Court Opinion

ID: 2797996
Source: CourtListenerOpinion
Date Created: 2015-05-01 15:02:36.341352+00
Date Added: 2024-06-11T09:10:05.710517
License: Public Domain

EFiled: Apr 30 2015 03:25PM EDT
                                                     Transaction ID 57163687
                                                     Case No. 8509-VCN
   IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MERLIN PARTNERS LP, and                     :
AAMAF, LP,                                  :
                                            :
                         Petitioners,       :
                                            :
            v.                              :      C.A. No. 8509-VCN
                                            :
AUTOINFO, INC., a Delaware                  :
corporation,                                :
                     Respondent.            :

                         MEMORANDUM OPINION

                        Date Submitted: January 9, 2015
                         Date Decided: April 30, 2015

Ronald A. Brown, Jr., Esquire, Marcus E. Montejo, Esquire, Kevin H. Davenport,
Esquire, and Eric J. Juray, Esquire of Prickett, Jones & Elliott, P.A., Wilmington,
Delaware, Attorneys for Petitioners.

A. Thompson Bayliss, Esquire and David A. Seal, Esquire of Abrams & Bayliss
LLP, Wilmington, Delaware, Attorneys for Respondent.

NOBLE, Vice Chancellor.
      Petitioners Merlin Partners LP and AAMAF, LP are former common

stockholders of Respondent AutoInfo, Inc. (“AutoInfo” or the “Company”).

Pursuant to 8 Del. C. § 262, they demanded appraisal of their shares in connection

with a merger (the “Merger”) whereby AutoInfo’s common stockholders were

cashed out at a price of $1.05 per share. This memorandum opinion sets forth the

Court’s post-trial findings of fact and conclusions of law.

                                I. BACKGROUND

A. AutoInfo’s Business

      At the time of the Merger, AutoInfo was a public non-asset based

transportation    services   company    operating    through   two   wholly-owned

subsidiaries.1 It did not own any equipment and provided brokerage and contract

carrier services through a network of independent sales agents in the United States

and Canada. AutoInfo and its agents split fees generated by freight transportation

transactions.2    The agents developed and maintained all important client

relationships.3

      The Company also provided support services to its agents. Its assistance

was primarily financial, such as making long-term loans and short-term advances.

1
   This memorandum opinion does not distinguish between AutoInfo and its
subsidiaries; they are collectively referred to as AutoInfo.
2
  Trial Tr. 145 (Puglisi).
3
  Trial Tr. 34 (Patterson).
                                          1
AutoInfo also supplied non-financial services, such as training, marketing

assistance, market segment data, and business analysis tools.4

      The Company’s 100% agent-based model distinguished it from many others

in the transportation logistics industry that rely on a “company store” model.

While AutoInfo’s brokers were independent contractors, “[b]rokers [in a company

store model] are direct employees of the company.”5

B. AutoInfo’s Board and Management

      AutoInfo’s management (the “Management”) consisted of Harry Wachtel

(“Wachtel”), the Chairman and Chief Executive Officer (“CEO”); Michael

Williams (“Williams”), the President, Chief Operating Officer, and General

Counsel; William I. Wunderlich (“Wunderlich”), an Executive Vice President and

the Chief Financial Officer (“CFO”); Mark Weiss (“Weiss”), an Executive Vice

President; and David Less, the Chief Information Officer and Vice President.

      Throughout the sales process, and at the time of the Merger, AutoInfo’s

board (the “Board”) consisted of five directors. Two, Wachtel and Weiss, were

inside directors. The others, Peter Einselen, Thomas C. Robertson, and Mark K.

Patterson (“Patterson”), were outside directors. Wachtel served as the Board’s

chairman.6

4
  JX 335 (“AutoInfo 2012 Form 10-K”) at 2.
5
  JX 179 (“L.E.K. Consulting Due Diligence Presentation”) at 32.
6
  AutoInfo 2012 Form 10-K at 28.
                                         2
C. The Merger

      1. AutoInfo Considers Strategic Alternatives

      During a regularly scheduled meeting in the first quarter of 2011, the Board

discussed AutoInfo’s financial results, budget, business, and financial prospects. It

was concerned that the market undervalued AutoInfo relative to comparable agent-

based, non-asset based transportation services companies. Part of the problem was

that the Company was small, thinly traded on the Nasdaq Over-the-Counter

Bulletin Board, and did not receive much analyst coverage. The Board decided

that exploring strategic options, including a potential sale, was in the best interests

of AutoInfo’s stockholders.7

      The Board was not the only AutoInfo constituent disappointed with the

Company’s stock price.      Around this time, Patterson (a Board member) was

contacted by Kinderhook, LP (“Kinderhook”), a stockholder with which he had a

relationship.8 Kinderhook believed that AutoInfo’s stock price failed to reflect its

financial performance. Although it did not push for a sale of the Company, it

encouraged the Board to develop a strategy to increase the stagnant stock price,

which was then trading in the $0.50-0.60 per share range.9

7
  JX 334 (“Apr. 1, 2013, AutoInfo Schedule 14A”) at 23.
8
   Trial Tr. 7 (Patterson). Kinderhook controlled 6,278,312 AutoInfo shares,
representing approximately 18.3% of the Company’s outstanding common shares.
JX 336 (“Apr. 1, 2013, AutoInfo Form DEFM14A”) at 72.
9
  Trial Tr. 12, 23-24 (Patterson).
                                          3
      2. AutoInfo Retains Stephens

      In summer 2011, Patterson contacted Stephens Inc. (“Stephens”), an

investment bank with experience in the transportation industry, to explore

AutoInfo’s strategic options. Stephens prepared and presented on July 29, 2011, a

Strategic Initiatives Overview, outlining avenues for enhancing stockholder

value.10 While AutoInfo had “built a solid legacy within the transportation and

logistics industry,” it “consistently traded at valuation multiples well below its peer

group due to the Company’s relatively small scale and corresponding lack of

interest from the investment community.”11 Stephens believed that if the Company

could grow its market capitalization from $20 million to approximately $400-500

million, then it would gain greater Wall Street attention and access capital at a

lower cost.12 The investment bank concluded that AutoInfo might need to alter its

strategy to achieve the necessary growth.13

      Stephens thus proposed strategic alternatives, including organic projects,

shareholder distributions, and acquisitions.14 It identified pros and cons for each

option. For example, it suggested that “[e]xecution risk,” related to Management’s

ability to execute, would be a concern should the Company decide to pursue an

10
   JX 19 (“Stephens’s Strategic Initiatives Overview”).
11
   Id. at 5.
12
   Trial Tr. 276-77 (Miller); Stephens’s Strategic Initiatives Overview 12.
13
   Stephens’s Strategic Initiatives Overview 5.
14
   Id. at 14.
                                          4
organic project.15 Stephens also preliminarily valued the Company within a range

of $0.59 to $1.76 per share.16 The average of its valuations was $0.98 per share,

above the Company’s then-current $0.60 price.17

      In August 2011, after considering its various options, the Board began

reaching out to potential purchasers.18 Patterson contacted parties that were active

in mergers and acquisitions in the transportation industry. While there was some

interest, AutoInfo could not reach a satisfactory agreement.19

      Several months later, in November 2011, activist hedge funds Baker Street

Capital L.P. and Khrom Capital Management, through affiliated entities (“Baker

Street”), acquired a 13% equity interest in AutoInfo.20          Baker Street began

expressing its desire that AutoInfo be sold. According to Patterson, those demands

did not impact the Board’s sales process, which was already underway.21

      In early 2012, after interviewing several investment banks, AutoInfo

formally retained Stephens to run a sales process.22 The parties agreed to an

incentive-based fee structure whereby Stephens would be paid 2% on the first $54

15
   Id. at 15; Trial Tr. 16 (Patterson).
16
   Stephens’s Strategic Initiatives Overview 19.
17
   Id.
18
   Trial Tr. 17 (Patterson).
19
   Trial Tr. 19 (Patterson).
20
   JX 23 (Baker Street November 10, 2011, Schedule 13D); JX 86 (Baker Street
Apr. 20, 2012, Schedule 13D, Amendment No. 1).
21
   Trial Tr. 20 (Patterson).
22
   Trial Tr. 25 (Patterson).
                                         5
million of a transaction price and 5% on any additional value.23 Stephens had

extensive industry experience; Michael Miller (“Miller”), who worked on

AutoInfo’s engagement, had focused on the transportation logistics space since

2002.24

      3. Management’s Financial Projections

      To implement the sales process, Stephens asked Management to prepare a

bottoms-up five-year financial forecast (the “Management Projections”).25

Stephens specified that because they would be used to market the Company, the

projections should be optimistic.26 Management had never prepared multi-year

projections before and its first attempt fell largely on Wunderlich’s (its CFO)

shoulders.27 Internally, Management doubted its ability to forecast the Company’s

future performance accurately and perceived its attempt as “a bit of a chuckle and a

joke.”28 It questioned how to go about a process it had never before attempted.29

      Recognizing that the Management Projections would be used to shop the

Company, Wunderlich focused on painting an “aggressively optimistic” picture.30

23
   Trial Tr. 280 (Miller).
24
   Trial Tr. 274 (Miller).
25
   Trial Tr. 281 (Miller).
26
   Id.
27
   Trial Tr. 481-82 (Wachtel).
28
   Williams Dep. 170.
29
   Trial Tr. 354 (Williams).
30
   Wunderlich Dep. 49. See also Caple Dep. 38 (“[The Management Projections
were] about the most optimistic you could make them.”); Trial Tr. 237 (Puglisi)
                                         6
Williams, AutoInfo’s President, helped develop the forecast by projecting agent

revenue.31 He started with each agent’s historical revenue and “took the most

optimistic view of [the] agents’ performance in the marketplace . . . .”32 He

categorized agents by size and assumed that larger agents would grow at a lower

percentage than smaller agents.”33 Williams testified that there “was no science”

behind those assumptions.34 He also looked at agent-by-agent historical results and

predicted, based on knowledge of the individual agents, how much the agent’s

business could grow during 2012-2013.35          Those growth assumptions were

extrapolated to later years.36 The Management Projections also included estimates

of how successfully the Company would recruit new agents.37

(“They were optimistic. I didn’t see anybody who said they weren’t optimistic.”);
Trial Tr. 359 (Williams) (“Overly optimistic, really to the exclusion of external and
internal risk factors that otherwise are part of the business.”); Trial Tr. 399
(Williams) (“[W]e prepared those projections with the most optimistic view of the
future that we could possible conceive.”).
31
   Williams Dep. 168-70. Weiss and AutoInfo’s director of corporate marketing
and communications assisted this effort. Trial Tr. 395 (Williams).
32
   Trial Tr. 396 (Williams).
33
   Williams Dep. 175.
34
   Id.
35
   Id. at 169.
36
   Id. at 169-70.
37
   Id. at 168.
                                         7
      4. Comvest Emerges as the Highest Bidder

      In the spring of 2012, Stephens contacted 164 potential strategic and

financial acquirers, focusing on those most interested in the transportation space.38

Approximately seventy bidders signed non-disclosure agreements (“NDAs”) and

received a Confidential Information Memorandum (“CIM”).39 Those interested

were provided several weeks for due diligence before a deadline to submit an

indication of interest (“IOI”).40 By the end of May, ten bidders had presented IOIs,

with bids ranging from $0.90-$1.36 per share.41 Nine moved on to a second round

of the sales process, at which point they attended Management presentations and

received access to an electronic data room.42

      On June 28, 2012, the Board formed a special committee (the “Special

Committee”) to evaluate the competing offers. The Special Committee consisted

38
    Trial Tr. 33 (Patterson); Trial Tr. 282-83 (Miller). The Board opted against
publicly announcing a sales process because it did not want to disrupt its agent
base. The possibility of losing agents is particularly troublesome for a 100%
agent-based company because the agents maintain all client relationships. Trial Tr.
33-34 (Patterson). If a public announcement caused agents to leave the company,
then AutoInfo would not likely have maintained its revenue and earnings. Trial
Tr. 34 (Patterson).
39
   Trial Tr. 285 (Miller).
40
   Id.
41
   JX 295 (“Stephens’s Special Committee Presentation”) at 9.
42
   Id. The one party that did not advance to the next round had provided the lowest
IOI. Trial Tr. 287 (Miller).
                                         8
of the three outside directors, with Patterson serving as chair.43 It proceeded, with

the assistance of a legal advisor and a financial advisor, to review the bids.44

      By July, three would-be acquirers had submitted written letters of intent

(“LOI”) and two others had presented verbal valuation ranges.45 After receiving

legal advice regarding its fiduciary duties, the Special Committee weighed the

proposals as against each other and the alternative option of foregoing a sale at that

time.46 It decided to continue with the sales process and instructed Stephens to

negotiate with the bidders over price.47

      Later that month, Stephens updated the Special Committee with final terms

for the written bids. HIG Capital (“HIG”) had made the highest offer at $1.30 per

share.48 The Special Committee determined that the highest offer was also the best

and recommended that the Board pursue a transaction with HIG. The Board

accepted this determination and on August 14, 2012, executed an LOI at the $1.30

43
   JX 114 (June 28, 2012, Board minutes).
44
   Patterson Dep. 102-03.
45
   Stephens’s Special Committee Presentation 9. Comvest Partners was one of the
bidders which expressed verbal interest with the caveat that it would need
additional time for due diligence because of conflicts with other transactions.
JX 117 (Stephens’s July 2, 2012, Process Update) at 4.
46
   Apr. 1, 2013, AutoInfo Schedule 14A at 26.
47
   Id. at 26-27.
48
   Stephens’s Special Committee Presentation 9.
                                           9
per share price, which provided for a forty-five day exclusivity period to negotiate

and perform further due diligence.49

      HIG conducted due diligence for the next thirty days but by mid-September,

it decided not to proceed with the purchase.50 HIG’s lead partner on the deal had

left the firm, apparently due to various disagreements with his colleagues,

including whether HIG should decrease its offer for AutoInfo.51          After that

partner’s departure, HIG opted against pursuing AutoInfo.52            The parties

terminated their LOI, and AutoInfo decided to continue with the sales process.

Stephens contacted previously interested parties, as well as others it recommended

to AutoInfo.53

      By October 2012, two interested parties had submitted written LOIs and two

others had indicated interest verbally. The highest offer came from Comvest

Partners (“Comvest”) and valued the Company at $1.26 per share.54 The others

were substantially lower, ranging from $1.00-$1.07 per share.55 After determining

that Comvest’s offer was the best, the Special Committee recommended that the

Board pursue that transaction.         The Board unanimously agreed and on

49
   Apr. 1, 2013, AutoInfo Schedule 14A at 27.
50
   Id.
51
   Trial Tr. 290 (Miller).
52
   Id.
53
   Id.
54
   Stephens’s Special Committee Presentation 9.
55
   Id.
                                         10
November 12, 2012, AutoInfo executed an LOI with Comvest at $1.26 per share

with a thirty day exclusivity period.56        Comvest then hired accounting, legal,

industry, and other advisors to conduct due diligence.57

      5. Comvest’s Due Diligence Process

      Comvest hired L.E.K. Consulting (“LEK”), a strategy consultant, to assess

AutoInfo’s competitive positioning in the trucking freight brokerage market.58

LEK evaluated growth trends and dynamics in the brokerage market generally, as

well as concerns associated with AutoInfo’s agent-based business.59 Comvest

considered LEK’s findings as very positive.60

      LEK’s analysis came relatively early in the due diligence process, and as

that process evolved, Comvest learned of potential issues associated with

AutoInfo’s business.61 For example, AutoInfo’s infrastructure for recruiting new

agents, which represented the lifeblood of the Company, was lacking.62 Comvest

determined that it would need to address that deficiency, and others, before it could

56
   Id.
57
   Id.
58
   L.E.K. Consulting Due Diligence Presentation 3.
59
   Trial Tr. 445 (Caple).
60
   Trial Tr. 446 (Caple).
61
   Id.
62
   Id.
                                          11
effectively recruit agents and grow AutoInfo’s business.63 Its biggest concerns,

however, arose during its accounting due diligence.

      Comvest retained McGladrey LLP (“McGladrey”) to perform financial due

diligence; its work included conducting a quality of earnings analysis to test the

accuracy of the Company’s stated historical earnings and its ability to achieve

projections.64 McGladrey began its review in November 2012, with Wunderlich,

AutoInfo’s CFO, serving as its primary Company contact.          McGladrey was

immediately taken aback by the poor quality of AutoInfo’s financial records,

which were unusually bad for a publicly traded company.65 The state of the

financials caused the due diligence process to be more difficult than McGladrey

had anticipated.66

      McGladrey was surprised that AutoInfo used QuickBooks, accounting

software popular among small businesses, but rarely employed by public

companies.67 Also troubling to McGladrey was the fact that a Florida-based public

company would engage a one-office, Connecticut-based accounting firm as its

outside auditor.68 More importantly, McGladrey believed that some of AutoInfo’s

63
   Trial Tr. 447 (Caple).
64
   Trial Tr. 405, 408 (Spizman).
65
   Trial Tr. 412 (Spizman); JX 159 (emails among McGladrey personnel).
66
   Trial Tr. 414 (Spizman); JX 159. McGladrey also considered Wunderlich to be
“in over his head” as a public company CFO. Trial Tr. 424 (Spizman).
67
   Trial Tr. 414-15 (Spizman).
68
   Trial Tr. 415 (Spizman).
                                        12
accounting practices violated generally accepted accounting principles.69

McGladrey raised these concerns with an increasingly troubled Comvest.70

       In December 2012, McGladrey reported its findings to Comvest (the

“McGladrey Report”).71 AutoInfo’s Management had estimated the Company’s

2012 adjusted EBITDA as $10 million.72 McGladrey concluded that $7.7 million

was an appropriate estimate, representing a 23% reduction.73 Comvest considered

the McGladrey Report a “huge problem” with the potential to “blow[] up” the

deal.74 Not only was AutoInfo’s EBITDA apparently much lower than initially

assumed, but there was “a whole series of weaknesses in the company’s financial

reporting practices . . . .”75

       AutoInfo responded to the McGladrey Report through a memorandum

prepared by Wunderlich.76 McGladrey considered the rebuttal unconvincing.77 At

the beginning of January, Wunderlich, Wachtel, and a representative from

Stephens met with a Comvest representative to discuss the McGladrey Report and

69
   Spizman Dep. 65-66.
70
   Trial Tr. 417 (Spizman).
71
   JX 223.
72
   Trial Tr. 418-19 (Spizman).
73
   Trial Tr. 419 (Spizman).
74
   Trial Tr. 453 (Caple).
75
   Caple Dep. 116.
76
   JX 208; Trial Tr. 419-20 (Spizman).
77
   Trial Tr. 420 (Spizman).
                                         13
AutoInfo’s response.78     While Comvest listened to AutoInfo’s arguments, it

remained convinced that the McGladrey Report raised valid issues and McGladrey

did not change its conclusions.

      After that meeting, Comvest lowered its offer to $0.96 per share and

AutoInfo countered at $1.15.79 During ensuing negotiations, Comvest learned that

AutoInfo had guaranteed some loans, the existence of which had been undisclosed

and unreported.    Some of the borrower’s creditors had filed an involuntary

bankruptcy petition and AutoInfo was facing the possibility of having to satisfy the

guarantees.80 Comvest was concerned not only by AutoInfo’s increased liabilities,

but more importantly, it was troubled by the fact that the guarantees had not been

properly identified in the first place.81 Its confidence in the quality of AutoInfo’s

financial information and controls further deteriorated.82

      On January 18, 2013, the Special Committee and Comvest agreed to a new

price of $1.06 per share.83       Comvest had successfully negotiated for Wachtel

(AutoInfo’s CEO) to roll over $500,000 and for Weiss (another executive) to roll

78
   JX 211 (email from Wachtel to Patterson regarding Comvest meeting).
79
   Trial Tr. 294 (Miller).
80
   JX 231 (memo to Special Committee).
81
   Trial Tr. 460 (Caple).
82
   Caple Dep. 176-77.
83
   JX 236 (emails among Comvest employees).
                                          14
over 25% of his deal proceeds.84 The deal process then resumed, until discovery of

another accounting deficiency. AutoInfo had improperly booked a transaction,

worth approximately $1,000,000 in EBITDA, in the third quarter of 2012 before

the deal had closed.85 Comvest was shocked at this revelation and was worried

that AutoInfo would need to restate its financials. Characterizing his reaction,

John Caple, Comvest’s lead partner on the AutoInfo deal, testified, “As much as I

had seen financial weaknesses in the business, the fact that the company could

book a million dollar transaction that hadn’t actually happened, I’ve just never seen

that before in any business I’ve worked with, public or private.”86 AutoInfo

determined, after an approximately two week review, that its financials would not

need to be restated.87 Nonetheless, Comvest was “disturb[ed that the error] could

have happened at all, particularly given the size and the impact of the

transaction.”88 Comvest’s already low confidence in AutoInfo’s Management and

internal controls eroded further and it revised its offer to $1.00 per share.89

84
   Id. Comvest demanded the rollover agreements as a condition to executing at
$1.06 so that Management would retain an economic stake in AutoInfo’s business
moving forward. Trial Tr. 458-59 (Caple).
85
   Trial Tr. 460 (Caple).
86
   Id.
87
   Trial Tr. 461 (Caple). “The auditors determined that because the transaction
could be closed now that it was simply . . . sort of a paperwork error.” Id.
88
   Id.
89
   Id.
                                           15
      On February 28, 2013, after additional negotiations, the parties ultimately

reached an agreement at $1.05 per share, with Wachtel entering into an

indemnification agreement for potential breaches of AutoInfo’s representations and

warranties, whereby $500,000 of his proceeds would be held in escrow.90 The

Board approved the Merger pursuant to the Special Committee’s unanimous

recommendation. Stephens had provided a fairness opinion and presentation to the

Special Committee. AutoInfo announced the Merger on March 1, 2013.91

      On April 25, 2013, AutoInfo’s stockholders approved the deal and the

transaction closed later that day. No topping bids had emerged between the deal’s

announcement and closing.92

              II. THE PARTIES’ COMPETING VALUATIONS

      Both parties retained well-qualified experts to opine on the fair value of

Petitioners’ stock as of the date of the Merger. Petitioners’ expert, Donald Puglisi

(“Puglisi”), suggests that AutoInfo’s fair value was $2.60 per share. He places

equal weight on three valuation calculations: a discounted cash flow (“DCF”)

90
   Trial Tr. 462 (Caple); Apr. 1, 2013, AutoInfo Form DEFM14A at 5. Wachtel,
Williams, and Weiss entered a rollover agreement whereby they acquired an
indirect ownership interest in AutoInfo upon the closing of the Merger. Wachtel
and Williams also entered into new employment agreements with AutoInfo. Id.
91
   JX 302.
92
   This was despite at least one stockholder’s attempts to solicit topping bids. See,
e.g., JX 309; JX 314; JX 318.
                                         16
analysis, and two comparable companies analyses, one using a historical based

multiple and the other a forward looking multiple.93

      AutoInfo’s expert, Mark Zmijewski (“Zmijewski”), submits that AutoInfo’s

fair value on the date of the Merger was $0.967 per share.          Unlike Puglisi,

Zmijewski does not believe that a DCF or comparable companies analysis can be

reliably performed with available data. Instead, he analyzed the Merger price and

the market evidence regarding the strength of AutoInfo’s sales process.         He

concluded that the Merger price, minus cost savings arising from the Merger, is the

best available evidence of the Company’s fair value on the Merger date.94

                                 III. ANALYSIS

A. The Appraisal Statute

      Under 8 Del. C. § 262, stockholders who elect against participating in

certain merger transactions may petition the Court to determine the fair value of

their stock.95 Assuming all procedural requirements are satisfied, the Court

      determine[s] the fair value of the shares exclusive of any element of
      value arising from the accomplishment or expectation of the merger or
      consolidation, together with interest, if any, to be paid upon the

93
   JX 380 (“Puglisi Opening Report”).
94
   JX 381 (“Zmijewski Opening Report”). Zmijewski did conduct a DCF analysis,
for illustrative purposes, for his rebuttal expert report. See JX 415 (“Zmijewski
Rebuttal Report”) at 22. That did not affect his fair value conclusion.
95
   8 Del. C. § 262.
                                         17
      amount determined to be the fair value. In determining such fair
      value, the Court . . . take[s] into account all relevant factors.96

      “Fair value” represents “the value to a stockholder of the firm as a going

concern, as opposed to the firm’s value in the context of an acquisition or other

transaction.”97 To discharge its statutory responsibility, the Court independently

evaluates the evidence concerning fair value and does not presumptively defer to

any particular valuation metric.98 The Court may consider “any techniques or

methods which are generally considered acceptable in the financial community and

otherwise admissible in court . . . .”99 Depending on the case, a DCF analysis, a

comparable transactions analysis, a comparable companies analysis, or the merger

price itself may inform the Court’s determination.100 “[A]n arms-length merger

price resulting from an effective market check” is a strong indicator of actual

value.101

      In a Section 262 appraisal proceeding, “both sides have the burden of

proving their respective valuation positions by a preponderance of the evidence.”102

96
   8 Del. C. § 262(h). There is no dispute that Petitioners have met all procedural
requirements.
97
   Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214, 217 (Del. 2010).
98
   Id. at 217-18.
99
   Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983).
100
    Huff Fund Inv. P’ship v. CKx, Inc., 2013 WL 5878807, at *9 (Del. Ch. Nov. 1,
2013), aff’d, -- A.3d --, 2015 WL 631586 (Del. Feb. 12, 2015) (“Huff”).
101
    Global GT LP v. Golden Telecom, Inc., 993 A.2d 497, 507 (Del. Ch. 2010),
aff’d, 11 A.3d 214 (Del. 2010).
102
    M.G. Bancorporation, Inc. v. Le Beau, 737 A.2d 513, 520 (Del. 1999).
                                        18
The Court may select one of the parties’ valuation models, make adjustments to a

proffered model, or fashion its own framework.103

B. Puglisi’s DCF Analysis

      Puglisi bases his valuation of AutoInfo in part on a DCF analysis. “DCF, in

theory, is not a difficult calculation to make—five-year cash flow projections

combined with a terminal value are discounted to their present value to produce an

overall enterprise value.”104 However, when reliable inputs are unavailable, “any

values generated by a DCF analysis are meaningless.”105            Puglisi used the

Management Projections in his DCF calculation. The first question is: are those

projections reliable?106

      The Court will often give weight to management projections made in the

regular course of business because “management ordinarily has the best first-hand

knowledge of a company’s operations.”107 Nonetheless, “management projections

[may be disregarded] where the company’s use of such projections was

unprecedented, where the projections were created in anticipation of litigation, or

where the projections were created for the purpose of obtaining benefits outside the

103
    Cede & Co. v. Technicolor, Inc., 684 A.2d 289, 299 (Del. 1996).
104
    Huff, 2013 WL 5878807, at *9.
105
    Id.
106
    That the projections were not ultimately realized does not foreclose the potential
conclusion that they were reliable as of their preparation date.
107
    Doft & Co. v. Travelocity.com Inc., 2004 WL 1152338, at *5 (Del. Ch. May 20,
2004).
                                         19
company’s ordinary course of business.”108 If management had never prepared

projections beyond the current fiscal year, the Court may be skeptical of its first

attempt.109

      Here, Petitioners have failed to establish that the Management Projections

can be relied upon.110 Management prepared them at Stephens’s request and with

the guidance that they “need[ed] to be optimistic” to maximize the effort to market

the Company.111      Management had never prepared anything resembling the

Management Projections before and “hadn’t analyzed the business historically in a

way that would allow [it] to predict the future.”112 Stephens had advised, “You’re

trying to sell the business. You need to paint the most optimistic and bright current

and future condition of the company that you can. All positive. Let’s get the most

interest by painting the most positive picture of this business.”113

108
    Huff, 2013 WL 5878807, at *9.
109
    Merion Capital, L.P. v. 3M Cogent, Inc., 2013 WL 3793896, at *11 (Del. Ch.
July 8, 2013) (citing Gearreald v. Just Care, Inc., 2012 WL 1569818, at *4 (Del.
Ch. Apr. 30, 2012)).
110
    AutoInfo’s expert agrees that “the Management Projections are not a reliable
forecast of the Company’s expected future performance and, thus, would not yield
a reliable indication of the Fair Value of AutoInfo common stock.” Zmijewski
Opening Report ¶ 53.
111
    Trial Tr. 281-82 (Miller).
112
    Trial Tr. 354 (Williams).
113
    Trial Tr. 355 (Williams).
                                          20
      As discussed in Section I.C.3 above, the Management Projections were

indisputably optimistic.114 Puglisi, Petitioners’ own expert, testified that he would

have implied a discount factor to back out the optimism if the record had provided

a basis for calculating one.115 Even if Management had not been motivated to paint

a bright picture, its projections would have been unreliable. Again, Management

itself had no confidence in its ability to forecast.116 If Management could not have

been trusted to produce credible projections in the ordinary course of business, the

projections it created during the sales process deserve little deference. Because

Petitioners have failed to establish the credibility of a key component in their

expert’s DCF analysis, the Court gives that analysis no weight.117

C. Puglisi’s Comparable Companies Analyses

      Puglisi performed two comparable companies analyses, one using a 2012

EBITDA figure derived from AutoInfo’s 2012 10-K, and the other using an

estimated 2013 EBITDA created by modifying the Management Projections. To

perform a comparable companies analysis, one must first identify a set of actively

traded public companies sharing similar business characteristics with the subject

114
    See supra note 30.
115
    Trial Tr. 237 (Puglisi).
116
    See supra text accompanying note 28 (describing the Management Projections
as “a bit of a chuckle and a joke”).
117
    This conclusion is corroborated by the dramatic difference between Puglisi’s
DCF value and the Merger price. As discussed below, the Merger price, unlike
Puglisi’s DCF output, is indicative of fair value.
                                         21
company. Using available information, one then derives a valuation multiple that,

when multiplied by a relevant financial performance metric, such as EBITDA,

provides an estimate of the value of a company as a whole.

      The Court may credit a comparable companies analysis in an appraisal

proceeding; however, “[t]he utility of the comparable company approach depends

on the similarity between the company the court is valuing and the companies used

for comparison.”118     Petitioners bear the burden of proving that Puglisi’s

“comparables are truly comparable.”119 Because they fail to meet their burden, the

Court gives no weight to Puglisi’s comparable companies analyses.120

      1. AutoInfo is Significantly Smaller than Puglisi’s Supposed Comparables

      The Court may reject comparable companies analyses based on purported

comparables that differ significantly in size from the company being appraised.121

118
    In re Radiology Assocs., Inc. Litig., 611 A.2d 485, 490 (Del. Ch. 1991).
119
    In re AT & T Mobility Wireless Operations Hldgs. Appraisal Litig., 2013 WL
3865099, at *2 (Del. Ch. June 24, 2013) (quoting ONTI, Inc. v. Integra Bank, 751
A.2d 904, 916 (Del. Ch. 1999)).
120
    Of course, if the Court had accepted that the comparables are truly comparable,
it would have needed to test the reliability of the EBITDA figures that Puglisi used
as inputs.
121
     See, e.g., Merion Capital, 2013 WL 3793896, at *6 (“[I]t would be
inappropriate to compare a company with an enterprise value of $14.7 million . . .
to a company . . . with an enterprise value more than 25 times higher.”); Reis v.
Hazelett Strip-Casting Corp., 28 A.3d 442, 477 (Del. Ch. 2011) (rejecting the
comparable companies approach because the comparables were “much bigger than
[the subject company] . . . [and] enjoy[ed] better access to capital . . .”); In re PNB
Hldg. Co. S’holders Litig., 2006 WL 2403999, at *25 n.125 (Del. Ch. Aug. 18,
2006) (finding a comparable companies analysis flawed where the “comparable
                                          22
It is undisputed that Puglisi’s comparables are all significantly larger than

AutoInfo. As of the Merger date, their market capitalizations ranged from more

than twice, to more than 300 times, AutoInfo’s size.122 All but two of Puglisi’s

comparables had a market capitalization more than ten times AutoInfo’s. While

recognizing this fact, Petitioners argue that size, while relevant in other contexts, is

not a determining factor here.

      Puglisi testified that he did not observe a meaningful relationship between a

company’s size and its multiple among his comparables. He could not recall “ever

discriminating inclusion in comparable companies based on company size . . .

[because] size itself should not have an impact on the ultimate valuation.”123

Although there may be little theoretical basis for discriminating comparables based

on size, doing so has empirical support and is common both in practice and in this

Court.124 Zmijewski suggests that it would be inappropriate to select comparables

publicly-traded companies all were significantly larger than [the subject company],
with one having assets of $587 million as compared to [the subject company’s]
assets of $126 million . . .”); Gray v. Cytokine Pharmasciences, Inc., 2002 WL
853549, at *9 n.19 (Del. Ch. Apr. 25, 2002) (finding a comparable companies
analysis unreliable where the comparables “taken together had a market
capitalization with a median 24 times higher than [the appraised company] . . . [and
t]he median revenue of the comparable companies was 12 times larger than [the
appraised company]”).
122
    Puglisi Opening Report Ex. C.
123
    Trial Tr. 155-56 (Puglisi).
124
    See supra note 121. See also ROBERT W. HOLTHAUSEN & MARK E. ZMIJEWSKI,
CORPORATE VALUATION THEORY, EVIDENCE & PRACTICE 525 (Cambridge
Business Publishers, LLC 2014). Puglisi did employ a size premium in his DCF
                                          23
without regard to relative market capitalization without otherwise controlling for

risk and other differences.125

      All else equal, smaller firms are riskier and thus face higher costs of equity

capital. This higher cost of capital leads to lower market multiples.126 Miller,

Stephens’s representative, suggests

             Typically in this sector, small cap companies tend to be valued
      at lower multiples. That’s generally been the case in the . . . dozen
      years that I’ve spent covering this sector. The market tends to ascribe
      premium multiples to companies that are larger . . . [and] are
      considered more stable businesses. And therefore, investors are
      willing to . . . afford those companies . . . a higher trading multiple.127

      Before delivering its fairness opinion, Stephens performed a comparable

companies analysis.      Based on its experience in the transportation services

industry, Stephens, unlike Puglisi, did not rely on the median multiple of its

comparables. It selected a lower multiple range, based on differences between

AutoInfo and the comparables, including size, business model, and the quality of

management.128     Stephens grouped its comparable companies by size, which

showed a relationship between size and multiples.129

analysis, thus recognizing the empirically observed size effect whereby the capital
asset pricing model understates the returns to small firms. See Trial Tr. 198-99
(Puglisi).
125
    Zmijewski Rebuttal Report ¶ 30.
126
    Id. at ¶ 28. See also Merion Capital, 2013 WL 3793896, at *6.
127
    Miller Dep. 148.
128
    Miller Dep. 154-55.
129
    Stephens’s Special Committee Presentation 18.
                                          24
      While Petitioners criticize Stephens’s size grouping as arbitrary and self-

serving, in its initial July 29, 2011, Strategic Initiatives Overview presentation to

AutoInfo, Stephens highlighted the fact that AutoInfo had “consistently traded at

valuation multiples well below its peer group due to the Company’s relatively

small scale . . . .”130 Petitioners have failed to show that the size difference

between    AutoInfo    and   Puglisi’s   supposedly    comparable    companies     is

immaterial.131

      2. AutoInfo’s 100% Agent-Based Model

      Puglisi did not consider the differences between freight brokerage businesses

that use the company store model and those that employ an agent-based model as

important for valuation purposes.132 As described in Section I.A above, in a

company store model, “[b]rokers are direct employees of the company,” while in

an agent-based model, the brokers are independent contractors. 133 According to

130
    Stephens’s Strategic Initiatives Overview 5.
131
    Petitioners note the Court’s usual skepticism of “an expert [who] throws out his
sample and simply chooses his own multiple in a directional variation from the
median and mean that serves his client’s cause . . . .” In re Orchard Enters., Inc.,
2012 WL 2923305, at *11 (Del. Ch. July 18, 2012). While Petitioners contend that
Puglisi’s use of a median multiple is thus preferable to accepting Stephens’s lower
numbers, AutoInfo has not suggested that the Court rely on any comparable
companies analysis. Also, Stephens’s choice of multiple was not a post hoc
determination made during litigation, but a reasoned selection based on its industry
experience. Regardless, the Court need not consider the soundness of Stephens’s
choice to view Puglisi’s methodology as unreliable.
132
    Puglisi Dep. 125.
133
    L.E.K. Consulting Due Diligence Presentation 32.
                                         25
Miller, who has years of experience in the transportation sector, “agent-based

models . . . are generally less desirable.    They’re perceived as riskier.     The

company does not have control over the customer relationship. The agent does.

And so the agent-based models are generally . . . less desirable and generally they

tend to trade at lower multiples than the company store models.”134

      That the market perceives the agent-based model as inferior was

corroborated by the reaction that one AutoInfo stockholder received while

soliciting topping bids for the Company. That stockholder learned that “the agent-

based model with no company-owned locations, especially in important shipping

hubs, was a bigger deal to potential acquirers than . . . [initially] realized.”135

AutoInfo’s 100% agent-based model was a “problem” for potential buyers.136

      At trial, Puglisi, who lacks Miller’s experience in the freight brokerage

sector, could not identify which of his comparable companies used which type of

business model, but suspected that the majority were agent-based.137          Miller

testified specifically regarding the business models of Stephens’s comparables and

134
    Trial Tr. 304 (Miller). Miller testified regarding the many differences between
AutoInfo and the supposedly comparable companies. See Trial Tr. 302-15
(Miller).
135
    JX 357 (email exchange regarding AutoInfo’s valuation).
136
    JX 346 (email to uninterested solicited buyer).
137
    Trial Tr. 238-39 (Puglisi).
                                        26
explained that they mostly use company store models.138 In its fairness opinion,

Stephens had taken advantage of its industry experience and its knowledge of

AutoInfo’s business to select a below-median multiple for its comparable

companies analysis.139     Petitioners have not established that the differences

between AutoInfo’s business model and those of Puglisi’s comparable companies

are unimportant.

      3. Summary of Puglisi’s Comparable Companies Analyses

      Because the weight of the evidence suggests that size and business model

affect the multiples at which companies trade in the freight brokerage industry,

Puglisi’s comparable companies analyses are not reliable indicators of value. The

Court’s confidence in this conclusion is bolstered by the facts that (i) all of the bids

received by AutoInfo during the sales process implied market multiples well below

Puglisi’s, and (ii) AutoInfo ultimately sold, through a thorough sales process, at a

price less than half of Puglisi’s comparable companies valuations.140 The Court

was unable independently to derive in any reasoned manner a valuation multiple

from the purported comparables. Accordingly, the Court gives no weight to any

comparable companies analysis.

138
    Trial Tr. 302-14 (Miller). Some companies used a mixed model. AutoInfo
used a 100% agent-based model.
139
    Trial Tr. 314-15 (Miller).
140
    See RX-9; RX-10 (demonstrative exhibits charting market multiples implied by
bids for AutoInfo).
                                          27
D. Merger Price

       Zmijewski, AutoInfo’s expert, relies on the Merger price as a reliable

indication of AutoInfo’s fair value at the time of the Merger.            “[W]here no

comparable companies, comparable transactions, or reliable cash flow projections

exist, . . . the merger price [may be] the most reliable indicator of value.”141

Nonetheless, the Court will give little weight to a merger price unless the record

supports its reliability.

       The dependability of a transaction price is only as strong as the process by

which it was negotiated.142      For example, a transaction that implicates self-

interested parties or an inadequate market check may generate a price divergent

from fair value.      Conversely, where a company “was marketed to potential

buyers . . . [through a process that was] thorough, effective, and free from any

spectre of self-interest or disloyalty,” the outcome of that process is significant.143

       Petitioners argue that the Merger price deserves no weight because (i) the

Merger price is not a business valuation methodology, (ii) the Court cannot rely on

the price if no business valuation methodology, e.g., a DCF analysis, was

performed to corroborate the price, and (iii) even if the Merger price could be

considered, AutoInfo’s sales process was deficient.

141
    Huff, 2013 WL 5878807, at *13.
142
    Id.
143
    Id.
                                           28
      Petitioners’ first two contentions are easily dismissed. As discussed, this

Court can, and has, relied on a merger price when appraising a company. When it

is the best indicator of value, the Court may assign 100% weight to the negotiated

price.144 Although the Court may not presumptively defer to price, no particular

valuation methodology must provide corroboration. Rather, the Court may, in its

discretion, look to any “evidence tending to show that [the merger price] represents

the going concern value of the company rather than just the value of the company

to one specific buyer.”145     Here, evidence regarding AutoInfo’s sales process

substantiates the reliability of the Merger price.

      The manner by which AutoInfo was sold is described in Section I.C. above.

This case does not involve self-interest or disloyalty; nothing like a controlling

stockholder’s freezing out the minority is at issue. The Merger was negotiated at

arm’s length, without compulsion, and with adequate information. It was the result

of competition among many potential acquirers. However, Petitioners argue that

the sales process was flawed and cannot be expected to have produced a price

representative of value.      Based on the evidence, the Court concludes that

Petitioners’ objections, discussed next, are either unwarranted or overblown.

144
    See, e.g., Union Ill. 1995 Inv. Ltd. P’ship v. Union Fin. Gp., Ltd., 847 A.2d 340,
357 (Del. Ch. 2004).
145
    M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 797 (Del. 1999).
                                          29
       1. Lack of Analyst Coverage

       AutoInfo was thinly traded and lacked financial analyst coverage.

Petitioners contend that the market underpriced the Company because it was

ignorant of its potential. While “[t]he court cannot defer to market price as a

measure of fair value if the stock has not been traded actively in a liquid

market,”146 the Merger price does not reflect the value that a potentially

uninformed market attributed to AutoInfo. The Merger price represented a 22%

premium to AutoInfo’s average stock price during the six months before

February 28, 2013, the last trading day before public announcement of the

Merger.147 At no time in the two years before the Merger’s announcement had the

market price for the Company’s stock reached $1.00.148 Further, the Merger price

exceeded the highest price that AutoInfo stock had reached during the previous

five years.149

       To shop the Company, AutoInfo retained an experienced investment bank

with knowledge of the transportation industry. Stephens’s fee had an incentive-

based component, which allowed the bank to earn a higher percentage fee the

146
    Applebaum v. Avaya, Inc., 812 A.2d 880, 890 (Del. 2002). In fact, as discussed,
in an appraisal, the Court may never defer to market price without independently
testing its reliability.
147
    Apr. 1, 2013, AutoInfo Schedule 14A at 31.
148
    Id.
149
    Stephens’s Special Committee Presentation 11.
                                        30
larger the deal.150 Stephens reached out to and provided information on AutoInfo

to many potential bidders. Part of the reason for hiring the bank would have been

to educate the market and assure the Company that it was not leaving value on the

table.151 The Board formed a Special Committee to pursue the sales process.

Ultimately, AutoInfo was sold at a premium to market. Despite attempts by a

stockholder to solicit interest, no topping bid emerged during the time frame

between announcement and closing of the Merger.152 While the market may have

been uninformed about AutoInfo before the sales process, it subsequently gained

ample information.

      2. Alleged Pressure from Large Stockholders

      Petitioners contend that large stockholders pressured the Board to sell

quickly. Approximately 31.4% of AutoInfo’s voting power was held by Baker

Street and Kinderhook.153 According to Petitioners, those hedge funds sent a clear

message that if a liquidity event were not achieved, then they would get active and

Management would potentially face a control contest.

150
    Trial Tr. 280 (Miller).
151
    In explaining Stephens’s request that the Management Projections be optimistic,
Miller stated “You certainly don’t want to be conservative and leave potential
shareholder value on the table.” Trial Tr. 282 (Miller).
152
     One investment advisor who had initially been skeptical of the merger
concluded, after learning of the issues associated with an agent-based model, that
“the deal was done at a fair, or very close to fair, price.” JX 357 (email to the
soliciting stockholder).
153
    Kinderhook held an 18.4% stake and Baker Street held 13%.
                                        31
      Baker Street purchased its stake in the Company in November 2011. By that

time, AutoInfo had already begun to consider strategic alternatives, including a

potential sale.   The Board had reached out informally to potential purchasers

months before Baker Street became a stockholder. Stephens’s July 29, 2011,

presentation to AutoInfo had indicated “that now is an opportune time to explore

initiatives to maximize shareholder value, including . . . [a c]hange of control

transaction.”154 By the time Baker Street arrived on the scene, AutoInfo was

already contemplating the selection of a bank to lead the formal sales process.155

      Unlike Baker Street, Kinderhook was not adamant that AutoInfo be sold.

Rather, like the Board, Kinderhook desired change to address AutoInfo’s low stock

price.156 Patterson, the Special Committee’s chair, testified that neither Baker

Street nor Kinderhook impacted the sales process. Before retaining Stephens, the

Board had received early indications of interest and “absolutely” could have sold

quickly if the terms had been right.157 Instead, the Board retained Stephens and

embarked on a sales process lasting over a year. Near the end of that process,

Patterson told the rest of the Special Committee “I plan to tell [Comvest] to pay

$1.06 or walk away.”158 If necessary, the Special Committee was prepared to

154
    Stephens’s Strategic Initiatives Overview 5.
155
    Trial Tr. 20 (Patterson).
156
    Trial Tr. 23-24 (Patterson).
157
    Trial Tr. 32 (Patterson).
158
    JX 277 (email from Patterson to other Special Committee members).
                                         32
“regroup, push some changes through and clean up” for a future sale. 159 Based on

the evidence, neither Baker Street nor Kinderhook appear to have materially

impacted the sales process.

       3. Negotiations with Comvest

       Petitioners next argue that Comvest completely overwhelmed AutoInfo’s

Management and Board during negotiations. More specifically, they contend that

Comvest commissioned the McGladrey Report as a tool to drive down the Merger

price. According to Petitioners, AutoInfo was incapable of adequately responding

to that report.

       Hiring an accounting firm to conduct due diligence is standard practice for

Comvest.160       While due diligence sometimes flags issues, in other cases, the

process is positive and the accounting firm concludes that the target company is

actually a better deal than Comvest initially believed.161 McGladrey was not the

only outside firm hired to conduct due diligence. For example, Comvest engaged a

strategy consultant, whose review of AutoInfo’s business was very positive.162

159
    Id. Petitioners argue that Baker Street had demanded a deal by June 2012 and
had suggested that any sale at or above $1.00 per share would suffice. The Board
did not approve the Merger until 2013 and the Special Committee was “not
comfortable” with a $1.00 price. See id.
160
    Trial Tr. 451-52 (Caple).
161
    Trial Tr. 452-53 (Caple).
162
    Trial Tr. 445-46 (Caple).
                                         33
      It is mostly undisputed that AutoInfo’s CFO was below-average, the

Company used relatively unsophisticated accounting software, and its accounting

records contained errors discovered throughout negotiations. There is room to

debate whether all of McGladrey’s adjustments to AutoInfo’s financials were

necessary. However, the record does not support the notion that McGladrey’s

auditors would have sacrificed their professional independence to benefit Comvest

on this one particular transaction. AutoInfo did attempt to rebut the McGladrey

Report, but many of McGladrey’s findings “were valid issues.”163          Because

AutoInfo had sub-par accounting and financial controls, McGladrey was

understandably alert to potential problems, and Comvest was understandably

concerned by the issues raised.    Comvest viewed the agreement it eventually

reached with AutoInfo as inferior to the deal it had initially anticipated.164 The

record does not support the allegation that McGladrey was a hired gun employed to

overwhelm AutoInfo.165

163
    Trial Tr. 334 (Miller); see also Trial Tr. 105 (Patterson).
164
    Trial Tr. 458 (Caple).
165
    Those contacted by an AutoInfo stockholder soliciting topping bids for the
company shared at least some of McGladrey’s concern. See, e.g., JX 320 (email
from accountant questioning “why . . . a Shelton, CT based firm (not even a
regional firm) [would] be auditing a Miami based company . . .”); JX 325 (email
from disinterested party stating: “Just as a personal aside I also wonder about the
accounting. They convert notes to goodwill ($10M) in exchange for cash flow but
then they don’t amortize the goodwill against that cash flow at all. I doubt that
cash flow will continue infinitely.”).
                                        34
         4. Stephens’s Process

         Petitioners suggest that (i) Stephens’s market canvas was unfocused,

(ii) Stephens improperly suggested a valuation of AutoInfo to some bidders,

(iii) Stephens did not provide a formal valuation of the Company until the Merger

was negotiated, and (iv) the Board did not adequately oversee the sales process.

         The sales process is described supra Section I.C.      The weight of the

evidence discredits Petitioners’ stated concerns. The Court concludes that the sales

process was generally strong and can be expected to have led to a Merger price

indicative of fair value. Accordingly, it deserves weight in the Court’s valuation.

E. The Court’s Determination

         Any real-world sales process may be criticized for not adhering completely

to a perfect, theoretical model.          Nonetheless, AutoInfo’s process was

comprehensive and nothing in the record suggests that the outcome would have

been a merger price drastically below fair value, as Petitioners’ expert suggests.

Placing heavy weight on the Merger price “is justified in light of the absence of

any other reliable valuation analysis.”166 Not only are other credible valuations

unavailable, but the record also contains evidence corroborating the Merger price’s

reliability. Even Petitioners’ expert agrees that AutoInfo was “shopped quite a bit”

166
      Huff, 2013 WL 5878807, at *13.
                                         35
and that the sales process was arm’s length.167 The Merger was the result of “an

adequate process.”168 The Merger price is thus a strong indicator of value.169

      Before placing full weight on the Merger price, the Court performed its own

DCF analysis. Having rejected the Management Projections, the Court relied on

financial projections that Comvest had prepared for internal use in evaluating the

AutoInfo deal.170 In a February 25, 2013, Investment Committee Memo, Comvest

projected five-year financials for AutoInfo based on both a base case (the “Base

Case Projections”) and a downside case scenario. Comvest’s projections were

prepared during due diligence to provide more detail than the Management

Projections. They represented Comvest’s then-current belief regarding AutoInfo’s

likely future performance.171 After Comvest’s investment committee requested “a

number of alternative scenarios below the down side case,” a revised downside

case and a “shock case” were also produced.172

      When preparing his expert report, Zmijewski considered using the Base

Case Projections in a DCF valuation. While he concluded that those projections

would not yield a reliable indication of fair value, he did use them to conduct a

167
    Trial Tr. 221-22 (Puglisi).
168
    Trial Tr. 222 (Puglisi).
169
    Delaware law does not require that a sales process conform to any theoretical
standard. Huff, 2013 WL 5878807, at *14.
170
    See JX 282 (email to Caple attaching Comvest’s presentation to its investment
committee).
171
    Trial Tr. 449 (Caple).
172
    Trial Tr. 450-51 (Caple).
                                         36
DCF analysis included in his rebuttal report. AutoInfo has argued that Comvest’s

projections are a better forecast of the Company’s future performance as of the

date of the Merger than are the Management Projections.

      In his rebuttal expert report, Puglisi analyzed the Comvest Base Case

Projections. He considered them reasonably reliable, observing that

      after months of due diligence and hundreds of thousands of dollars
      spent, up until days prior to the stockholder vote on the transaction,
      Comvest continued to focus its internal investment committee
      presentations on its Base case projections, including in its closing
      memo, noting the Company’s strong 2013 first quarter results, and
      highlighting that the Company had outperformed revenue and gross
      margins stated in its Base case projections.173

      Because the Base Case Projections are the most reliable forecast in the

record, the Court employed them in its DCF analysis. The Court generally adopted

the DCF framework used by Zmijewski in his rebuttal expert report.174 However,

as explained in Section 3.F below, the record does not support Zmijewski’s

decision to remove $1,449,000 per year (before tax) in purported merger cost

savings. The Court added back that value to arrive at a corrected estimate of

AutoInfo’s forecasted free cash flows.          The Court otherwise credited the

173
    JX 382 (Puglisi Rebuttal Report) at 10.
174
    Despite the gulf between the parties’ fair value estimates, there is little dispute
over the appropriate DCF model. Rather, the parties disagree on whether there are
reliable inputs to run a DCF and the appropriate equity size premium, which
impacts AutoInfo’s cost of equity and thus its weighted average cost of capital.
                                          37
uncontroversial assumptions underlying Zmijewski’s model, as well as his use of

17.57% as AutoInfo’s weighted average cost of capital (“WACC”).

      The parties disagree on AutoInfo’s WACC, which is used in a DCF analysis

to discount cash flow projections and a terminal value to estimate the Company’s

enterprise value as of the Merger. Zmijewski used a WACC of 17.57%, while

Puglisi used 11.30%. The difference stems entirely from debate regarding the

appropriate equity size premium to be added to AutoInfo’s cost of equity.175 The

most common method for estimating a company’s cost of equity, and the method

employed by both experts, is application of the capital asset pricing model (the

“CAPM”). Because empirical evidence suggests that the CAPM understates small

companies’ costs of equity, valuation professionals often add a size premium,

based on historically observed data, to a CAPM-derived cost of equity.176

Zmijewski and Puglisi each added a size premium to AutoInfo’s CAPM-based cost

of equity; Zmijewski used 11.65%, and Puglisi selected 3.81%.

      Following standard practice, both experts derived the size premium using

data from Ibbotson Associates (“Ibbotson”). The 2013 edition of Ibbotson breaks

down publicly traded stocks into deciles based on market capitalization.177 It

further breaks down the 10th decile, which includes the smallest companies, into

175
    See RX-1 (demonstrative exhibit comparing the experts’ WACC calculations).
176
    SHANNON P. PRATT & ROGER J. GRABOWSKI, COST OF CAPITAL: APPLICATIONS
AND EXAMPLES 232-61 (John Wiley & Sons, Inc. 4th ed. 2010).
177
    JX 201.
                                       38
four subdeciles. Subdecile 10z subsumes the smallest companies in Ibbotson’s

data set.

       Puglisi chose the size premium for Ibbotson’s micro-cap category, which

includes the 9th and 10th deciles, i.e., companies with market capitalizations

ranging from $1.139 million to $514.209 million. Zmijewski looked to the 10z

subdecile, which consists of companies with market capitalizations from $1.139

million to $96.164 million. At the time of the Merger, AutoInfo had a market

capitalization of approximately $30 million. AutoInfo thus fell comfortably within

subdecile 10z based on its market capitalization. For several reasons, the Court

relied on the 10z size premium.

       First, Puglisi testified that he “would have used [a size premium] close to the

10z category, if not 10z itself,” had he not believed it necessary to strip out a

marketability factor.178 Puglisi’s adjustment to the size premium runs counter to

Delaware law.179 In Gearreald v. Just Care, Inc., this Court “decline[d] to reduce

the Company’s size premium to less than what is implied by its actual size.”180 In

that case, as here, the parties agreed as to which Ibbotson subdecile applied based

on size alone, yet petitioners’ expert used a lesser size premium to “eliminate[e]

178
    Puglisi Dep. 156.
179
     See Gearreald v. Just Care, Inc., 2012 WL 1569818, at *10-12 (Del. Ch.
Apr. 30, 2012).
180
    Id. at *12.
                                          39
the ‘well-documented liquidity effect’ contained within the size premium.” 181 The

Court rejected the adjustment “because the liquidity effect at issue relate[d] to the

Company’s ability to obtain capital at a certain cost, . . . [and was therefore] related

to the Company’s intrinsic value as a going concern and should be included when

calculating its cost of capital.”182 Petitioners attempt to distinguish between a

marketability discount and an illiquidity discount, which may represent distinct

concepts in a separate context. However, AutoInfo’s cost of capital directly affects

transactions between the Company and providers of capital, and is thus part of its

value as a going concern. Because in these circumstances there is an insufficient

factual basis for doing so, the Court declines to depart from the size premium

implied by AutoInfo’s actual size.183

      The Court also considered the fact that Stephens, when valuing AutoInfo,

used a size premium and WACC even higher than what Zmijewski recommends.

Stephens believed that AutoInfo would need to significantly increase its market

capitalization to benefit from a lower WACC.184           Perhaps most importantly,

relying on Puglisi’s WACC produces an estimate of fair value completely divorced

181
    Id. at *10.
182
    Id. at *11.
183
    Id. at *12. While Ibbotson no longer publishes 10z size premium data, Duff &
Phelps, LLC has “pick[ed] up the mantle.” Trial Tr. 590 (Zmijewski). Duff &
Phelps is a widely used and well-respected source of size premium data. See Pratt
& Grabowski, supra note 176, at 110.
184
    Stephens’s Strategic Initiatives Overview 12.
                                          40
from the negotiated Merger price (and the other bids offered for the Company).

The discrepancy between Puglisi’s estimates and the market’s valuation of

AutoInfo cannot be explained by anything in the record.185

      Using a WACC of 17.57% and the Base Case Projections, the Court

performed a DCF analysis that resulted in a fair value determination of

approximately $0.93 per share on the date of the Merger.186 Under Delaware law,

it would be appropriate to provide weight to the value as implied by the Court’s

DCF analysis.187 Nonetheless, because the Merger price appears to be the best

estimate of value, the Court will put full weight on that price.188

F. Must the Merger Price Be Adjusted for Cost Savings?

      While the Merger price was the baseline for Zmijewski’s fair value opinion,

he adjusted that amount downward to account for the portion of the price that he

deemed attributable to the consummation or prospect of the Merger.189 In this, as

in any appraisal action, the Court must value Petitioners’ shares “exclusive of any

element of value arising from the accomplishment or expectation of the

185
    Cf. Union Ill. 1995 Inv. Ltd. P’ship, 847 A.2d at 359 n.43 (citing to a highly-
regarded corporate finance text for the proposition “that if the DCF analysis you
perform of a stock does not match the market price, you have probably used poor
forecasts”).
186
     The Base Case Projections were provided to the Court in native format at
JX 390. The Court used Zmijewski’s basic model, as set forth in his rebuttal
report.
187
    See Union Ill. 1995 Inv. Ltd. P’ship, 847 A.2d at 364.
188
    Id.
189
    Zmijewski’s fair value estimate was thus below the Merger price.
                                          41
merger . . . .”190   AutoInfo argues that two categories of cost savings, which

increased the price that Comvest was willing to pay for it, must be backed out of

the Merger price to arrive at AutoInfo’s fair value as a going-concern as of the

Merger date. Those categories are (i) public company costs that Comvest could

eliminate once AutoInfo ceased trading as a public company, and (ii) executive

compensation costs that Comvest planned to eliminate. AutoInfo bears the burden

of showing that adjustments should be made to the Merger price.191

         Zmijewski suggests backing out these cost savings because AutoInfo’s

stockholders likely captured 100% of the value created by those savings and, thus,

the value is embedded in the Merger price.192 He cites academic literature that

concludes that target firms capture virtually all of the value created by corporate

combinations through the price paid by the acquirer.193 Because the $1.05 price

would be expected to reflect anticipated cost savings, Zmijewski adjusted the

Merger price downwards to account for Merger-related effects on the stock’s

value.

190
    8 Del. C. 262(h).
191
    See Huff Fund Inv. P’ship v. CKx, Inc., 2014 WL 2042797, at *2 (Del. Ch.
May 19, 2014), aff’d, -- A.3d --, 2015 WL 631586 (Del. Feb. 12, 2015) (“Huff
Fund”).
192
    Zmijewski Opening Report ¶ 98.
193
    Id. at ¶ 97.
                                        42
      This Court only excludes from an appraisal award value that is merger-

specific.194 An appraisal award does not include “the amount of any value that the

selling company’s shareholders would receive because a buyer intends to operate

the subject company, not as a stand-alone going concern, but as a part of a larger

enterprise, from which synergistic gains can be extracted.”195

      Zmijewski based his calculation of cost savings on adjustments that

Comvest made to AutoInfo’s earnings when preparing the Base Case Projections.

Comvest apparently anticipated savings related to public company costs and

executive compensation. It assumed that the savings would not grow over time

and would persist into perpetuity.196

      In Huff Fund, the respondent company urged the Court to subtract $0.29

from the merger price to arrive at fair value.197 Its rationale was that prior to the

merger, the acquirer had identified $4.6 million in annual cost savings that it hoped

to realize by converting the target from a publicly held corporation to a privately

held firm.198 The evidence for those anticipated cost savings was an investment

memorandum that the acquirer had prepared. The Court did not need to “reach[]

the theoretical question of under what circumstances cost-savings may constitute

194
    Huff Fund, 2014 WL 2042797, at *3.
195
    Union Ill. 1995 Inv. Ltd. P’ship, 847 A.2d at 356.
196
    Zmijewski Opening Report ¶ 100.
197
    Huff Fund, 2014 WL 2042797, at *3.
198
    Id.
                                         43
synergies excludable from going-concern value under Section 262(h)” because the

record did not establish that the acquirer had based its bid on cost savings that the

target could not have itself realized had it continued as a going concern.199

      Accepting Zmijewski’s adjustments would appear to require the Court to

reduce for cost savings the fair value established in an appraisal proceeding

through reliance on the transaction price. Allowing a near automatic reduction in

price would reverse the burden that is on the party arguing that adjustments are

warranted. Zmijewski derived his cost savings figures from three lines of data

included in Comvest’s development of its Base Case Projections.200 The Court

does not know how Comvest arrived at its numbers or even what it included as

“public company costs.” Unlike the Merger price, which was corroborated by a

thorough and public sales process, the reliability of the purported cost savings has

not been tested.201   AutoInfo has thus failed to establish that any downward

adjustment to the Merger price is warranted.202

199
    Id.
200
     Zmijewski Opening Report ¶ 100. AutoInfo cites to one other one-page
document that purports to show Comvest’s plan to save on executive
compensation. See JX 348. No context for that document was provided and
Zmijewski did not rely on it in calculating cost savings.
201
     Because AutoInfo has failed to provide adequate evidence to support its
adjustments to the Merger price, the Court need not reach the issue of whether
similar cost savings would be excluded from fair value in another context.
202
     Further, AutoInfo has not established that the executive compensation cost
savings, which represent the bulk of Zmijewski’s adjustments, could only have
been realized through accomplishment of a merger. The Special Committee
                                          44
                               IV. CONCLUSION

      Where, as here, the market prices a company as the result of a competitive

and fair auction, “the use of alternative valuation techniques like a DCF analysis is

necessarily a second-best method to derive value.”203 The result of a DCF analysis

depends critically on its inputs. For example, small changes to the assumed cost of

capital can dramatically impact the result.

      AutoInfo’s expert, a tenured professor at the University of Chicago Booth

School of Business, concluded that there is no reliable data to input into a DCF or

comparable companies model. He determined that the process by which AutoInfo

was marketed and sold would be expected to have led to a price indicative of the

fair value of the Company’s stock. The Court has independently reached these

same conclusions.

      For the reasons set forth above, the fair value of one share of AutoInfo at the

time of the Merger was $1.05. Petitioners are entitled to interest at the legal rate.

Counsel are requested to confer and to submit an implementing form of order.

expected that if the Comvest deal fell through, the Board would push through
Management-related changes in the hope of increasing share price. See, e.g.,
JX 277 (Patterson email to other Special Committee members).
203
    Union Ill. 1995 Inv. Ltd. P’ship, 847 A.2d at 359.
                                         45