Opinion ID: 777188
Heading Depth: 2
Heading Rank: 3

Heading: Sale of DHLI/MNV1 and the DHL Trademark

Text: 10 From late 1986 to early 1988, DHL and DHLI negotiated with United Parcel Service (UPS) concerning merger possibilities, but these negotiations broke down over price. UPS expressed little or no interest in the DHL trademark during these negotiations. 11 On December 21, 1988, Japan Airlines Co., Ltd. (JAL) and Nissho Iwai Corp. (NI) made an offer to purchase up to 80% of the combined DHL network. This offer was not well received, in part because Hillblom, a leading shareholder of both DHL and DHLI, did not want to give up his entire interest in DHL. A second offer was made on June 14, 1989. JAL and NI offered to purchase 60% of DHLI/MNV based on a total value for those companies of $450 million, and to purchase the trademark for $50 million. DHL counter-offered with a $100 million price for the trademark and a $500 million price for DHLI/MNV. However, in December 1989, the parties reached a memorandum of understanding for the sale based on the $450 million value for DHLI/MNV and the $50 million price, subject to confirmation of the tax effect, for the trademark. 12 During the course of the negotiations, different parties provided a number of valuations of the DHL network and the DHL trademark. In February 1989, Robert Fleming Co. valued DHLI/MNV in a range of $392.2 to $680.4 million, and found that the DHL name, while intangible, was of some value that should be reflected in the final price. Peers and Co. produced a report on June 8, 1989, valuing DHLI/MNV at $522 to $580.9 million. In a revised report of September 14, 1989, it placed the value at $625 to $700 million. In June 1989, Nicholas Miller of Coopers & Lybrand valued the DHL trademark, outside the United States, at $25 million. This valuation was based in part on the view that DHL's trademark rights were diluted by its agreements with DHLI. On February 23, 1990, First Boston, retained by Lufthansa (JAL and NI's new partner), valued DHLI/MNV at $400 to $600 million and the trademark at $100 to $200 million. The First Boston trademark valuation, however, appears to have been done without knowledge of any ownership problems in the trademark. 13 On May 31, 1989, a Coopers & Lybrand report, commissioned by the foreign investors, raised the following concerns relevant to a possible purchase of DHLI/MNV: (1) DHL should receive an injection of capital via sale of the trademark; (2) DHL might be charged with imputed income based on prior uncharged royalties; and (3) DHL, in a trademark sale, should not have to pay royalties given its difficult financial position. DHL representatives also began to express concern about the tax consequences of the sale of the trademark, and they therefore sought a lower value for the trademark. As a result of these concerns, in July 1990, DHL sought a comfort letter from Bain & Co. on a $20 million trademark valuation. Bain supported the $20 million valuation after taking into account DHLI's possible ownership of the trademark and encumbrances in the form of royalty-free licenses to both DHLI (for the non-U.S. trademark interest) and DHL (for the U.S. trademark interest). On July 9, 1990, DHL and DHLI executed an agreement granting DHLI an option to purchase the DHL trademark for $20 million. 14 In late 1989, Lufthansa joined JAL and NI (collectively, the Consortium). On December 7, 1990, the Consortium and DHL/DHLI reached a final agreement under which the Consortium acquired (1) a 12.5% stock interest in DHLI/MNV, with an option to purchase an additional 45% interest based on a $450 million valuation of DHLI/MNV; (2) a 2.5% interest in DHL; and (3) an option to purchase the DHL trademark for $20 million, conditional upon the Consortium having first exercised its option to purchase the additional 45% interest. 15 The trademark option provided that DHL could use the DHL trademark in the United States royalty-free for 15 years. After 15 years, DHL would have the exclusive U.S. rights to the trademark for 10 years, but would have to pay a royalty fee of 0.75%. The final trademark purchase and sale agreement allocated the $20 million for the trademark in the following way: $17 million for the transfer of U.S. trademark rights, and $3 million for a quitclaim in the non-U.S. trademark rights. These two interests were to be transferred to separate entities. 16 The two-step acquisition process was designed to give the Consortium an opportunity to learn more about the DHL network prior to making a control commitment. During the interim period, the Consortium had the power to appoint 7 of the 13 directors of DHLI/MNV. The Consortium exercised this power, but the employees at the management level of DHLI/MNV remained the same. The Consortium did not exercise control over day-to-day management. 17 On June 7, 1992, the Consortium exercised its stock option, purchasing a majority stake in DHLI/MNV. The Consortium subsequently reorganized the entity into DHL International Ltd., incorporated in Bermuda. On September 17, 1992, the Consortium caused this new entity to exercise its option to purchase the DHL trademark rights for $20 million.