although Coleman's value did decline under Dunlap's management, after Perelman/Levin management took over that value had been restored by the time the back-end merger took place. The valuation dispute in this case ultimately turns on the question of whether, between March 30, 1998 and January 6, 2000, Coleman had — or had not — lost most of its value. The Court next turns to that factual issue.

D. Coleman's Financial Fortunes Between The Front-End and Back-End Mergers

After Sunbeam acquired control of Coleman in the front-end merger, Dunlap moved quickly to integrate Coleman's operations into those of Sunbeam. He did that by selling off some of Coleman's businesses and by consolidating the remainder with Sunbeam's other businesses. Dunlap consolidated the two companies' manufacturing and distribution facilities. Dunlap consolidated the Coleman sales force into the Sunbeam sales force, he eliminated Coleman's marketing department without hiring replacements, he assimilated Coleman's international businesses into Sunbeam's international businesses, and he merged Coleman's pre-merger corporate level functions into the Sunbeam corporate infrastructure.

Unfortunately, only weeks after the front-end merger, Dunlap's regime started to unravel. On June 13, 1998, Mr. Levin learned that Sunbeam's board had terminated Dunlap. MF — which at this point was Sunbeam's largest single shareholder — asked Mr. Levin to serve temporarily as the CEO of Sunbeam, since he had previously been Coleman's CEO.

Shortly after Mr. Levin and his team were brought back in, they learned of Dunlap's (and Sunbeam's) fraud, and discovered that the integration of Coleman into Sunbeam had been (as even Petitioners concede) "chaotic and disruptive."²¹ Most of Coleman's senior managers had left the company. Coleman's EBITDA for 1998 had plummeted because the company was unable to get its product onto the retailers' shelves. And, the SEC would not permit the back-end merger to proceed because of unresolved issues relating to the integrity of Sunbeam's financial statements.

21 Petitioners' Opening Post-Trial Br. at 13.

The core fact issue on which the two sides part company is whether the damage that Dunlap inflicted upon Coleman was permanent or temporary. The Petitioners contend that Coleman recovered in a relatively short time, because the new management team successfully persuaded a significant number of senior managers to return to Coleman. Those senior managers were able to turn the company around (Petitioners argue) not only because of their own efforts but also because of Coleman's high quality products and very strong brands. As a result (Petitioners urge) sales and EBITDA bounced back, turning 1999 into a very good year, and Coleman was restored to the growth trend that management was predicting before Sunbeam acquired it. In the end, Petitioners argue, Coleman was at least as, if not more, valuable than it was before Sunbeam (under Dunlap) acquired control.

Coleman, for its part, contends that as a result of Dunlap's fraud, the company suffered "a permanent loss of value in the form of human capital,"²² that its relationships with its retailers were "permanently damaged,"²³ and that Coleman suffered "severe financial distress, materially affecting the businesses of both Sunbeam and Coleman for years to come and ultimately resulting in [Sunbeam's] bankruptcy."²⁴ The Respondent, Coleman, contends that because it lost substantial value between the frontend and back-end mergers, $5.83 per share was Coleman's the fair value at the time of the back-end merger.

22 Respondent's Opening Post-Trial Br. at 12.

23 Id. at 13.

24 Id. at 13-14. Sunbeam's bankruptcy was accompanied by Sunbeam's causing Coleman to file a Chapter 11 bankruptcy petition on February 6, 2001 in the United States Bankruptcy Court for the Southern District of New York.

The facts that are critical to this central issue are found to be as follows:

1. Coleman's 1999 Financial Performance

An important aspect of the dispute over whether Coleman gained or lost value between 1998 and 2000, are the reasons why Coleman's financial performance for 1999 was so favorable. Both sides agree that 1999 was a very good year. From 1996 to 1997, EBITDA climbed from $56.6 million to $97 million; in 1998, EBITDA dropped to $37.1 million, but in 1999 it rebounded to $155.8 million. Moreover, between 1997 and 1999 Coleman's debt declined from $543.2 million to $316.3 million.²⁵ These facts are not disputed. What is disputed is whether the 1999 results were a one time "fluke," i.e., an artificially inflated non-recurring event, or whether they reflected the greater strength of Coleman's core business, i.e., Coleman's complete recovery and return to its pre-Sunbeam growth prospects.

25 RX 1, Ex. 7.

The Respondent, Coleman's, position is that its exemplary 1999 EBITDA performance was essentially a "bounce," attributable solely to Y2K-related concerns in the consumer marketplace.²⁶ As Respondent puts it, "[f]ueled by Y2K-related fears, consumers were ravaging the marketplace for emergency preparedness products (camping equipment, lanterns, sleeping bags, stoves, and generators)[,]" all of which "would be valuable to a consumer in the event that the lights went out[.]"²⁷ According to Coleman, its management initially believed that the increased sales for 1999 indicated the greater strength of its core business, but by December of 1999 it had become apparent that management's belief was incorrect. Once it became clear that the year 2000 would not cause the widespread disruption that had been anticipated, management knew that 1999 results would not be replicated, and that sales for year 2000 would dramatically decrease.

26 "Y2K" is a shorthand for the concern that there would occur a world-wide breakdown of all machinery and equipment, including public and private facilities, that were operated by computers that were manufactured in earlier years and were not calibrated to recognize any date after December 31, 1999.

27 Respondent's Opening Post-Trial Br. at 15.

What is wrong with this picture is that Coleman is unable to point to any contemporaneous document of record that supports that scenario — that by late 1999 management came to believe that Coleman would do much worse the next year. All Coleman is able to cite is the testimony of Messrs. Levin and Bobby Jenkins (Coleman's Chief Financial Officer). That testimony can hardly be viewed as either disinterested or non-self serving. Arrayed against that testimony, moreover, are numerous contemporaneous documents that establish that Coleman's management was telling securities analysts and its bankers the precise opposite of what the Respondent is arguing today. That is, the documents overwhelmingly show that until August 2000 — long after the merger date — management believed that the results for 2000 would be even better than for 1999, despite the impact of Y2K. These documents are next summarized.

2. Sunbeam's Projections To Analysts and To Its Bankers Of Its (and Coleman's) Financial Performance For The Years 2000 and Beyond

(a) The Reports To The Analysts

The first group of contemporaneous documents are the scripts of management's quarterly conference calls with analysis.²⁸ Those scripts contain statements that reflected management's best information at the time the statements were made.²⁹ They leave no room to doubt management's genuine and continued optimism about the year 2000, until August of that year.

28 See PX 35, 75-76.

29 Mr. Levin specifically testified that "everything [he] personally said and everything [he] heard from Mr. Jenkins on any of these calls [he] believed to be true at the time. Trial Tr. at 78. At trial Mr. Levin was questioned about each of the scripts, and after being asked "did you make that statement?" and "was it true when made?", answered in the affirmative each time. Trial Tr. at 78-126.

In a November 9, 1999 conference call, management told the analysts:

— "What I am calling `the strategic planning process' has actually been an ongoing effort since mid-1998 . . . our strategic plan is indicative of the future direction of the company.³⁰

— "Our strategic plans are developed at the business unit level. There have been no corporate mandates, other than to create shareholder value within the boundaries of our vision and principles."³¹

— "We are confident that . . . new products at Powermate will allow us to continue to profitably grow this business in 2000 and beyond."³²

— "We continue to see tremendous global opportunities for all of our brands. Powermate's products, in particular, are in demand"³³

30 PX 35 at 11810.

31 Id.

32 PX 35 at 11813.

33 Id.

30 PX 35 at 11810.

31 Id.

32 PX 35 at 11813.

33 Id.

In the March 8, 2000 conference call, Coleman's management told the analysts:

— "In our Outdoor Leisure group, both Coleman and Powermate had tremendous years in 1999. While it appears that a portion of their growth during 1999 was due to significant storm activity and Y2K fears, we were able to manage year-end trade inventories lower, such that minimal returns to the trade have not resulted in returns to the Company. The tremendous year we had in 1999 does present a significant hurdle to exceed in 2000, and we have planned our business accordingly. But we continue to expect that sales of new products will allow us to continue to grow despite the Y2K impact in the prior year."³⁴

34 PX 35 at 11824 (emphasis added).

34 PX 35 at 11824 (emphasis added).

And, in a May 10, 2000 conference call, management said:

— "While the first quarter is the Company's slowest sales season and operationally its least profitable, the results were very encouraging to us and continue to [represent] . . . the ongoing improvement in the performance of our businesses, as both revenues and operating margins were improved versus the prior year period."³⁵

— " [S]trong performance at Coleman both in North America and Japan, more than offset weak performance at our Powermate unit. ³⁶

— " As we progress into the back half of the year, we expect Powermate's performance to improve as new products, including our standby `Power Station' unit, begin to roll out. These products should permanently add to the core base of the Powermate's revenues."³⁷

— "Revenues for the Company's Outdoor Leisure Group were up $10 million versus the prior year, an increase of 5% . . . Our Coleman Outdoor Recreation business continued its positive trend with double-digit gains versus the prior year."³⁸

— "[R]elative to `Y2K'-related sales made in 1999, we are now able to report with certainty that returns to the Company's Powermate and Coleman businesses related to such `Y2K' purchases were minimal, as we had anticipated."³⁹

35 PX 75 at 11827.

36 Id. (emphasis added).

37 Id. (emphasis added).

38 Id. at 11829 (emphasis added).

39 Id. at 11832.

35 PX 75 at 11827.

36 Id. (emphasis added).

37 Id. (emphasis added).

38 Id. at 11829 (emphasis added).

39 Id. at 11832.

These reports to analysts were delivered during the first half of 2000 — more than five months after the merger. Not until the August 17, 2000 report was there any hint of impending trouble. Yet even then, eight months after the merger, management remained optimistic:

— "[T]he 2^nd quarter of 2000 was negatively impacted by several key factors. Most significantly, as we entered the year, while we realized there was risk, we underestimated the degree to which the sale of Y2K-related products, particularly Powermate generators and Coleman cooking and lighting products, impacted our results in 1999 — AND cannibalized 2000 sales in these categories.⁴⁰

— "Excluding . . . [Eastpak] . . . Outdoor sales were down about $36 million or 11% . . . That said, Coleman's current business is very healthy and, even inclusive of the Y2K-effect, this year and last, their sales are essentially flat year-on-year."⁴¹

— "Improved results in the Company's International group helped offset some of the revenue shortfall in our domestic businesses."⁴²

(b) The Centrality of Sunbeam's January 31, 2000 Projections and Of Its Reports To The Banks

40 PX 76 at 11835.

41 Id. at 11837 (emphasis in original).

42 Id. The script goes on to say that the Company noticed an "industry-wide retail slowdown" starting in May and that it was cautious about the rest of the year. Id. at 11841. That slowdown was, in fact, the onset of the 2000 recession which, it appears, caused much of the sales slowdown at Coleman and throughout the economy. That recession caught Coleman — and everyone else — by surprise: it was not on the radar screen at the time of the back-end merger in January 2000.

40 PX 76 at 11835.

41 Id. at 11837 (emphasis in original).

42 Id. The script goes on to say that the Company noticed an "industry-wide retail slowdown" starting in May and that it was cautious about the rest of the year. Id. at 11841. That slowdown was, in fact, the onset of the 2000 recession which, it appears, caused much of the sales slowdown at Coleman and throughout the economy. That recession caught Coleman — and everyone else — by surprise: it was not on the radar screen at the time of the back-end merger in January 2000.

During that same period, Sunbeam was also making, in its "deliverables" to its banks, representations that were similar to and consistent with what Sunbeam's (and Coleman's) management were telling the analysts. Under the terms of its credit agreement, Sunbeam was required to "deliver" to its banks its management's projections for 2000-2002.⁴³ Mr. Levin testified that the plans delivered to the banks were "our best estimate at that time as to what was happening,"⁴⁴ and that when any corporate officer made a representation in a document it would be "true, correct and complete."⁴⁵ Similarly, Bobby Jenkins, who served as Coleman's Chief Financial Officer (Outdoor Recreation division) from September 1997 until May 1998, and as Sunbeam's Chief Financial Officer from June 1998 to October 2002, testified that "we always tried to provide information to the banks that was reasonable."⁴⁶ Indeed, management had no alternative: the banks employed a consultant, Policano Manzo, that reviewed management's plans and projections on the banks' behalf, to ensure that the projections were reasonable.

43 After the front-end merger, Sunbeam did not separately track Coleman's financial results. As a result, there are no "stand-alone" plans or projections for Coleman. However, for external reporting purposes, Sunbeam prepared separate audited financials for Coleman through 1999. Trial Tr. at 810-11.

44 Trial Tr. at 58.

45 Id. at 53.

46 Trial Tr. at 881.

A key set of projections were those contained in the January 31, 2000 "deliverable," most of the work for which had been completed before or at the time of the merger.⁴⁷ The January 31 deliverable incorporated the year 2000 projections that Sunbeam had earlier provided to the banks on January 15, 2000.⁴⁸ Those projections are highly important in this proceeding, because (i) the Petitioners' valuation expert relied upon them in arriving at the Petitioners' computation of Coleman's fair value, and (ii) Coleman has strived mightily to denigrate the evidentiary significance of those projections and led its own valuation expert to disregard them and create its own projections. Because of their centrality to the valuation issues, these January 31, 2000 "deliverable" projections, and their reliability, are now addressed in some depth.

47 PX 51, at 49951, 50027.

48 Id. at 49954-49957.

According to the report of Coleman's valuation expert, Chicago Partners, Coleman's reported EBITDA for 1999 was $155.8 million; and for the year 2000, management was projecting EBITDA for Coleman of $175.6 million.⁴⁹ Management's almost $20 million projected EBITDA increase had been determined conservatively: for Coleman Outdoor Recreation, Sunbeam was projecting flat sales and a decline in EBITDA in year 2000; for Powermate, Sunbeam was projecting only a modest growth in net sales and EBITDA. It therefore can be inferred that the Coleman projections had already incorporated a significant Y2K effect. That inference is consistent with, and supported by, Levin's March 2000 report to analysts that Coleman "continue[d] to expect the sales of new products will allow us to continue to grow despite the Y2K impact in the prior year."⁵⁰

49 RX 1, Ex. 7. RX 21 and PX 51 (the January 31 projections) are identical. For that same year, Sunbeam was projecting EBITDA for the consolidated company (including Coleman) of $225 million. RX 19 at 0001217. That projection is contained in the January 31, 2000 bank deliverable. PX 51 at 49954-49955.

50 PX 35 at 11824.

The contemporaneous documents — Sunbeam management's reports to securities analysts and the financial projections for Coleman that its management delivered to the banks — are utterly inconsistent, and cannot be reconciled, with that same management's current litigating position, viz., that by the (back-end) merger date Coleman was a failing company that had lost most of its March 1998 value. Presumably, in an effort to prevent that inconsistency from coming to light, Coleman resisted Petitioners' attempts to discover the 1999-2000 financial projections and similar materials, and thereafter, Coleman took the position that those documents did not exist. That position was later shown to be false. After this Court granted the Petitioners' motion to compel, Coleman produced the projections and bank deliverables as part of a 17,000-page production of documents whose existence Coleman had (in great part) previously denied.

Having no choice but to face up to its own management's earlier projections and representations made to the banks in 2000, Coleman (controlled by Sunbeam management), next attempts a different gambit. Coleman now seeks to walk away from its own projections and representations. Coleman attempts that by advancing four arguments, none of which are supported by the contemporaneous documents of record.

Coleman first argues that the Sunbeam/Coleman 2000 projections were not an accurate prediction of Sunbeam's results for 2000, and were designed solely to motivate the SBU's and "stretch" their ability to achieve the best financial performance. The record shows otherwise. Sunbeam/Coleman did furnish its banks with projections containing what was explicitly described as "EBITDA with stretch objectives"⁵¹ and "updated financial information . . . consistent with the operating targets being established for the long term incentive plan (LTIP) toward which SBU management will be driving."⁵² But those latter projections were furnished six weeks after the projections that were contained in the January 31 bank deliverable. Regarding that latter plan, Mr. Levin testified that "it was our best estimate at the time as to what was happening."⁵³ Levin also testified that Sunbeam's objective was to provide the banks with business plans the company could "execute" or "succeed," because as a consequence of having failed to meet aggressive plans in the past, he learned that "the banks didn't really care for that approach."⁵⁴ In short, the record does not support Coleman's newly minted argument that the 2000 plan was only a cheerleading, motivational device.

51 RX 24 at 0005740.

52 Id. at 0005732.

53 Trial Tr. at 57-58.

54 Trial Tr. at 55-58, 94-95; PX 29 at 5654.

Coleman's second argument is a variation on the first. Coleman argues that very little work went into creating the projections contained in the January 31 bank deliverable, and that those projections were "not designed to depict what management thought Sunbeam would do . . . [but rather] were designed to depict what it could do in the right circumstances."⁵⁵ But, the January 31, 2000 "deliverable" projections expose that argument as irrelevant and misleading. They show predicted increases for certain Sunbeam SBUs to reflect Sunbeam's performance attaining the level of its competitors. But that was not how the Coleman SBUs were portrayed. That is because the Coleman SBUs were already outperforming their competitors, whereas Sunbeam's SBUs were not.

55 Respondent's Opening Post-Trial Br. at 19 (emphasis in original).

Specifically, the January 31, 2000 "deliverable" projections: (i) noted that Sunbeam's competitors had average EBITDA margins of between 14% and 17%, (ii) stated that Sunbeam wished to attain those margins over time, and then (iii) projected such increases for each of the Sunbeam SBUs.⁵⁶ The projections for the Coleman SBUs, however, showed no such increases. That is because (i) Coleman Outdoor Recreation's EBITDA margin was already 18.3% and Powermate's was 19%, and (ii) for the year 2000 the projections were that those margins would decrease to competitive levels.⁵⁷ Accordingly, the argument that the January 31, 2000 "deliverable" projections were designed to show what management thought Sunbeam could do under more ideal circumstances, is irrelevant, because that was not how Coleman was being depicted. The argument is also misleading, because the Respondent's carefully chosen words (that the projections "were designed to depict what [Sunbeam] could do") implies (inaccurately) that that portrayal included Coleman as well.

56 PX 51 at 50030, 50030-50033.

57 Id. at 50033.

The third argument Coleman advances in an effort to walk away from management's contemporaneous projections, is that those projections were "aggressive" and that Sunbeam/Coleman so informed their banks. Thus, Coleman urges that ". . . Sunbeam's 2000 plan had been created for motivational, rather than valuation, purposes, and was intended by management to be aggressive."⁵⁸ This argument is also misleading and wrong. Sunbeam, in fact, did furnish projections described as "aggressive" to its banks. But those were not the January 31, 2000 "deliverable" projections. Rather, they were March 1, 2000 projections, which were self-described as "aggressive" and contained "stretch" EBITDA figures.

58 Respondent's Opening Post-Trial Br. at 42 (citing the testimony of Chicago Partners' John Garvey).

PX 51, which is the Sunbeam January 31, 2001 bank "deliverable," contains the projections that Petitioners' expert used to perform his Section 262 valuation of Coleman. Nothing in those projections or in the accompanying cover letter describes them as "aggressive." To the contrary, PX 51 recites Sunbeam management's belief "that actual results for this time period should exceed these projections . . ."⁵⁹ and that:

59 PX 51 at 50029.

[a]s we continue execution of our corporate strategy during 2000 (as discussed at our recent meeting). . . . we believe that our growth targets in 2001 and 2002 should increase such that our [EBITDA] performance by 2002 is closer to $450 million versus the $371 million reflected herein.⁶⁰

60 Id. at 50030.

60 Id. at 50030.

Later, on February 15, 2000, Sunbeam sent its banks a letter promising to provide, among other things, " anticipated `stretch' improvements in SBU financial results in 2001 and 2002."⁶¹ On March 1, 2000, Sunbeam sent the banks a new set of projections, which stated that " the targeted results and timetable could be characterized as somewhat aggressive."⁶² The third page of that document explained that the new "stretch" objectives were "being established for the long-term incentive plan (LTIP) toward which SBU management will be driving."⁶³ It was those projections — not the January 31, 2000 "deliverable" projections — that had been designed to give "incentives" to SBU management.⁶⁴

61 RX 23 at 1462 (emphasis added).

62 RX 24 at C5731 (emphasis added).

63 Id. at C5732.

64 The EBITDA "LTIP" targets for 2000-2002 are shown on the chart at page C5732 of RX 24. The projections on page C5740 of that same exhibit confirm that those were the EBITDA targets "with stretch objectives." The projections in RX24, to repeat, came weeks after the January 31 (15) 2000 projections.

Coleman's final effort to denigrate its management's projections is to argue that the projections are flawed because they were based on the assumption that Coleman would not lose its financing. Again, however, no contemporaneous document voices any concern about the danger that the banks would not fund Coleman. That is no surprise, because the banks would have been cutting their own throats to do that. 1999 was an excellent year. The year 2000 was projected to be even better. If the banks "pulled" their loan, that would force Sunbeam into bankruptcy and possibly liquidation.⁶⁵ Coleman is what was keeping the entire Sunbeam edifice afloat, and Sunbeam, to all appearances, would be able to work out the problems on its own.⁶⁶

65 The possibility of the banks cutting off Coleman's credit would have occurred (if at all) only because of Sunbeam's unilateral decision in 1999 to pledge all of Coleman's assets to support Sunbeam's debt. That decision that was made solely for Sunbeam's benefit and needs, not Coleman's.

66 As events ultimately turned out, that did not occur, but that result was not knowable until long after the merger date. As of the January 6, 2000 merger date there was every indication — and Sunbeam's management believed — that Sunbeam was on its way to recovering from the harm inflicted by the Dunlap regime. Nonetheless, one year later, in February 2001, Sunbeam filed a Chapter 11 bankruptcy reorganization petition, and caused Coleman to do likewise. Shortly thereafter, the United States Bankruptcy Court lifted the automatic stay and allowed this appraisal proceeding to go forward. The record does not disclose the current status of the Sunbeam bankruptcy.

E. The Back-End Merger

The final chapter of the narrative is the back-end merger, which occurred on January 6, 2000. By that point, the market price of Sunbeam stock — which comprised the bulk of the merger consideration negotiated in February 1998 — had significantly declined. Sunbeam (Coleman) management did not, however, seek financial advice about whether the originally-negotiated merger consideration package, if paid in January 2000, would be fair to the minority. Nor did management employ any other process to determine if the 1998 merger terms remained fair. All Sunbeam (Coleman) management did, in the back-end merger whereby it acquired the publicly-owned Coleman shares, was pay the identical package of cash and Sunbeam stock that had been negotiated in February 1998. In 1998 that package was worth from $27.50 to $30+ per share, but on January 6, 2000 its worth (measured by the market price of Sunbeam stock) had fallen to $9.31 per Coleman share.

In this proceeding, Coleman asserts that as of the merger date, the going concern value of Coleman stock was $5.83 per share — almost $3.50 per share less than the $9.31 per share that the public shareholders (other than the Petitioners, who sought appraisal) actually received. That $5.83 value did not result from any valuation process employed specifically in connection with the back-end merger. It is simply the number that Coleman's valuation expert arrived at after it had been retained to give expert testimony in this litigation.

II. THE PARTIES' CONTENTIONS AND THE ISSUES PRESENTED

A. The Applicable Standards

In an 8 Del. C. § 262 appraisal proceeding, this Court must "appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger . . . together with a fair rate of interest, if any."⁶⁷ In determining "fair value," the Court must value the appraised company as an ongoing enterprise, i.e., as a going concern, by considering "all relevant factors."⁶⁸ In doing that, the Court must consider "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court."⁶⁹

A. The Parties' Appraisals And Their Respective Contentions Summarized

67 8 Del. C. § 262(h).

68 Id; Matter of Shell Oil Co., 607 A.2d 1213, 1218 (Del. 1992).

69 Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983).

1. Preliminary

The ultimate issue that must be decided is Coleman's fair value as of the January 6, 2000 back-end merger date. Based upon the valuation of their expert, Dr. Samuel J. Kursh, the Petitioners claim that Coleman's fair value was $31.94 per share.⁷⁰ Relying upon the valuation performed by its expert, John Garvey of Chicago Partners, the Respondent contends that Coleman's fair value was $5.83 per share. Because these two quite divergent appraisals generate the issues presented, the methodology employed by each expert, and each side's criticisms of the other's methodology, are next summarized. The details of each expert's methodologies are set forth in footnotes accompanying the description, and the parties' respective contentions are fleshed out more fully in Part III of this Opinion.

70 Assuming 58.8 million shares outstanding as of the merger date.

Before the competing valuations (and the parties' challenges thereto) can be meaningfully summarized, the Court must first address a basic, threshold issue: what number of Coleman common shares was outstanding on the date of the merger? It is undisputed that the actual number of shares outstanding was 58.8 million. It is that number that forms the basis of Coleman's fair value calculations. The Petitioners claim, however, that the number of outstanding shares that should be assumed for purposes of determining Coleman's fair value is 55.8 million — 3 million shares less.

The basis for Petitioners' claim is that in 1999, Sunbeam and Coleman entered into agreements under which Sunbeam was issued 3 million shares of convertible preferred Coleman stock at prices that Petitioners contend were unfairly low. That transaction, Petitioners argue, represented a breach of Sunbeam's fiduciary duty to Coleman and should therefore be disregarded. That is, Petitioners argue that Sunbeam's conversion of its preferred stock into common shares shortly before the back-end merger should be treated as if the conversion had never occurred.

What complicates the picture is that Petitioners instructed their expert to assume that the 1999 transaction had been equitably undone, such that on the merger date Coleman's outstanding shares totaled 55.8 million, rather than 58.8 million. As a result, the valuation analysis performed by each side's expert assumed a different number of outstanding shares, likening any comparison of their results to apples and oranges. That state of affairs requires the Court to confront at the outset the question of what number of outstanding shares should be assumed for purposes of this appraisal proceeding.

It is unnecessary to decide the merits of the Petitioners' fiduciary duty claim to answer that question. In Gentile v. Singlepoint Financial, Inc., ⁷¹ Vice Chancellor Noble determined that this Court lacks the power in a Section 262 appraisal proceeding to disregard a pre-merger issuance of stock, even if that transaction is claimed to be improperly dilutive. Because the Court finds Gentile to be controlling, the Petitioners' wrongful dilution claim is not cognizable, as it falls outside the scope of issues this Court is empowered to decide in a statutory appraisal proceeding. Accordingly, the discussion of both expert valuations that follows, will assume the actual number of Coleman common shares that were outstanding at the time of the merger: 58.8 million.⁷²

2. Dr. Kursh's Valuation Analysis And Coleman's Attack Upon It

a. Dr. Kursh's Valuation Summarized

71 C.A. No. 18677-NC, 2003 WL 124050 at *5 (Del.Ch. Mar. 5, 2003).

72 In fairness to the Petitioners, Dr. Kursh did prepare an exhibit to his report (PX 21, Ex. V) that discloses the results of his valuation in alternative form; i.e., assuming that the number of outstanding shares was either 55.8 million or (alternatively) 58.8 million.

Dr. Kursh appraised Coleman by employing four separate valuation methodologies. These methodologies involved analyses of: (1) transactions in Coleman's own stock and assets ("Coleman-specific transactions"); (2) acquisitions of companies whose businesses approximated Coleman's during the relevant period ("comparable company transactions"); (3) a discounted cash flow ("DCF") analysis based upon the January 31, 2000 "deliverable" projections that Coleman provided to its banks; and (4) publicly traded companies analyzed in the March 1998 Morgan Stanley and CSFB fairness opinions ("comparable company analysis").⁷³ Coleman-Specific Transactions Analysis. Dr. Kursh first valued Coleman based upon five transactions that involved Coleman stock or assets: (a) the cash-out of Coleman options on January 6, 2000; (b) the front-end merger involving the purchase of MF's stake in Coleman on March 30, 1998; (c) the trading history of Coleman stock on February 27, 1998; (d) the proposed IPO of Powermate; and (e) the pending divestiture of Eastpak.

73 PX 21.

Dr. Kursh's analysis of the first of those transactions — the January 6, 2000 cash-out of Coleman options — yielded a value of $32.35 per share.⁷⁴ The second transaction (the March 30, 1998 front-end merger) resulted in valuations of $46.82 per share and $33.31 per share, respectively, depending on whether or not Coleman's EBITDA increased between 1997 and 1999 is taken into account.⁷⁵ The third subject company transaction — Coleman's actual trading results on the New York Stock Exchange on February 27, 1998⁷⁶ — resulted in alternative values of $46.22 per share and $42.38 per share as of January 6, 2000.⁷⁷ Dr. Kursh's analysis of the fourth transaction (the proposed Powermate IPO) resulted in values ranging from $28.86 to $32.43 per share.⁷⁸ Dr. Kursh's fifth valuation analysis, which centered on the proposed divestiture of Eastpak at a price of $100 million that had been agreed-to in principle, implied an EBITDA multiple of 14.93x and a value for Coleman of $34.72.⁷⁹

74 Computed as follows: the option holders were given the right to cash out their shares at the greater of the market price or $27.50 per share. Because the $27.50 figure was derived from a calculation that included a 15% discount for lack of marketability to reflect the restricted stock that MF was receiving (PX 48 at 43514; PX 21 at 23; Trial Tr. at 252), that discount was "backed out" (i.e., a 15% premium was added), resulting in an undiscounted cash out price of $32.35 per share. That value, which represented an implied EBITDA multiple of 13.35x (PX 21 at 28), is consistent with the $30+ per share Mr. Levin received in cashing out his Coleman options.

75 Sunbeam's purchase of MF's majority interest in Coleman represented a 1997 EBITDA multiple of 19.48x, which, when used to calculate Coleman's Total Enterprise Value ("TEV") on the merger date, resulted in an implied fair value of $48.82 per Coleman share. That value reflects Coleman's significantly increased EBITDA between 1997 and 1999. (PX 21 at 22, Ex. G). If, however, it is assumed that there had been no such increase in EBITDA (i.e., if Coleman's TEV were held constant over that period), and if the valuation of the MF front-end merger (rather than its multiple) were used as an indicator of value as of the merger date, the result would be an EBITDA multiple of 13.71x and an implied fair value of $33.31 per share as of the merger date. Id.

76 February 27, 1998 was the last day Coleman traded as an independent company before its stock price was influenced by Sunbeam becoming the majority stockholder.

77 After converting the assumed number of outstanding shares from 55.8 million to 58.8 million. Coleman's closing price on February 27, 1998 was $20.88 per share. Because that price reflected an implicit minority discount, an adjustment (in the form of an additional control premium) was required. In Dr. Kursh's view, the range of control premiums actually observed in the market was from 30 to 40 percent. (PX 21 at Ex. D, p. 13; Trial Tr. at 256). According to Dr. Kursh, Morgan Stanley, in its fairness opinion, concluded that 50% was the appropriate non-synergy premium. Applying that premium to Coleman's minority trading price yielded an EBITDA multiple of 19.44x and an implied fair value of $48.71 per share. (PX 21, Ex. G). Because 50% was above the range of premiums typically observed, Dr. Kursh performed an alternative valuation that assumed a 35% premium. That analysis yielded an EBITDA multiple of 17.93x and an implied fair value of $44.66 per share as of January 6, 2000. ( Id.)

78 After converting the number of outstanding shares from 55.8 million to 58.8 million. On the merger date, Coleman was considering an IPO of a 19% minority interest in Powermate for at least $100 million, which represented an implied valuation of $500 million for 100% of Powermate. (PX 21 at 27; Trial Tr. at 130-31). To adjust for the minority discount inherent in that offering price, Dr. Kursh applied both the 35% premium observed in the marketplace and the 50% premium used by Morgan Stanley. That yielded an EBITDA multiple range of 12.63x to 14.03x, and a range of fair values from $30.41 to $34.17 per share. (PX 21, Ex. G).

79 PX 21 at 26, 27. The $34.72 per share price assumes 58.8 million outstanding shares on the merger date.

To summarize: Dr. Kursh's analysis of actual subject company transactions in Coleman stock (plus the proposed sale of Eastpak and IPO of Powermate) yielded merger-date fair values ranging from $32.35 to $46.86 per share.

Comparable Company Transactions Analysis. Dr. Kursh's second valuation method involved analyzing 37 acquisitions of publicly traded companies in the years before the merger date. Both Morgan Stanley and CSFB had employed that methodology in their 1998 fairness opinions, to derive multiples for their targets' EBITDA for the last twelve months (LTM). Although Dr. Kursh did not believe that any company was truly comparable to Coleman, he, nonetheless, did identify a subset of five acquired companies whose acquisition was relatively close in time to the merger and whose combined product mix were, in his judgment, the most similar to Coleman. These transactions exhibited LTM EBITDA multiples between 12.7x to 14.8x, and a median EBITDA multiple of 14.3x, which was within the range identified by Morgan Stanley's fairness opinion.⁸⁰ Applying the observed multiples to Coleman's EBITDA yielded values that ranged from $29.56 to $34.92 per share as of the merger date.⁸¹ Discounted Cash Flow Analysis. Dr. Kursh also valued Coleman under the DCF methodology,⁸² using a three-stage model, as distinguished from the two-stage DCF valuation performed by Chicago Partners. In Dr. Kursh's view, the three-stage model is more accurate and less reliant upon the final terminal value. That is because the intermediate stage "smoothes the transition" between the first stage (where values are derived from discounted projected net cash flows for a fixed number of years) and the final stage (where the terminal value is derived). Dr. Kursh employed management's January 31 "bank deliverable" projections for the first stage of his analysis. For the second stage, he developed projections for years 2003 through 2005; and for the third stage he used an accepted financial measure (the Gordon Growth Model) to calculate Coleman's terminal value.

80 From the 31 company groups it analyzed, Morgan Stanley identified a multiple range of 12.0x to 15.6x for use with Coleman's LTM EBITDA. (PX 21 at 31 and Ex. H; PX 42 at CLN 36735/MX10096).

81 PX 21 at 31-32; Ex. V, p. 2.

82 PX 21 at p. 32-42; Exs. J-O.

Dr. Kursh used the January 31 "deliverable" projections for the first stage because in his view they were highly reliable. First, those projections had been furnished to Coleman/Sunbeam's banks in circumstances where the companies' performance and prospects were being carefully scrutinized and where it was essential that Coleman's actual performance met or exceeded those projections. Second, the projections had been "vetted" for reliability by an independent firm, Policano and Manzo, which the banks had engaged for that purpose. Third, management had represented the projections as their best estimate of the future. The main difficulty with the projections was that they were at the SBU level, rather than being developed for Coleman as a separate entity. Accordingly, Dr. Kursh had to consolidate the financial data from Coleman's separate SBUs, and from that consolidated data he calculated Coleman's aggregate EBITDA and free cash flow.⁸³

83 Coleman questions whether Dr. Kursh's consolidation methodology accurately allocated Sunbeam corporate expenses at a Coleman SBU level. Mindful of the problem, Dr. Kursh checked the 1999 EBITDA results generated by his consolidation model against the EBITDA consolidated figures reported in Coleman's audited figures for 1999. Dr. Kursh's consolidation model produced results that varied from Coleman's own cost-allocated figures by less than one-half percent. Trial Tr. at 278-279; PX 21 at Ex. J. Accordingly, there is no basis to question the accuracy of Dr. Kursh's consolidation.

For his second, or intermediate, stage, Dr. Kursh "ramp[ed] [down] sales growth" from 16.1% in 2002 to 10% in 2005, before applying alternative growth assumption scenarios of 4%, 5%, and 6%, to arrive at Coleman's terminal value. His intermediate period projections also reflected that capital expenditures had exceeded depreciation by a cumulative $32.3 million from 1995 through 1999, and were projected to exceed depreciation from 2000 through 2002 by a cumulative $4.2 million.⁸⁴

84 PX 21 at p. 41.

To compute Coleman's (third stage) terminal value, Dr. Kursh used a range above the rate of long-term inflation, assuming (alternatively) perpetual growth rates of 4%, 5% and 6%. Because Coleman's product lines had a dominant market share and brand recognition, Dr. Kursh concluded that it was appropriate to assume perpetual growth rates of 5% to 6% to calculate Coleman's terminal value.⁸⁵

85 Trial Tr. at 280-282; PX 21 at 49 and Ex. O.

Applying discount rates ranging between 11% and 13%, Dr. Kursh reduced the projected cash flows, and the terminal value to present values.⁸⁶ After analyzing the resulting matrix, Dr. Kursh concluded that the most reasonable range of values (using discount rates between 11.5% and 12%) was from $25.41 to $31.94 per share.⁸⁷ Comparable Companies Analysis. Lastly, Dr. Kursh performed an analysis of the stock prices of publicly traded comparable companies, and arrived at a value range of $24.94 to $27.29 per share as of the merger date.⁸⁸ He concluded, however, that because there were no truly good comparables for Coleman, this method was not an accurate indicator of value and that he would not rely upon it.⁸⁹ For that reason, Dr. Kursh's comparable companies valuation is not further considered in this Opinion.

86 PX 21 at 42 and Ex. V, p. 2. To those values, Dr. Kursh added Coleman's current cash balances and the proceeds of the pending Eastpak sale to arrive at total enterprise value(s).

87 PX 21 at Ex. V and § 6.6 at p. 42.

88 Id; Trial Tr. at 287.

89 Trial Tr. at 287-88.

* * *

Having performed these separate valuations, Dr. Kursh then ranked them based on which valuation, in his judgment, most reliably indicated Coleman's fair value. Dr. Kursh arrived at his ultimate fair value by weighting most heavily the component valuations he determined were the most reliable. In Dr. Kursh's judgment, the Coleman-specific transactions in Coleman's own stock provided the best indication of value. The acquired company transactions analysis merited somewhat less weight and was ranked second; and the DCF valuation analysis, which was accorded the least weight, ranked third.⁹⁰ Dr. Kursh's ultimate fair value conclusion — $31.94 per share — represented a point on a range line that fell at the lower end of his subject company transaction value range (from $29.38 to 46.86 per share), at the middle of the comparable company transaction value range (from $29.56 to $34.92 per share), and at the high end of the DCF value range (from $25.41 to $31.94 per share).⁹¹ b. Coleman's Challenges To Dr. Kursh's Valuation Analysis

90 Trial Tr. at 288-89.

91 PX 21, Ex. V; Trial Tr. at 289.

Coleman advances an array of arguments, the bottom line of which is that Dr. Kursh's analyses must all be disregarded as conceptually and factually erroneous.

Coleman claims that Dr. Kursh's valuations are conceptually wrong for two reasons. The first is that all of his valuations rely, explicitly or implicitly, upon values obtained from sales of Coleman stock or assets, or sales of comparable companies. That approach, Coleman urges, is impermissible because the focus of Section 262 is going concern value, not "sale value." Sales value cannot be considered, Coleman insists, because it includes statutorily proscribed "elements of value arising from the accomplishment or expectation of the merger."⁹² This argument, although claimed to invalidate all of Dr. Kursh's valuations, is directed primarily to Dr. Kursh's "Coleman-specific transactions" analysis (which Dr. Kursh weighted most heavily) and to his "acquired company transactions" analysis (to which he gave the second highest weight).

92 8 Del. C. § 262(h).

Coleman's second conceptual argument, which also challenges those two valuation methods, is that Dr. Kursh's results do not properly measure Coleman's "going concern value" as of the merger date. In addition, Coleman argues that Dr. Kursh improperly treated Eastpak as a "subject company transaction" at the agreed-to-in-principle sale price of $100 million. That treatment was improper (Coleman says) because the sale of Eastpak did not close until May 2000, and Sunbeam had no definitive agreement to sell Eastpak until March 2000 — events that both occurred after the merger. That treatment (Coleman urges) also fatally infected Dr. Kursh's DCF analysis, which should have valued only Eastpak's projected future cash flow, rather than treating Eastpak as a $100 million monetized asset and then adding to it Coleman's DCF value (without Eastpak).

Coleman's also challenges Dr. Kursh's "acquired company transactions" and DCF analyses in more financially specific terms. Coleman contends that Dr. Kursh's acquired company transactions valuation is flawed, because the resulting values include a control premium. Adding a control premium is impermissible, Coleman urges, because there was no express testimony establishing that publicly traded stock prices reflect an implicit minority discount.

Coleman also challenges Dr. Kursh's DCF analysis on the ground that its inputs are faulty in several different respects. Specifically, Coleman claims that Dr. Kursh: (1) improperly projected cost allocations that were based upon Sunbeam's "aggressive" January 31, 2000 projections; (2) improperly used a three-stage DCF, which involved "inventing" three years of additional projections to add extra value to the company; (3) improperly adopted an unreasonably high perpetual growth prediction to calculate terminal value; and (4) improperly used a low discount rate that ignored Coleman's operative reality at the time of the merger.

The Petitioners assiduously dispute all of these criticisms.

3. Chicago Partners' Valuation Analysis And The Petitioners' Attack Upon It

a. Mr. Garvey's Valuation Summarized

Coleman's trial valuation expert, John Garvey of Chicago Partners, used two valuation methods to support his conclusion that Coleman's fair value on the merger date was $5.83 per share: the comparable company approach and a DCF analysis.⁹³ Because Garvey concluded that the comparable company valuation approach would more likely provide a reasonable estimate of Coleman's fair value" than the DCF valuation, he used his DCF results only to confirm the conclusions reached under his comparable companies analysis.⁹⁴ Mr. Garvey's Comparable Companies Analysis. This method values a firm based on ratios of stock market valuations and the revenue or profitability of the subject firm and of comparable companies in that firm's industry. Market prices derived from comparable companies are used to determine an appropriate multiple of the subject company's EBIT or EBITDA. Common multiples are the ratio of total enterprise value (the value of equity plus debt) to EBIT or EBITDA of the peer companies. The subject firm's projected performance (EBIT or EBITDA) is then multiplied by the selected peer multiple to compute the firm's total enterprise value. The value of the firm's debt and its non-common equity shareholdings is then deducted from enterprise value, to arrive at the value of the firm's common equity shares.⁹⁵

93 RX 1 at 30.

94 Id. at 36, 31-32.

95 Id. at 30-31.

Under this approach the first step was to identify companies that were comparable to Coleman. Mr. Garvey examined the CSFB and Morgan Stanley 1998 fairness opinions, as well as Bloomberg L.P.'s designation of Coleman's peers, and companies identified by Ibbotson Associates. From these sources he then compiled a broad list of 15 companies that manufactured outdoor recreation products ( e.g., camping or sporting goods, excluding apparel) and products closely related to Coleman's Powermate or Eastpak businesses.⁹⁶

96 Id. at 37-38.

After gathering relevant historical and projected financial data for those companies, Garvey calculated the ratio of each company's enterprise value to sales, gross margins, EBIT and EBITDA for the latest twelve months (LTM) up to the merger date. He also calculated those ratios from similar projected data for the year 2000. The resulting multiples ranged from 3.82x to 7.58x times EBITDA for year 2000. Within that range the mean multiple was 5.61x and the median was 5.78x. Based upon the peers' reported EBITDA for 1999, the resulting multiples of LTM EBITDA ranged from 3.33x to 11.05x, with a mean multiple of 6.53x and a median multiple of 6.34x.⁹⁷

97 RX 1 at Exs. 10, 11.

Mr. Garvey next applied his 2000 EBITDA median multiple (5.78x) against a matrix of sales growth and EBITDA margin assumptions for Coleman for the year 2000. Like Dr. Kursh, Mr. Garvey had to create projections for Coleman for year 2000 based upon the Coleman components (SBUs) of Sunbeam's 2000 plan. Combining the Sunbeam projections for the Coleman Outdoor Recreation, Powermate, and Eastpak SBUs, as well as Coleman's portion of the International SBU and the corporate and shared service expense, Garvey arrived at projected sales growth of 12.8%, and projected EBITDA margin of 12.8%, for Coleman. The result was an EBITDA for 2000 of $175 million.

But, Garvey did not use the $175 million EBITDA projections, or any other of management's contemporaneous projections that were delivered to the banks on January 31, 2000. Rather, based primarily on his discussions with Sunbeam/Coleman management, Mr. Garvey concluded that (1) Sunbeam's January 31, 2000 "deliverable" projections had been created for motivational rather than valuation purposes and were intended to be "aggressive;" (2) the projections rested upon assumptions that had either proven false or were still unknown as of the valuation date;⁹⁸ and (3) based upon Coleman's historical performance, the EBITDA margin Coleman realized in 1999 was not achievable on an ongoing basis. Accordingly, Mr. Garvey's matrix reflected primarily Garvey's own assumptions of lower margins and sales growth.⁹⁹

98 Those assumptions were that: (i) Sunbeam would be unable to get the necessary bank waiver or the additional receivable financing it needed to continue operating after April 2000; and (ii) management had assumed that Y2K emergencies would occur and increase Coleman's sales of emergency-related equipment. As previously found in Part I of this Opinion, the Court rejects Coleman's contention that Sunbeam's projections for 2000 as reflected in the January 31, 2000 bank deliverables were aggressive and unworthy of reliance for purposes of valuing Coleman on the merger date.

99 Trial Tr. at 571-581. The "low" end of Mr. Garvey's matrix assumed a 10% decline in Coleman sales and a 6% decline in EBITDA margin, leading to an EBITDA of $65.4 million. (RX 1 at Ex. 12B).

From that matrix, Mr. Garvey selected as the most reasonable enterprise values ranging between $632 million and $790.1 million. Mr. Garvey assumed that sales would increase 12.8% between 1999 and 2000, and that 2000 EBITDA margins would be 8% or 10% of sales, rather than the 12.8% growth rate assumed by the January 31, 2000 Sunbeam "deliverable" projections.¹⁰⁰ Unlike Dr. Kursh, Mr. Garvey did not add a control premium to the total enterprise values he derived by the comparable company method.

100 Trial Tr. at 579-80.

Mr. Garvey's DCF Analysis. Mr. Garvey also performed a DCF valuation of Coleman. Because no projections or forecasts existed for Coleman as a separate entity on the merger date, Mr. Garvey (like Dr. Kursh) constructed his own forecast for Coleman, by using portions of the Sunbeam 2000 plan and its 2001-02 projections as building blocks for that forecast. Mr. Garvey valued Coleman's free cash flows through the year 2002 and determined Coleman's terminal value as of year-end 2002.

Mr. Garvey knew that Sunbeam's management had projected Coleman's net revenues to grow by 12.8% in 2000, by 13.6% in 2001 and by 15.5% in 2002; and for those same years, had projected EBITDA margins of 12.8%, 13.4% and 13.9%, respectively. Relying primarily upon his interview with former Sunbeam CFO Bobby Jenkins, Garvey concluded that a more reasonable forecast for Coleman's EBITDA as a percentage of net revenues was 8%, 9% and 10% for years 2000, 2001 and 2002, respectively.¹⁰¹ Mr. Garvey then created a matrix of EBITDA projections, from which he determined Coleman's enterprise values using an 11% Weighted Average Cost of Capital (WACC) and a terminal value multiple of 5.8x times 2002 EBITDA. The resulting enterprise values ranged from $698.9 million to $885.4 million.¹⁰²

101 Garvey did rely upon management's sales growth rate assumption of 12.8%, 13.6%, and 15.5% growth for years 2000, 2001, and 2002, respectively. (RX 1 at 44, 46).

102 RX 1, at 46 and Ex. 15.

Mr. Garvey then reduced those enterprise values to account for "the impact [of] Sunbeam's financial distress . . . on the value of Coleman as of the Appraisal Date."¹⁰³ Based on an earlier academic article that analyzed the probability of a firm defaulting on its debt based on the firm's bond rating, Garvey determined that Sunbeam (which had a low Moody's debt rating as of January 2000) had a 48.4% probability of default. That is, Mr. Garvey found that Sunbeam had a 48.4% probability of filing bankruptcy for itself and its subsidiaries, including Coleman. Assuming that the gross cost of financial distress would be 25% of Coleman's estimated enterprise value, Garvey then multiplied that percentage (25%) by the 48.4% probability of financial distress, to arrive at a 12.1%-of-enterprise-value "cost of financial distress" for Coleman. That "financial distress" adjustment reduced Coleman's enterprise valuation to an amount ranging from $332.5 million to $892.5 million (based on his projected 2000 EBITDA multiple) and from $150.2 million to $853.5 million (based on his projected 2000 EBIT multiple).¹⁰⁴ Chicago Partners' Fair Value Conclusion. Based upon his review of the record, his discussions with Coleman and Sunbeam management, and his comparable company and DCF valuation analyses, Mr. Garvey concluded that the fair value of Coleman as of January 6, 2000 was $5.83 per share. That value was based on Mr. Garvey's determination that Coleman's enterprise value on the merger date was $750 million, and was derived as follows:

103 RX 1 at 46.

104 Id. at 47.

------------------------------------------------------------- | Enterprise Value as of January 6, 2000 $750.0 | | Less: Financial Distress Discount (12.1%) (90.8) | | Debt and Minority Interest (316.3) | | Equity Value 343.0 | | Number of Shares Outstanding ÷ 58.8 | | ______ | | | | Equity Value Per Share As of January 6, 2000 $ 5.83 | ------------------------------------------------------------

b. The Petitioners' Challenges To Mr. Garvey's Valuation Analysis

The Petitioners level a multitude of challenges to Mr. Garvey's valuation analyses, which are next summarized.

Petitioners argue that the valuation resulting from Chicago Partners' primary methodology — its comparable company analysis — is flawed for various reasons. Specifically: (1) the comparable company method is normally not used as a primary, but only as a "back-up," valuation methodology because it is peculiarly susceptible to manipulation; (2) Chicago Partners' inputs — namely, its year 2000 EBITDA figure, its EBITDA multiple, its discount for financial distress, and its net debt whose source was incorrect, self-serving information from management — were conceptually and factually wrong; (3) the "net debt" input was incorrect because it included short term borrowings and minority interests; (4) the year 2000 EBITDA input ($129.75 million) was an after-the-fact projection created during litigation, and was $45 million less than management's $175.6 million projection for year 2000; (5) the EBITDA multiple inputs (LTM multiple=6.33x; year 2000 multiple=5.78x) were wrong because they were based on multiples of companies that were not comparable to Coleman and which analysts had rated as "very, very, very cheap;"¹⁰⁵ (6) Garvey's failure to remove the implicit minority discount (by adding an offsetting control premium) was improper as a matter of finance theory and Delaware law; and (7) Garvey's discount for Sunbeam's "financial distress" is unsupported in fact and invalid under Delaware law.

105 Petitioners' Opening Post-Trial Br. at 48.

The Petitioners also level a multi-pronged attack upon Chicago Partners' DCF valuation. That valuation, Petitioners argue, merits outright rejection because: (1) Chicago Partners' terminal value represents from 70% to 80% of the entire DCF valuation and is based upon an improper EBITDA multiple (5.78x) derived from its flawed comparable companies analysis; (2) the DCF analysis used the same projections that had been used in the comparable companies approach; and (3) Coleman's cost of debt was miscalculated in determining the weighted average cost of capital (WACC).

Coleman heavily disputes all of these criticisms.

B. The Issues Presented

The parties' competing valuations, and their respective challenges thereto, generate the issues presented, most of which pertain to the validity of either Dr. Kursh's or Chicago Partners' valuation of Coleman.

The issues relating to the validity of Dr. Kursh's valuation are:

(1) Were the valuations resulting from Dr. Kursh's Coleman-specific and acquired company transactions analyses legally improper measures of Coleman's going concern value, because they rely upon values derived from sales of Coleman stock or assets or upon sales of companies (including Coleman)?

(2) Was it proper under Delaware law to add a control premium to the value(s) derived from Dr. Kursh's acquired company transactions methodology?

(3) Was it proper for Dr. Kursh to treat the pending Eastpak sale as a company-specific transaction valued at $100 million, even though the transaction did not become the subject of a formal contract, and did not close, until after the merger?

(4) Were the inputs to Dr. Kursh's DCF analysis improper for any or all of the following reasons:

(a) Dr. Kursh used the management projections that were delivered to Sunbeam's banks on January 31 2000;

(b) Dr. Kursh included three additional years of projected results that he developed as a "second stage" before computing Coleman's terminal value;

(c) Dr. Kursh's terminal value improperly assumed that Coleman would experience perpetual growth above the rate of inflation; and/or

(d) Dr. Kursh's discount rate was unreasonably low, given Coleman's operative reality at the time of the merger?

The issues relating to the validity of Chicago Partners' valuation are:

(1) Should Chicago Partners' comparable company transaction valuation be rejected for any or all of the following reasons:

(a) It is not commonly regarded as a "primary" valuation methodology in the financial community;

(b) One or more of the inputs to Chicago Partners' comparable company analysis were improper because:

(i) Chicago Partners based certain inputs upon erroneous information it obtained in off-the-record interviews with Sunbeam management;

(ii) Chicago Partners overstated "net debt" by improperly including short-term borrowings and minority interests;

(iii) Chicago Partners created its own year 2000 EBITDA projection in connection with this litigation, rather than relying upon management's own contemporaneous projection, which was $45 million higher;

(iv) Chicago Partners derived its EBITDA multiple(s) from firms that were not comparable to Coleman; and/or

(c) Chicago Partners' failure to eliminate the minority discount implicit in its comparable company valuation (by adding a control premium), was improper as a matter of finance theory and Delaware law?

(2) Should Chicago Partners' DCF valuation of Coleman be rejected for any or all of the following reasons:

(a) Chicago Partners used the same (improper) EBITDA multiple derived from its comparable companies valuation, to calculate a flawed terminal value that represents 70% to 80% of Coleman's total DCF valuation of Coleman;

(b) Chicago Partners based its DCF valuation on the same (flawed) projections that it used to determine Coleman's value under the comparable companies method; and/or

(c) Chicago Partners miscalculated Coleman's cost of debt in determining Coleman's weighted average cost of capital?

* * *

Although the parties have clearly generated a multitude of valuation issues, it is not necessary for this Court to resolve them all in order to determine Coleman's fair value as of the merger date. In Parts III (A) and (B), infra, of this Opinion, the Court assesses the merits of the valuations performed by Chicago Partners and Dr. Kursh, respectively. In Part IV (A), the Court independently determines Coleman's fair value, and in Part IV (B), infra, the Court determines the appropriate rate of interest.¹⁰⁶

106 Petitioners also seek an award of attorneys' fees and expenses against Coleman, on the ground that Coleman has conducted this litigation in bad faith. The attorneys' fee issue is not addressed in this Opinion, and will be the subject of a later separate opinion.

III. ANALYSIS OF THE TWO EXPERTS' VALUATIONS

A. Merits of Chicago Partners' § 262 Valuation of Coleman

Having considered the Chicago Partners valuation, the Court concludes that it is not a reliable measure of Coleman's fair value on the merger date and must be rejected. Several reasons compel that conclusion.

First, the Chicago Partners valuation rests on a core factual assumption that as of January 6, 2000, Coleman was a "basket case," having lost most of its pre-acquisition value, facing an assured decline in sales, facing long-term negative growth, and teetering on the edge of insolvency with its banks poised to cut off its supply of funds. That assumption is flatly contrary to the facts found by this Court, and amounts, in this Court's view, to a transparent contrivance for litigation purposes.

The adjudicated fact, supported by the overwhelming weight of credible evidence, is that despite the damage that Sunbeam inflicted upon Coleman, by January 6, 2000 Coleman had recovered its pre-acquisition value. Indeed, the same MF management that had turned Coleman around after the Sunbeam disaster was telling the securities market and its banks that Coleman was thriving and would enjoy further growth. The contemporaneous documentary record confirms management's public pronouncements, and provides no support for the quite opposite picture that that same management now seeks to portray to this Court. To be blunt, the entire edifice of the Chicago Partners valuation rests upon a core factual foundation that is plainly wrong.

Second, the Chicago Partners valuation relies primarily upon a methodology — the comparable company analysis — that in this particular case is inherently less reliable than the company-specific transaction and DCF approaches.¹⁰⁷ The comparable company approach is also of minimal value in this case because: (1) the EBITDA multiples that Chicago Partners derived were from companies that were not "comparable" to Coleman in any meaningful sense; and (2) the projected EBITDA for year 2000 that Chicago Partners used to calculate Coleman's enterprise value(s), was essentially arbitrary because it bore no relationship to Coleman's actual EBITDA for the previous year or to management's actual EBITDA projection for that same year (2000).

107 See Lane v. Cancer Treatment Centers of America, Inc., C.A. No. 12207, 2004 WL 1752847 at *35 (Del.Ch. July 30, 2004) (finding the DCF analysis "more reliable than the comparable companies analysis in the context of finding fair value" for the company being valued, and weighting the DCF valuation 85% and the comparable companies valuation 15%).

Chicago Partners' EBITDA input for year 2000 — $129.75 million — was $26 million lower than Coleman's historical 1999 EBITDA ($155.8 million), and almost $45 million lower than management's own contemporaneous EBITDA projection for year 2000 ($175.6 million). Chicago Partners selected that lower ($129.75 million) EBITDA figure essentially because it chose to credit management's unsworn representations, derived from off-the-record interviews, that Coleman's 1999 performance could not be replicated and that management's year 2000 projections were "very aggressive." The Court concludes that Chicago Partners' $129.5 million EBITDA input was flawed and unworthy of acceptance, because (1) this Court has previously found as fact that the management representations that Chicago Partners chose to credit were self-serving and incorrect; and (2) this Court has consistently expressed its preference for the most contemporaneous management projections available on the merger date, and has consistently been skeptical of after-the-fact adjustments to such projections made during litigation.¹⁰⁸ As Chancellor Chandler stated in Cede Co. v. Technicolor, Inc.:¹⁰⁹

Contemporary pre-merger management projections are particularly useful in the appraisal context because management projections, by definition, are not tainted by post-merger hindsight and are usually created by an impartial body. In stark contrast, post hoc, litigation-driven forecasts have an "untenably high" probability of containing "hindsight bias and other cognitive distortions."

* * *

When management projections are made in the ordinary course of business, they are generally deemed reliable. Experts who then vary from management forecasts should proffer legitimate reasons for such variance.¹¹⁰

110 Id. at *7 (quoting Agranoff v. Miller, 791 A.2d 880, 892 (Del.Ch. 2001)); accord, In re Emerging Communications Shareholders Litigation, supra.

108 Cede Co. v. JRC Acquisition Corp., C.A. No. 18648, 2004 WL 286963 at *2 (Del.Ch. Feb. 10, 2004) ("[T]his Court prefers valuations based on management projections available as of the date of the merger and holds a healthy skepticism for post-merger adjustments to management projections or the creation of new projections entirely."]; accord, In re Emerging Communications, Inc. Shareholders Litigation, 2004 WL 1305745 (Del.Ch., May 3, 2004, revised June 4, 2004) at *14.

109 C.A. No. 7129, 2003 WL 23700218 (Del.Ch. Dec. 31, 2003, revised July 9, 2004) (appeal pending).

110 Id. at *7 (quoting Agranoff v. Miller, 791 A.2d 880, 892 (Del.Ch. 2001)); accord, In re Emerging Communications Shareholders Litigation, supra.

Chicago Partners has failed to "proffer legitimate reasons" to vary from the projections that management prepared and delivered to Sunbeam's banks on January 31, 2000, and that were ascertainable on the merger date. Chicago Partners' reason for that variance was (to repeat) its reliance on management's off-the-record denigrations of its own projections,¹¹¹ which this Court has rejected as counterfactual. The Court, moreover, has validated the January 31 "deliverable" projections as management's honest and best effort, at that time, to predict Coleman's performance for the year 2000.

111 See Emerging Communications Shareholders Litigation, supra, 2004 WL 1305745 at *25 (criticizing valuation expert's reliance upon "unsworn, post-merger conversations with management" rather than "conduct careful due diligence using the sworn testimony and contemporaneous discovery record.").

Compounding Chicago Partners' error in selecting the EBITDA input was the extraordinarily low EBITDA multiple that it derived from nine selected "comparable" companies. A comparable company analysis is only as valid as the "comparable" firms upon which the analysis is based, are truly comparable.¹¹² Here, none of the companies selected by Chicago Partners were "comparable" to Coleman in any meaningful sense. Even Mr. Levin conceded that Coleman was "unique," and that he did "not know of any company that is directly comparable to Coleman."¹¹³

112 As this Court has previously observed in In re Radiology Associates, Inc., 611 A.2d 485, 490 (Del.Ch. 1991):

The utility of the comparable company approach depends on the similarity between the company [being valued] and the companies used for comparison. At some point the differences become so large that the comparable company method becomes meaningless for valuation purposes.

113 Trial Tr. at 207.

To understand why that observation is accurate, it is helpful to consider Coleman's major product lines and their proportionate share of their respective markets. Based on Mr. Levin's presentations at brokerage conferences in early 2000, Coleman was ranked in first place in terms of industry market share, for each of its significant product lines, during the previous year. ¹¹⁴ That information in summarized in chart form below:

114 PX 36 at 11853; Trial Tr. at 75-76.

------------------------------------------------------------ | Product Line Market Position MarketShare | | Outdoor Recreation | | Lanterns #1 86% | | Camping Stoves #1 67% | | Accessories #1 23% | | Branded Tents #1 20% | | Sleeping Bags #1 36% | | Power Products | | Generators #1 48% | | International (Europe) #1 in camping and backpacks | ------------------------------------------------------------

In selecting comparables for Coleman, Chicago Partners did not choose companies whose products were similarly dominant in their respective markets. Nor did Chicago Partners use the companies Morgan Stanley had identified as comparables in the valuation report it prepared for purposes of the front-end merger in 1998. And, with one possible exception, the companies that Chicago Partners selected were not even in the same business as Coleman.

Of the nine companies that Chicago Partners designated as comparable, three (VF Corp., Russell Corp., and The Kellwood Company) were apparel firms — a category that Chicago Partners in its valuation report claimed it tried to exclude.¹¹⁵ The fourth (Brunswick) was a boating company, of whose business only about 10% was in other outdoor recreation lines.¹¹⁶ The fifth (Pentair) was a manufacturer of tools, water technologies, and enclosures, i.e., a business completely different from Coleman's.¹¹⁷ That is also true for the sixth company (The Stanley Works), which manufactured a wide variety of consumer hand tools, industrial tools, hinges, closet organizing systems, and automatic doors;¹¹⁸ and also for the seventh company (Black Decker), which manufactured and marketed power tools, electric lawn and garden tools, hardware, home improvement products, and engineered fastening and assembly systems.¹¹⁹ The eighth firm (Briggs Stratton) made small engines for outdoor appliances (one of its important products being lawnmower engines), but had only a small product line (generators) that competed modestly with Coleman's Powermate SBU.¹²⁰ The ninth firm (Newell Rubbermaid) had the highest multiple of all nine "comparables."¹²¹ The Petitioners concede that Newell Rubbermaid could be considered as comparable to Coleman during 1998, but (they argue) by 1999, even that firm was trading "at a sharp discount" relative to its peers,¹²² and was "selling at close to its lowest relative valuation in a decade."¹²³

115 RX 1 at 37. Although Kellwood had a subsidiary that made sleeping bags and VF had a business that competed with Eastpak, Mr. Garvey conceded that these were small subsidiaries and that the price of those companies' stocks would be driven by apparel, which was a majority of the business. Trial. Tr. at 693-94.

116 Trial Tr. at 695-96.

117 RX 1 at Ex. 9. Mr. Garvey was under the impression that Pentair made generators, motors and engines but the pertinent exhibit to Chicago Partners' own report showed that Pentair did not manufacture those products. Id; Trial Tr. at 704.

118 RX 1 at Ex. 9.

119 Id.

120 Trial Tr. at 708-09; RX 1 at Ex. 9.

121 [11.06x for the last twelve months and 7.58 for the year 2000.] RX 1 at Exs. 10, 11. Newell Rubbermaid's LTM multiple is almost twice the median LTM multiple (6.53x) and 1.5 times the median 2000 multiple (5.78x) for the nine companies.

122 PX 91.

123 PX 92.

In short, as of the merger date, none of Chicago Partners' "comparables" was truly comparable to Coleman in any meaningful sense, and none of them had economics similar to Coleman's, specifically, a host of product lines that dominated their respective markets. The only attribute that Chicago Partners' "comparables" had in common was that their stock was significantly undervalued in the market, with resulting low EBITDA multiples, as the year 2000 analyst reports for those companies confirm.¹²⁴

124 PX 81 (analyst reports that Kellwood trading at approximately one quarter of the SP 500 multiple); PX 85 (Brunswick trading at a 65% discount to the SP 500 and a 51% discount to its 10 year historical average P/E); PX 87 (Pentair in "takeover candidate territory"); PX 88 (Briggs Stratton is "among the most under appreciated in our capital goods universe"); PX 89 ("The past two years have been trying times for [The Stanley Works] shareholders [and] management"); PX 90 (describing Black Decker as "the most fundamentally misvalued company in our universe"); PX 91 and PX 92 (Newell Rubbermaid stock "remains at low absolute and relative valuations" and "in early December . . . was selling at close to its lowest relative valuation in a decade.").

Only by selecting firms whose securities were significantly undervalued in the market could Chicago Partners support its 5.78x EBITDA multiple for the year 2000. That multiple represents only about one third of Coleman's EBITDA multiple on January 6, 1998 (14.27x).¹²⁵ Mr. Garvey explained that over the ensuing two-year period market multiples had declined by 20% to 30%. But even if that were true, a 25% reduction in Coleman's 1998 EBITDA multiple would still have yielded a multiple of 10.7x — almost twice Chicago Partners' multiple of 5.78x.¹²⁶ The questions is: if, in fact, market multiples declined by 20% to 30% between the two mergers, why then did Chicago Partners choose an implied market multiple for Coleman that represented a 60% decline? Coleman does not answer that question.

125 On January 6, 1998, the closing price of Coleman stock was $15.75 which, when multiplied by 53.4 million shares then outstanding, results in a total enterprise value of $1.3843 billion. Dividing that total enterprise value by Coleman's 1997 EBITDA of $97 million (according to Chicago Partners' report), results in a multiple of 14.27x. (Trial Tr. at 726-34).

126 Trial Tr. at 734-35.

Third, Chicago Partners failed to eliminate the minority discount that is implicit in the value that results from its comparable company method, by adding an offsetting control premium. As Vice Chancellor Noble has observed in Lane v. Cancer Treatment Centers of America, Inc.:

Comparable company analysis . . . suffers from an inherent minority discount. To determine "the intrinsic worth of a corporation on a going concern basis," a premium must be added to adjust for the minority discount. . . . [T]his Court has tended to apply a premium on the order of 30%. . . .¹²⁷

127 2004 WL 1752847 at *35 (citing Doft Co. v. Travelocity.com, Inc., C.A. No. 19734, 2004 WL 1152338 at 10-12 (Del.Ch. May 20, 2004)).

127 2004 WL 1752847 at *35 (citing Doft Co. v. Travelocity.com, Inc., C.A. No. 19734, 2004 WL 1152338 at 10-12 (Del.Ch. May 20, 2004)).

By not adding an offsetting control premium to the value it derived from its comparable companies analysis, Chicago Partners even further undervalued Coleman for Section 262 appraisal purposes.

Fourth, the Chicago Partners comparable company valuation was fatally flawed because it reflected a "parent financial distress" discount that has no basis in corporate finance theory, finance literature, or Delaware law. The rationale for this discount, according to Chicago Partners, was that at the time of the merger, Coleman's parent, Sunbeam, was in financial distress, and the parent's distress would cause equal distress to even a fully solvent subsidiary (Coleman). Chicago Partners arrives at this conclusion by reasoning as follows: Based on the results of a study,¹²⁸ a firm that has a CCC bond rating (as did Sunbeam) has a 48.4% chance of defaulting on its debt within ten years. Another study found that the direct costs of bankruptcy could equal up to 5%, and that the indirect costs could equal up to 20%, of enterprise value.¹²⁹ Assuming (without factual support) that a corporation's default on debt is tantamount to bankruptcy, Chicago Partners added together the high end of both estimates to arrive at a 25% loss of enterprise value, if Sunbeam were to go bankrupt. Multiplying the 48.4% chance of default by 25%, Chicago arrived at its 12.1% discount for Sunbeam's distress.

128 RX 1 at 47.

129 Trial Tr. at 628-29.

This argument is unworkable, conceptually, factually and even arithmetically. Under Delaware law the proponent of a valuation methodology must establish that its approach is "generally considered acceptable in the financial community."¹³⁰ While a discount of some kind might be plausible if it were applied to Sunbeam, Chicago Partners was unable to point to any finance authority to support the application of such a discount to Coleman.

130 Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983).

Nor does the arithmetic work either. Even if correct, Chicago Partners' 48.4% figure does not represent an immediate chance that Sunbeam would default on its debt (let alone go bankrupt) on the specific merger date. All it represents is the likelihood that a default will occur at some point over the next ten years. By equating a default with bankruptcy, and then multiplying the "costs" of default by the "chance" of a default, Chicago Partners reached a number that reflects the very maximum bankruptcy (not default) costs that Sunbeam might incur at some point over the next ten years.

Thus, the 12.1% number does not reflect value that in any meaningful factual sense Coleman would have lost on the day of the merger. Even if a "parent distress" discount were grounded in finance theory and Delaware law, it was not grounded in reality. At the very least, the 12.1% figure would have to be reduced to present value, which Chicago Partners never did. In short, the discount for distress is simply another contrivance to drive down Coleman's "fair value" to the $5.83 per share level that Chicago Partners needed to justify.

Fifth, the DCF valuation, which Chicago Partners considered to be of only secondary importance in its analysis,¹³¹ is also fatally flawed, for two separate reasons. To begin with, Chicago Partners relied upon the same projections that it used — and this Court rejected — in its comparable companies valuation. Indeed, for the first year of its DCF projections Chicago Partners appears to have forecast an even lower EBITDA ($109 million) than it did in its comparable companies analysis ($129 million).¹³²

131 Chicago Partners used a DCF analysis as a check on their comparable company valuation. In its report, Chicago Partners did not "believe that the DCF valuation is the most accurate methodology for estimating Coleman's value for purposes of this appraisal." RX 1 at 32; Trial Tr. at 546.

132 See Trial Tr. at 743-44; RX 1 at Exs. 15A-15C.

Moreover, Chicago Partners' DCF terminal value — which represents 70% to 80% of Chicago Partners' total DCF value — is in reality a comparable companies analysis packaged in a different form. To compute Coleman's terminal value, Chicago Partners multiplied the previous year's EBITDA by an EBITDA multiple, and then discounted that result to present value. Although that approach is permissible theoretically, Chicago Partners used the same 5.78x EBITDA multiple it had derived from its comparable companies analysis, and that this Court has rejected. Because Chicago Partners concedes that the terminal value for Coleman represented between 70% and 80% of the total DCF value that it derived,¹³³ it follows that 70% to 80% of that DCF value is dependent upon the comparable companies analysis. Mr. Garvey conceded that if the Court rejected his comparable company analysis as unreliable — as has occurred here — that would render his DCF valuation essentially unreliable as well.¹³⁴

133 Trial Tr. at 752-53.

134 Id. at 759-60.

That result is proper and consistent with this Court's precedent. In Gray v. Cytokine Pharmasciences, Inc. ¹³⁵ this Court rejected a DCF valuation where the discounted terminal value represented 75% to 85% of total value. Vice Chancellor Lamb held, in terms equally applicable here:

135 C.A. No. 17451, 2002 WL 853549 (Del.Ch. Apr. 25, 2002).

[The respondent's] DCF is so heavily dependent on the determination of [the company's] terminal value that the entire exercise amounts to little more than a special case of the comparable companies approach to value and, thus, has little or no independent validity. This is easily seen from the fact that [the] discounted terminal value calculations equal or exceed 75% of the total discounted cash flow value of the enterprise in the lowest case and 85% or more in the other three cases presented. . . . In the circumstances presented, this is an added reason not to rely upon [the respondent's] DCF analysis in valuing [the respondent company].¹³⁶

136 Id. at *9.

136 Id. at *9.

At trial, the Petitioners asked Mr. Garvey to determine what Coleman's fair value would be if certain hypothetical adjustments were made to his $5.83 per share fair value. The results of those adjustments, which were set forth in a chart admitted into evidence as PX 93,¹³⁷ is summarized below:

137 The testimony that describes these adjustments, and their results, is found at Trial Tr. at 765-71.

------------------------------------------------------- | Adjustments | | | | — Stated Value in Report $ 5.83 | | — Without Discount 7.38 | | — Actual 1999 EBITDA 9.86 | | — '99 EBITDA × '98 Adjusted Premium 22.97 | | — Plus 35% Control Premium = $32.90 | -------------------------------------------------------

The first line of the chart is Mr. Garvey's $5.83 stated value. The second adjusts that value by eliminating the discount for Sunbeam's financial distress. The third line carries over that change but assumes that actual 1999 EBITDA was used rather than Chicago Partners' litigation projections. The fourth line then takes Coleman's 1999 EBITDA and multiplies it by the 10.7x multiple that would result from using Coleman's actual EBITDA multiple for 1998 and then reducing it by 25%. The fifth line applies a 35% control premium to the prior result to offset Coleman's implicit minority discount. Mr. Garvey agreed that the result of the foregoing adjustments would be $32.90 per share.

Having concluded that the Chicago Partners' valuation must be rejected because it does not reliably measure Coleman's going concern value on the merger date, the Court next addresses the merits of Dr. Kursh's valuation.

B. The Merits of Dr. Kursh's § 262 Valuation of Coleman

1. Coleman's "Sale Value" Argument

Although Coleman challenges Dr. Kursh's valuation on multitudinous grounds, it levels an overarching criticism that it cuts across all of Dr. Kursh's methodologies. For that reason this criticism is addressed at the outset.

Coleman claims that all of Dr. Kursh's analyses must be rejected, because they utilize, either explicitly or implicitly, the value of Coleman in a sale. That, Coleman says, is impermissible because what Section 262 is intended to capture is going concern value, not "sale value." In statutory terms, Coleman is arguing that "sale value" cannot be considered in determining "fair value," because sale value includes statutorily impermissible "elements of value arising from the accomplishment or expectation of the merger."¹³⁸

138 8 Del. C. § 262(h).

This argument verbally conflates three distinct concepts and as a result, hopelessly confuses and distorts all three. Coleman persists in referring to a term — "sale value" — that has no fixed meaning. "Sale value" can mean the value obtained in selling a minority block of shares on the market, which normally will produce a minority-discounted value. Or, it could mean the value expected to be obtained on the market if the entire company is sold, which is "control" or "going concern" value. Or, it could mean the value of the company to a specific purchaser, which normally includes a synergistic element.

Coleman's argument starts with the correct proposition that "fair value" equals going concern value. Coleman next cites cases that disapprove of valuation techniques that include synergies — what Section 262 describes as "elements of value arising from the expectation or accomplishment of the merger." From those predicates, Coleman then leaps to the conclusion that Delaware case law condemns the use of "sale value." Coleman's argument is misguided and misleading, because it does not distinguish between "sale value" that may be considered as evidence of "fair value" and "sale value" that may not be considered as evidence of "fair value." In point of fact, every major valuation technique uses one or more of these "sale values," but the only "sale value" that Section 262 and the case law proscribe are valuation techniques that improperly include synergistic elements of value and minority and illiquidity discounts.

To underscore this point, even the comparable company approach upon which Coleman principally relies necessarily incorporates a form of "sale value." Under that approach, an appraisal must multiply some measure of the subject company's financial performance (in this case, EBITDA) by a multiple that is derived from the stock prices of other companies. That is, the appraiser focuses upon sales of stock of presumably comparable companies and assumes that shares of the subject company will sell in the same multiple range. Thus, the comparable companies methodology relies upon one kind of "sale value" — although one that will often reflect an implicit minority discount.

Other valuation approaches, such as the subject company transaction and the comparative price earnings ratio analyses, also use "sales value" measures. Under those methodologies, the inquiry is: what did similar stocks sell for in the market, or what did the subject company sell for in the market, on the relevant valuation date? The only significant valuation method that does not rely primarily upon sale prices is the DCF, but even that methodology is heavily influenced by "sale value," because the discount rate component is developed in large part from stock sales.¹³⁹ "Sale value" becomes especially significant where terminal value is calculated (as Chicago Partners did here) by multiplying last year's EBITDA by a market-based multiple.

139 For example, the equity component of the weighted average cost of capital ("WACC") is derived from data on stock sales. That is equally true when calculating "beta," if the capital asset pricing model ("CAPM") is used.

In determining "going concern" value, the central inquiry is: what would the asset command in the market, if synergistic elements of value are excluded? Coleman's core valuation premise appears to be that this Court is free to consider sale prices if they are derived from the sale of a minority block of stock in the market, but it is not free to consider sale prices if they are derived from the sale of an entire company in the market. But why? On what principled basis is Chicago Partners free to consider market prices paid for minority stock in very different enterprises, yet Dr. Kursh is not free to consider the market price paid for Coleman itself in 1998?

Under Delaware appraisal law, there is only one principled basis to disregard the price actually derived from the sale of a company as a whole: where, but only to the extent that, the sale price or "sale value" contains synergistic elements. Conversely, therefore, and as the Delaware Supreme Court affirmed in M.P.M. Enterprises, Inc. v. Gilbert, a "sale price" that is derived from a sale of an entire company may be considered so long as synergies are excluded:

A merger price resulting from arms-length negotiations where there are no claims of collusion is a very strong indication of fair value. But in an appraisal action, that merger price must be accompanied by evidence tending to show that it represents the going concern value of the company, rather than just the value of the company to one specific buyer. ¹⁴⁰

140 731 A.2d 790, 796 (Del. 1999) (emphasis added).

140 731 A.2d 790, 796 (Del. 1999) (emphasis added).

That is, "sale value," meaning the sale of an entire subject company, can be a "very strong indication of fair value," if there is evidence that that value does not include synergistic elements — meaning, "the value of the company to one specific buyer." The record shows that the valuation advocated by the Petitioners does not include synergistic elements.¹⁴¹

141 Exhibit V of Dr. Kursh's valuation report (PX 21) sets forth a range of implied share values flowing from his different valuation analyses. By definition the discounted cash flow valuation does not include synergies, and Dr. Kursh's ultimate fair value ($31.94 per share, assuming 58.8 million shares outstanding) is at the high end of the DCF range. Dr. Kursh's subject company transaction valuation could arguably include synergies, but his ultimate fair value figure ($31.94) falls so close to the bottom end of that valuation range ($30.41 to $48.82) that the only fair conclusion must be that if any synergies were, in fact included, they were eliminated ("backed out") by the selection of an almost bottom-of-the-range value.

In short, Coleman's "sale value" argument attempts to conflate into a single quantity three quite distinct types of sale value: synergistic, minority, and "control" (or "going concern"). Synergistic and minority value are excluded under Section 262. Control value — the value derived from a sale of the company as a whole without any discounts for minority status or premia for synergies — is not a proscribed measure of going concern value under Section 262.

Of a similar piece is Coleman's argument that Dr. Kursh's valuations are wrong insofar as they include value that may be attributed to corporate control (i.e., a "control premium"). Coleman's argument is best described with reference to a chart that Coleman prepared, and that counsel used to cross-examine Dr. Kursh at trial. The chart had three parallel lines. The space above the top line was labeled "control value," the space between the top and middle line was labeled "control premium," and the space between the middle and the bottom lines was labeled "non-control value."¹⁴²

142 Trial Tr. at 299-300.

Unsure of what the chart purported to show, the Court questioned Coleman's counsel about it. In response, Coleman's counsel stated that Coleman's position was that "fair value is equal to what is denominated on this chart as non-control value."¹⁴³ From that response it follows that Coleman necessarily is contending that any value above what the chart denominates as "non-control value" — that is, any control premium — is impermissible and cannot be considered under Delaware appraisal law.¹⁴⁴ Coleman's argument — that Dr. Kursh's valuations are conceptually erroneous because they incorporate control premia — rests upon that unspoken premise.

143 Id. at 314-15.

144 Id.

This argument runs so blatantly counter to the settled Delaware precedent on the subject, and so unfairly distorts Dr. Kursh's valuation analysis, as to call into question Coleman's good faith in advancing it.¹⁴⁵ To the extent Dr. Kursh's valuations include a control premium, those valuations are consistent with Delaware law. At the trial, Dr. Kursh stated clearly and explicitly his position and understanding that: (1) a control premium and minority discount are "flip sides" of the same phenomenon; (2) "fair value" for purposes of Delaware appraisal proceedings is "control value" (as depicted in Coleman's chart); (3) "noncontrol value" (as depicted in the chart) represents the minority value of the company; that is, the market price of its stock, which reflects a minority discount from "control value;" (4) "minority" or "noncontrol" value does not represent "fair value" under Delaware law; and (5) it is necessary to add a "control premium" to "non-control" value to eliminate the minority discount, and thereby arrive at "control" or "fair" value.¹⁴⁶

145 Coleman does not advance this argument to advocate "the extension, modification, or reversal of existing law or the establishment of new law." Ct. Ch. R. 11 (b)(2). Rather, Coleman implicitly contends that its argument represents existing law. Given their significant sophistication and experience in matters of this kind, Coleman's counsel must know that that existing Delaware law holds precisely the contrary.

146 Trial Tr. at 305-08. Coleman also accuses Dr. Kursh of using the "wrong standard" under Section 262, because his report does not use the phrase "going concern value." For what that may be worth, and unfortunately for Coleman, neither does the Chicago Partners report. More substantively, Coleman's argument is misleading, because the going concern premise requires the appraiser to assume that the subject company will continue its operations in the same configuration of revenue-producing assets on the valuation date. Shannon P. Pratt, et al., Valuing A Business (4th ed. 2000) ("Pratt") at 33. Dr. Kursh did that, by assuming that Coleman would continue to operate in its normal course and would obtain the financing necessary to do so. The Court has validated that assumption factually, and has invalidated Chicago Partners' contrary assumption, which is that Coleman was on the verge of collapse in January 2000 and would likely not obtain the financing required to continue operations in the ordinary course.

Coleman also argues, in the alternative, that this Court is precluded from crediting the Petitioners' position that publicly traded stock prices reflect an implicit minority discount, because Dr. Kursh did not expressly testify to that effect in this case. According to Coleman, "the only opinion Kursh has offered on the subject . . . is his view that stock market prices are on average lower than pro rata sale value."¹⁴⁷ Only a studied refusal to read or acknowledge the evidence of record can justify that position, because the record clearly shows that Dr. Kursh did testify to that effect.¹⁴⁸ Dr. Kursh's testimony on that point is consistent with both the finance literature and the decisions of this Court,¹⁴⁹ whereas Coleman's contrary arguments, and its criticisms of Dr. Kursh's valuation on that basis, are not.

147 Coleman Op. Post-Trial Br. at 47-48 (emphasis in original).

148 Trial Tr. at 256 ("[P]retty much everyone in the valuation industry would agree [that the stock price] contains some implicit minority discount."); Id. at 285 (testifying that the values generated by the comparable company approach "are all minority trading multiples" because they are derived from the publicly traded stock prices of those companies); and Id. at 286 (stating, when asked to explain what he meant by the term "minority discount," that the valuation community recognizes that "public market prices reflect an implied minority discount . . . from the pro rata value or the fair value or the full value of an ownership interest.").

149 Pratt at 53-54 ("[M]inority ownership interests may be worth considerably less than a pro rata portion of the business value if it were valued as a single, 100 percent ownership interest."); Trial Tr. at 364 (defining the "effect on the pro rata value of an ownership interest" as "the lack of control discount" or "minority discount); accord, M.G. Bancorporation v. LeBeau, 737 A.2d 513, 522-23 and n. 26 (Del. 1999) (affirming Court of Chancery's recognition that the valuation literature supported determination that "market value of invested capital" approach, which used multiples derived from public market prices, "included a built-in minority discount" and "resulted in a minority valuation.").

If the demerit of Coleman's "minority discount/control premium" argument required any further demonstration, it would be this: on the day before the merger was announced the closing price of Coleman stock was $20.88 per share.¹⁵⁰ Given its prior arguments, Coleman's position is that no minority discount was reflected in that trading price, and, that therefore, all of the merger consideration above that $20.88 price represented synergies. There is, however, a way to test that argument. At trial, Mr. Garvey conceded that the way to determine if a stock was trading at a discount is to perform a DCF analysis, and then compare the resulting DCF valuation to the stock trading price.¹⁵¹ In fact, CSFB performed a DCF analysis of Coleman in connection with the first-step merger, and its analysis resulted in valuations that ranged from $24.78 to $29.62 per share — non-synergistic values.

150 PX 21 at Ex. D.

151 Trial Tr. at 737-38.

Coleman's final challenge to Dr. Kursh's company-specific transaction analysis is that Dr. Kursh valued Eastpak at the $100 million sale price that on the merger date had been agreed-to in principle. That was improper, Coleman urges, because on the merger date the Eastpak sale was not a "transaction." Rather, the Eastpak sale was a "speculative element of value not susceptible of proof as of the valuation date," because at that time Eastpak had only begun a process of soliciting bids.¹⁵² This argument does not square with the law or the evidence of record.

152 Coleman Op. Post-Trial Br. at 70. Chicago Partners did not value Eastpak separately, but, rather, accounted for its value by valuing Eastpak's contribution to Coleman's combined EBITDA, as part of its comparable companies analysis.

In a sworn interrogatory response, Coleman stated that in September 1999 — almost four months before the merger — Coleman and VF had "agreed to proceed with [the Eastpak] transaction at a $100 million purchase price."¹⁵³ And, although that sale did not close as soon as expected, Mr. Levin admitted that "at the time of the merger . . . Coleman [was] negotiating to sell Eastpak."¹⁵⁴

153 PX 18 at p. 6.

154 Trial Tr. at 68-69.

Our Supreme Court has held that "any . . . facts which were known or which could be ascertained as of the date of the merger and which throw any light on future prospects of the merged corporation are not only pertinent to an inquiry as to the value of the dissenting stockholder's interest, but must be considered by the agency fixing the value."¹⁵⁵ The $100 million Eastpak sale price that as of the merger date had been agreed-to in principle, but was not yet the subject of a definitive contract, is a fact that was known at the time of the merger. Stated differently, that VF considered Eastpak to be worth $100 million at that time, was not speculation but a known fact that may be considered for purposes of this appraisal.

155 Tri-Continental Corp. v. Battye, 74 A.2d 71, 72 (Del. 1950), quoted with approval in Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) at 713; see also Cede Co. v. Technicolor, Inc., 684 A.2d 289, 299 (Del. 1996).

(2) Coleman's More Specific Challenges

Coleman's remaining challenges are more specific and relate to Dr. Kursh's DCF valuation analysis.

Coleman attacks Dr. Kursh's DCF valuation on four separate grounds: (a) the valuation was based on the projections contained in the January 31, 2000 bank deliverable; (b) Dr. Kursh improperly created and included three additional years of projected cash flows before computing Coleman's terminal value (the "second stage"); (c) Dr. Kursh's terminal value rested on the erroneous assumption that Coleman would experience perpetual growth; and (d) Dr. Kursh's discount rate was unreasonably low. The Court is not persuaded that any of these criticisms is meritorious.

The Court has previously found that the management projections contained in the January 31, 2000 bank deliverables were reliable and, at the time of the merger, were the most recent projections available. Indeed, one of the reasons that the Court declined to credit the Chicago Partners valuation(s) was that Chicago Partners chose not to rely upon management's January 31 "deliverables" projections, but instead chose to create its own in the context of litigation. Conversely, the Court also found that it was proper for Dr. Kursh to rely upon those management projections that Chicago Partners chose to ignore.

Coleman next criticizes Dr. Kursh's use of a three-stage DCF as a contrivance designed to add extra value to the company. The Court cannot agree. Coleman does not contend that it was improper methodologically to construct a three-stage DCF model. Indeed, Morgan Stanley did that in its valuation.¹⁵⁶ Therefore, the only legitimate issue would be whether Dr. Kursh's employment of a three-stage model was reasonable in these specific circumstances. The Court finds that it was.

156 PX 21 at 41, n. 32; see also PX 42 at CLN 36741.

At the time of the merger, Coleman was projecting 16% growth in sales for year 2002, which represented a return to Coleman's prior operating levels.¹⁵⁷ Dr. Kursh utilized a three stage model because he did not believe a 16% growth rate was sustainable long-term. Accordingly, his "second stage" projected a gradual decline in growth rate from 16% in 2002 to approximately 14% for 2003, then to 12% for 2004, then to 10% for 2005, and declining thereafter to a final terminal rate of 4% to 6%, which was slightly above the level of long-term inflation.

157 PX 21 at 38 and Exs. J and O.

The Court is unable to find that approach facially unreasonable in any material respect. Coleman argues otherwise. It claims that Dr. Kursh should have followed Chicago Partners' approach, which was to drop immediately from the 2002 growth rate (16%) to his terminal rate (4% to 6%) in a single year, without any intermediate period or gradations. But Coleman points to no evidence of record that supports such a precipitate assumed decline in growth. Nor has Coleman shown that dramatic drops of that kind would normally occur in the real world of business.

Coleman argues that by including an additional three years of forecasts, Dr. Kursh added at least $391 million to his estimated Coleman enterprise value, as if that number were being made up out of whole cloth. But, if $391 million of value is "added," it is only in the sense that that value represents the amount by which Dr. Kursh's enterprise value exceeds the enterprise value determined by Chicago Partners. That added value is "invented" only if one posits (as Coleman apparently does) that only the Chicago Partners' assumed growth rate structure (and the value flowing therefrom) is reasonable, good and true, but any value above that level is not. Accentuating that flawed assumption is the lack of any effort on Coleman's part to demonstrate the reasonableness of its own terminal growth assumptions. The Chicago Partners report does not disclose any calculation that supports those growth assumptions.¹⁵⁸ For these reasons, no basis has been shown to reject Dr. Kursh's use of a three-stage DCF model in these circumstances.

158 Petitioners' counsel, however, performed such a calculation, which (counsel argues) indicates that the model that Chicago Partners deemed reasonable assumes that Coleman would experience a negative perpetual EBITDA growth each year, i.e., a perpetual decline in earnings. Petitioners reason as follows: a multiple is an inverse capitalization rate. Thus, inverting Chicago Partners' 5.78x terminal EBITDA multiple results in an effective capitalization rate of 17.3% (1÷ 5.78 = .173). A company's capitalization rate can be derived by subtracting its perpetual growth rate from its discount rate. Using Chicago Partners' EBITDA discount rate (5.78), Chicago Partners' perpetual growth rate would be a negative 6.3%, because 17.3 = 11- (-6.3). The Court notes this argument without deciding whether or not it is correct.

Coleman next claims that Dr. Kursh's terminal value must be disregarded because it rests upon the erroneous assumption that Coleman would experience perpetual growth — at twice the rate of inflation (Respondent claims). Dr. Kursh did project terminal values that assumed alternative perpetual growth rates of 4%, 5%, and 6%. What must be kept in mind that in computing a terminal value, only three growth assumptions are possible: (i) perpetual growth, (ii) perpetual stasis (no growth and no decline), and (iii) perpetual decline. To credit Coleman's position, this Court would have to conclude that after 2002, Coleman would experience, in perpetuity, either no sales growth or negative sales growth. Such a finding could only be based upon accepting the Respondent's portrayal of Coleman as a company on the brink of failure — a scenario this Court has rejected as contrary to the weight of the credible evidence of record. The only reasonable inference one can draw from the evidence is that over the long term Coleman's sales would grow, and that its rate of growth would exceed, to some extent, the rate of inflation. That assumption is what that underlies Dr. Kursh's DCF terminal valuation.

Although Respondent contends that Dr. Kursh projected perpetual growth rates at twice his estimated rate of inflation (2% to 3%), that is true only for his 6% assumed growth figures, not for the values derived from the 4% or 5% growth figures. Other than to make unsupported assertions, Respondent has not demonstrated that a 5% (or even 6%) perpetual growth assumption was excessive. In any event, even if it were, the argument is of minimal relevance because Dr. Kursh gave only tertiary weight to the values he derived from his DCF valuation; and Chicago Partners gave its own DCF valuation only secondary weight.

Lastly, Coleman argues that Dr. Kursh's DCF valuation must be rejected because his discount rates, which ranged from 11.5 % to 12% to reach his final DCF valuation conclusion, were unreasonably low, given Coleman's operative reality on the date of the merger. This argument is curious, given that Chicago Partners used a discount rate of 11%, which is lower than any of Dr. Kursh's discount rates. Both experts employed the CAPM to estimate a WACC for Coleman, and both utilized virtually identical risk free rates, equity risk premium and beta assumptions.

Coleman's complaint appears to be that Dr. Kursh's derived cost of equity (14.3% to 15%) was higher than Garvey's cost of equity (10.9% to 13.6%), which would have resulted in a discount rate (for Dr. Kursh) higher than 11.5%, except for the fact that Dr. Kursh "drove down his discount rate" by assuming a pre-tax borrowing rate for Coleman that was less than Dr. Kursh's risk-free rate. What Coleman fails to explain, however, is that if Mr. Garvey's 11% discount rate was reasonable, why Dr. Kursh's higher discount rates were not more reasonable — even though Coleman believes that his discount rates should have been higher.

In the end, however, this quibbling involves much ado over very little. Coleman has not persuaded me that Dr. Kursh's DCF valuation is invalid or should be disregarded. But, by the same token I am persuaded — if only because Dr. Kursh himself concedes — that his DCF analysis deserves less weight in these circumstances than does his company-specific transactions approach. Accordingly, his DCF analysis will be used essentially to verify the soundness of the fair value of Coleman that the Court next independently derives.

IV. THE COURT'S DETERMINATION OF FAIR VALUE AND INTEREST

Having assessed the merits of each side's appraisal of Coleman, the Court must next independently determine Coleman's fair value. Because the Chicago Partners valuation has been rejected, that determination must be based upon reasonable and fair inferences the Court is able to draw from Dr. Kursh's company-specific transactions analysis, and from other reliable evidence of fair value found in the record.

That is much easier said than done, since the task of enterprise valuation, even for a finance expert, is fraught with uncertainty. For a lay person, even one who wears judicial robes, it is even more so. No formula exists that can invest with scientific precision a process that is inherently judgmental. Chancellor Chandler's incisive expression of that problem merits quotation in full text:

[I]t is one of the conceits of our law that we purport to declare something as elusive as the fair value of an entity on a given date. . . . Experience in the adversarial battle of the experts' appraisal process under Delaware law teaches one lesson very clearly: valuation 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 an 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. [A corporation's]. . . . value 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 . . . based on considerations of fairness.¹⁵⁹

159 Cede Co. v. Technicolor, Inc., supra, 2003 WL 23700218 at *2.

159 Cede Co. v. Technicolor, Inc., supra, 2003 WL 23700218 at *2.

A. Coleman's Fair Value

Any analysis of Coleman's fair value as of the merger date must begin with a factual premise — a vision, if you will — about Coleman's financial condition and prospects at that point in time. As this Court has previously found, by the merger date Coleman had recovered its pre-acquisition value that was squandered during the Dunlap regime. And, viewed as a standalone firm, Coleman was poised to do even better, i.e., to achieve continued future growth.¹⁶⁰ Coleman's favorable prospects were based upon the inherent strength and market position of its product lines, wholly independent of whatever temporary revenue and earnings "bounce" might be attributed to Y2K.

160 The qualifier "if viewed as a stand-alone firm" is necessary, because Coleman was caused to file for bankruptcy in 2001 by Sunbeam, which was insolvent and controlled Coleman. There is no basis to suppose that that would have occurred if Coleman was not controlled by Sunbeam.

Two value-related issues flow from that factual premise: (1) what was Coleman's fair value in March 1998 when MF's controlling interest was acquired by Sunbeam in the front-end merger; and (2) between the front-end merger and the back-end merger, did Coleman's fair value increase or remain constant and if its value increased, by how much? The Court turns to these issues.

In this Court's view, the most reliable and persuasive evidence of Coleman's fair value at the time of the March 1998 front-end merger, is the value of the consideration that was negotiated at arm's length, and that Sunbeam actually paid, to acquire the controlling interest in Coleman and to cash out the options held by Messrs. Levin and Perelman. The contractually guaranteed floor price for cashing out the options, it will be recalled, was $27.50 per share. Similarly, the negotiated purchase price for MF's control block was a package of consideration valued at $27.50 per share. The $27.50 price, however, reflected a 15% marketability "haircut" or discount.¹⁶¹ Because marketability discounts at the shareholder level are impermissible under Delaware appraisal law,¹⁶² Dr. Kursh "added back" that discount, and arrived at a value of $32.35 per share. I accept that value as the fair value of Coleman in March 1998. That value is corroborated by Dr. Kursh's alternative $32.12 per share March 30, 1998 valuation that he derived from multiplying Coleman's EBITDA on that date by the EBITDA multiple paid in the front-end merger,¹⁶³ and by the March 2, 1998 back-end merger market value of $32.12 to $32.34 per share received by MF.¹⁶⁴

161 PX 21 at 23.

162 Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1144 (Del. 1989).

163 The $32.12 per share valuation does not take into account the increase in Coleman's EBITDA that occurred in 1997. Dr. Kursh also derived values of $46.22 and $42.38 per share from Coleman's actual NYSE trading results in March 1998, but concluded that those values were not good indicators of value. (PX 21 at 24-25). Accordingly, the Court does not rely upon those valuations for any purpose.

164 See pp. 9 11, supra, of this Opinion.

The next issue is whether Coleman's March 1998 fair value increased during the 18-month interval between the front-end and the back-end mergers. This is a more difficult question. The Court has found that qualitatively speaking, by January 6, 2000 Coleman had recovered its pre-acquisition value and was poised to grow in the future. Those future prospects would suggest a value increase, but if there was an increase the available evidence does not quantify it in any reliable way. For example, the implied value for Coleman that Dr. Kursh derived from his analysis of the proposed IPO of Powermate ranged from $28.86 to $32.43 per share; the implied value that he derived from the pending sale of Eastpak was $34.72; and the values that he derived from his DCF analysis ranged from $25.41 to $31.94 per share. None of these value ranges, or the underlying analysis that produced them, enables the Court to pronounce with any confidence that by the back-end merger date Coleman's fair value had increased by a reliably demonstrable amount.

Because the record does not enable the Court to quantify with any degree of confidence whatever increase in Coleman's March 1998 value may have occurred between the front-end and back-end merger dates, the question of whether Coleman experienced an increase (and if so, by how much) becomes essentially academic. Based upon the available reliable evidence of record, therefore, the Court concludes that the most reasonable (albeit conservative) conclusion is that Coleman's fair value on the January 6, 2000 merger date remained unchanged from its fair value at the time of the March 1998 front-end merger: $32.35 per share.

Although this result reflects the uncertainty that inheres in every judicial appraisal of a corporation's going concern value, there is one additional item of corroborating data that affords some degree of comfort. PX 93, it may be recalled, is a chart that chronicles the resulting increases in value by substituting for Mr. Garvey's valuation inputs, the adjustments that Petitioners argued (and this Court has found) are required either factually or by reason of Delaware law. The result of those adjustments, the chart reveals, is to increase Coleman's fair value from the $5.83 per share valuation of Chicago Partners to $32.90 per share — only $.55 per share above the $32.35 per share fair value adjudicated by this Court.

To summarize: the Court determines that the fair value of Coleman on the merger date was $32.35 per share.

B. The Appropriate Rate And Form of Interest

1. Rate of Interest

The final issue to be resolved is the appropriate rate of interest on the appraisal award, and whether that interest is to be simple or compound.

Once it determines fair value, this Court is required by Delaware's appraisal statute to determine "the fair rate of interest, if any" after considering "all relevant factors."¹⁶⁵ The Court has broad discretion to determine whether interest should be simple or compound, but the Court must explain its choice.¹⁶⁶

165 8 Del. C. § 262(h).

166 8 Del. C. § 262(i); LeBeau, 737 A.2d at 527; Gonzalves v. Straight Arrow Publishers, Inc., 725 A.2d 442 (Table), 1999 WL 87280 at *4 (Del. Feb. 25, 1999).

An interest award in appraisal cases has two purposes. The first is to require the respondent to disgorge any benefit it received from its use of the Petitioner's funds. The second is to compensate the Petitioners for the loss of use of its money. Gonsalves v. Straight Arrow Publishers, Inc. ¹⁶⁷ and other decisions of this Court hold that these twin purposes are served by weighting equally (i) the respondent's actual costs of borrowing and (ii) based upon an objective prudent investor standard, the Petitioners' opportunity cost.¹⁶⁸

167 2002 WL 31057465 (Del.Ch. Sept. 10, 2002) at * 12-13.

168 Cede Co. v. JRC Acquisition Corp., 2004 WL 286963 (Del.Ch. Feb. 10, 2004) at * 12; Ryan v. Tad's Enterprises, Inc., 709 A.2d 682, 705 (Del.Ch. 1996).

Our case law also holds that where the evidence is insufficient to enable the Court to utilize that approach, the legal interest rate can serve as a default rate for prejudgment interest.¹⁶⁹ The Petitioners contend that the "default" legal interest rate should be applied here, because as a result of Sunbeam's bankruptcy, they have been unable to establish what Coleman's unsecured borrowing costs were since the date of the merger,¹⁷⁰ and, hence, cannot calculate a fair rate of interest under the prudent investor approach.

169 Ryan, 709 A.2d at 705.

170 The only unsecured borrowing cost of record was 10.5% paid by Coleman Worldwide in 1998, a rate that Petitioners concede "is not particularly helpful for a 2000 valuation." Petitioners' Op. Post-Trial Br. at 72.

The Respondent, Coleman, on the other hand, did cause its expert, Chicago Partners, to perform "prudent investor" rate of return calculations for the relevant period. Those rates of return are claimed to total 4.5%. That rate, Coleman urges, is what the Court should apply, because "cost of borrowing is only a factor the Court may consider under § 262(h)," and because "Petitioners cannot cause their own windfall by failing to create a sufficient record on a factor they would have liked the Court to consider."¹⁷¹ Coleman contends the legal interest rate may be used in an appraisal only when the parties "have inadequately developed the record on the issue," which (Coleman says) was not done here.¹⁷²

171 Respondent's Post-Trial Answering Br. at 39-40. Coleman argues that an award of interest at the legal rate would provide Petitioners with a higher award than they would have obtained in the market. Id.

172 Respondent's Post-Trial Opening Br. at 74-75 (quoting Chang's Holdings, S.A. v. Universal Chems Coatings, C.A. No. 10856, 1994 WL 681091 at *3 (Del.Ch. Nov. 22, 1994).

This argument labors under three difficulties. The first is that Coleman obliquely implies, but makes no effort to argue (or support) straightforwardly, that Petitioners could have obtained the necessary post-merger cost-of borrowing information. The second is that although Coleman did present some information regarding the prudent investor rate in Chicago Partners' report, they did not present evidence of Coleman's borrowing costs either, although that information would appear to be far more readily available to Coleman than to the Petitioners. Third, although Coleman urges that its costs of borrowing is a factor that "may be considered," it cites only the statute for that proposition, ignoring a decade or more of judicial gloss that requires that factor to be included in the prudent investor analysis.¹⁷³ Among those authorities is Chang's Holdings, the very case that Chicago Partners purported to follow to arrive at its prudent investor rate.¹⁷⁴

173 See authorities cited in nn. 168 * 172, supra.

174 1994 WL 681091 at *2; RX 1 at 50, n. 76.

In short, the company's cost of borrowing is now an essential ingredient in a prudent investor rate analysis. Here, all the parties have "inadequately developed the record" on that issue. Accordingly, the legal rate of interest will be applied as the default rule.

Fortunately, the record is adequately developed on the legal interest rate question, since the Chicago Partners report chronicles the Delaware legal interest rate on a daily basis from January 2000 through February 28, 2003.¹⁷⁵ That report shows the interest rate starting at 10% on the merger date, rising to 10.50% for a period, reaching a high as 11% for a period, and then gradually phasing down to 5.75% between November 2002 and February 28, 2003.

175 RX 1, Appendix D, Ex. D.3.

Understandably, because of the time that has elapsed since the trial, the record on the legal interest rate is not current. The parties are directed to work cooperatively to supplement the record with that updated information. In calculating the amount of interest due, the parties shall apply to the amount of the appraisal award each specific legal rate that was in effect during the post-merger period or periods that that rate was actually in effect.

2. Form of Interest

The final issue is whether interest shall be simple or compound. The Petitioners contend that interest should be compounded monthly. Our courts have recognized that "in today's financial markets a prudent investor expects to receive a compound rate of interest on his investment,"¹⁷⁶ and this Court's recent decisions have awarded interest on a monthly basis.¹⁷⁷ The Respondent does not oppose the Petitioners' position on this issue. Accordingly, interest shall be compounded monthly.

176 LeBeau v. M.G. Bancorporation, C.A. No. 13414, 1998 WL 44993 at *12 (Del.Ch. Jan. 29, 1998), aff'd. 737 A.2d 513 (Del. 1999).

177 See, e.g., Emerging Communications, supra, at *28; Gray v. Cytokine Pharmasciences, supra at *12 (Del.Ch. 2002); Onti, Inc. v. Integra Bank, 751 A.2d at 926; Hintmann v. Fred Weber, Inc., 1998 WL 83052 (Del.Ch. Feb. 17, 1998); Grimes v. Vitalink Communications Corp., 1997 WL 5388676 at *13 (Del.Ch. Aug. 28, 1997).

V. CONCLUSION

Based on the rulings in this Opinion, the Court determines that the Petitioners are entitled to receive fair value of $32.35 per Coleman share, plus interest at the legal rate, compounded monthly, from January 6, 2000 to the date of judgment. Counsel shall work cooperatively to prepare an agreed-upon form of order, and to arrange for an in-chambers conference with the Court at the earliest feasible date to determine the course of future proceedings in this case.