Valuation in a litigation context is

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1 CORNERSTONE RESEARCH VALUATION CAPABILITIES Among the Valuation Matters Discussed Inside Becker v. Commissioner of Internal Revenue Bennett Funding Group Bankruptcy Bullmore v. Ernst & Young Cayman Islands Doft & Co. v. Travelocity.com Monona Wire v. Code, Hennessey & Simmons Oracle v. PeopleSoft UAL Corporation Unsecured Creditors of Iridium v. Motorola Valuation in a litigation context is often complex and requires analysis that responds to the issues raised in the case. Cornerstone Research approaches valuation matters using sound economic and finance principles tailored to the problem at hand. Our consultants and experts have experience with valuation issues that typically arise in litigation, including: Corporate transactions, such as mergers and acquisitions of public or private companies, initial public offerings, private placements, and going-private transactions. Specific securities, such as convertible and preferred securities, warrants, options, and debt instruments. Specific interests in public or private firms, such as minority shareholder interests. Specific assets, such as intellectual property rights, product lines, operating divisions, and subsidiaries. Agreements and contracts, such as noncompete agreements, technology development agreements, joint venture agreements, and supply and purchase agreements. Estate, gift, and income tax valuation. Corporate restructurings, such as reorganizations, bankruptcies, solvency opinions, divestitures, and buyouts. The unique combination of experienced Cornerstone Research consulting staff, renowned academic experts from leading universities, and credentialed industry experts provides a premier set of resources for addressing the economic and financial issues arising in valuation-related matters. Our academic testifying experts are drawn from leading business schools, economics departments, and law schools, and our industry experts include individuals with extensive experience as former investment bankers. Cornerstone Research consultants hold advanced degrees in economics, finance, accounting, or business and have extensive experience with both valuation and the litigation process. Several of our senior staff also serve as testifying experts. The following pages describe some recent valuation-related cases in which Cornerstone Research experts and staff have played a significant role.

2 CORPORATE TRANSACTIONS Mergers and Acquisitions Company Valuation Doft & Co., et al. v. Travelocity.com Inc., Travelocity Holdings Sub Inc., and Sabre Holdings Corporation Retained by Morris, Nichols, Arsht & Tunnell This appraisal case was brought after the merger of Travelocity.com and Sabre, which made Travelocity a wholly owned subsidiary of Sabre. Plaintiffs alleged that Sabre s tender offer for the publicly held shares of Travelocity was unfair and inadequate for Travelocity s former minority shareholders, and that Sabre had breached its fiduciary duties to those shareholders. Counsel for Sabre retained Cornerstone Research to support Professor Paul Gompers of the Harvard Business School who was retained to value Travelocity. Professor Gompers testified about his valuation and assessed the opposing expert s valuation. The court relied on many of Professor Gompers conclusions in its ruling on Travelocity s value, finding Gompers detailed analysis of Travelocity s risk and expected future growth rates reasonable and that Gompers provides detailed and reasonable calculations for both Travelocity and Expedia s financial multiples, and the court agrees that these multiples are appropriate in comparing the companies. Oracle v. PeopleSoft Retained by Davis Polk & Wardwell and by Richards, Layton & Finger In 2003 Oracle initiated a hostile takeover of PeopleSoft. Over the next 18 months Oracle made multiple offers, all of which PeopleSoft rejected as being inadequate. PeopleSoft also took defensive measures that were challenged by Oracle. Counsel for Oracle retained Cornerstone Research and a finance professor to analyze the valuation methodologies used by PeopleSoft, to evaluate the bases for PeopleSoft s rejection of Oracle s offers, and to estimate the premium represented by each offer. Our expert presented his findings at a 2004 hearing. The parties resolved their differences and announced a merger agreement. Monona Wire Corporation v. Code, Hennessey & Simmons II, LP, et al. Retained by Kirkland & Ellis A leveraged buyout fund sued a venture capital firm, claiming that an operating company sold to the plaintiff had been valued inappropriately and alleging failure to disclose material information about the operating company. Retained by defense counsel, Cornerstone Research staff worked with Professor Paul Gompers of the Harvard Business School to assess the custom and practice of due diligence in venture capital transactions, consider the materiality of information in such transactions, and examine the valuation analysis prepared by the plaintiff s expert. After both experts submitted reports and were deposed, the case settled. Franchise Valuation In a breach of contract case involving a national restaurant chain, Cornerstone Research assisted counsel for the plaintiffs, two potential franchisees, in valuing damages based on their claimed contractual share of the franchise. Cornerstone Research assessed the value of a regional restaurant franchise by performing discounted cash flow and comparable transaction analyses. We also analyzed defense experts damages calculations, showing them to contain fundamental errors that substantially understated damages. The case went to arbitration, where our clients were awarded substantial damages. 2

3 SPECIFIC SECURITIES AND INTERESTS Collateralized Mortgage Obligations Theo Bullmore, et al. v. Ernst & Young Cayman Islands, et al. Counsel for Ernst & Young Cayman Islands retained Cornerstone Research and Stanford University Professor Steven Grenadier in a New York Supreme Court case related to the failure of Beacon Hill Asset Management, a hedge fund. The court granted summary judgment in favor of Ernst & Young Cayman Islands and awarded costs. At issue was the fund s net asset value for a period before its failure. Cornerstone Research supported Professor Grenadier s investigation into the reasonableness of the prices assigned to the individual securities held in the fund s portfolio of collateralized mortgage obligations (CMOs). Because the CMOs were illiquid, they could not be valued based on contemporaneous market transactions. The valuations utilized were based instead on sophisticated valuation models. Drawing on a deep understanding of these models, as well as empirical research on the reasonable range of valuations for these complex derivative securities, Professor Grenadier established that the prices used by the hedge fund fell within a reasonable range of valuation estimates. Hedge Fund Management Firm In a dispute arising over a hedge fund failure, Cornerstone Research was asked to value the firm that managed the fund and to assess how the firm s value was affected by the fund s performance. Cornerstone Research worked with a prominent finance professor to develop and apply a methodology to value the management firm given the contracts between the firm and its investors. The value of a hedge fund management enterprise is based on its expected flow of fund management and incentive fees. Noting that the payoff from the flow of fees is analogous to a payoff of an option contract, we developed an option pricing framework to calculate the present discounted value of expected fees. Because fees also depend on the size of the assets being managed, we used a regression model to predict the net flow of assets into the fund. The model relied on a large sample of hedge fund performance data and predicted fund flow as a function of the fund s past performance, size, age, investment strategy, and other variables. Valuing the firm also required assessing its capital structure, which included several classes of privately issued equity and debt governed by contracts involving complex contingent claims. The realized value of investments in the managing firm depended, for example, on contingencies related to the firm s potential default on debt repayments and options to convert debt to equity. Realization of these contingencies depended on, among other things, the performance of the fund and the management firm. Again, option pricing theory provided the framework for estimating the value of investments in the firm. Warrant Valuation In re: The Bennett Funding Group, Inc. Bankruptcy Cases Retained by Simpson Thacher & Bartlett Cornerstone Research worked with New York University Professor William Silber on behalf of the Bennett bankruptcy estate to assess the value of a warrant of a small publicly traded company that was sold by the Bennett Funding Group shortly before its bankruptcy. We used a modified binomial tree technique and the Monte Carlo simulation technique to accommodate the forced exercise features of the instrument. At trial, Professor Silber presented convincing testimony that the sale price of the warrant had been inadequate and thus provided the key evidence that the transaction should be voided as a preferential transfer. In its ruling, the court cited Professor Silber s work and testimony as authoritative in the area of valuation. 3

4 SPECIFIC ASSETS Marketing Rights Patents Fair Market Value In re: UAL Corporation, et al., Debtors Retained by Mayer Brown United New Ventures, a subsidiary of UAL Corporation, acquired MyPoints, an online loyalty program. In response Our House, Inc., sued, alleging that United New Ventures had breached a contractual obligation to grant Our House, for an upfront fee, the right to send weekly promotions to MyPoints members. Counsel for United New Ventures retained Cornerstone Research and Professor Ward Hanson of Stanford University to evaluate Our House s damages claim. We analyzed MyPoints s membership database, prices, and the Internet marketing industry at the time of the MyPoints acquisition, and showed that marketing rights were valued at less than the consideration Our House was to have paid for them. Professor Hanson was deposed and testified at trial. In disallowing Our House s damage analysis, the judge said that with more appropriate values for volumes, message prices, and the discount rate, a sale of the marketing rights in question (assuming a willing buyer) would have taken place at a price range of $3 to $3.5 million less than the upfront fee that Our House was to have paid for them. A foreign tax commission retained Cornerstone Research and a finance professor to assist in a suit against a merchant bank and financial services group. The commission claimed that the taxpayer had inappropriately received a tax benefit intended to encourage investment in biotechnology by inflating the value of certain patents it owned. The commission also retained Kenneth West of the Technology Commercialization Group to assess the opposing experts valuation models and provide an alternative valuation. With support from Cornerstone Research, the finance professor reviewed the validity of the assumptions used by opposing experts in their valuation models, while Mr. West reviewed the validity of the inputs to those models. Cornerstone Research assisted the client and experts through the filing of two expert reports, two reply reports, and trial. Retained by Orrick, Herrington & Sutcliffe Cornerstone Research was asked to calculate the fair market value of the assets (including goodwill) of a privately held veterinary pharmaceutical company. The company had previously changed its status from a C corporation to an S corporation. When it was later acquired by a C corporation, the acquiring firm became liable for taxes the pharmaceutical company would have owed had it remained a C corporation. Counsel for the acquiring firm retained Cornerstone Research to value the pharmaceutical firm s assets at the time it made its S corporation election, five years earlier. George Strong of Cornerstone Research provided an analysis that was used to determine the potentially taxable gain in value between the time of the S corporation election and the time of the company s acquisition. Mr. Strong filed a report with the U.S. Tax Court, which identified the amount of increased value between the time of the company s S corporation election and the time of the company s acquisition. He determined that the increased value was attributable to assets acquired after the S corporation election, thus limiting the amount of taxable liability for the acquiror. 4

5 AGREEMENTS AND CONTRACTS CORPORATE RESTRUCTURINGS Contractual Rights Non-Compete Agreement Fraudulent Conveyance In a case involving an advanced system used to treat inoperable cancer, a medical device manufacturing company sued a competitor for patent infringement, unfair competition, and deceptive trade practices. The manufacturer retained George Strong of Cornerstone Research to determine the value of an exclusive contractual right to make offers for sale, as opposed to the value of actual sales made (that is, lost profits). Given the tens of millions of dollars involved in a single sale of the system, just one sale over 10 years was expected to generate profits to the seller of more than $10 million. Cornerstone Research supported Mr. Strong in creating a probabilistic model of potential future sales and an expected ex ante valuation of the contractual rights. The case settled. R. William Becker and Mary Ann Becker v. Commissioner of Internal Revenue Retained by Fox Rothschild In U.S. Tax Court, a Cornerstone Research expert provided testimony on valuing a noncompete agreement between a privately held company and its former chief operating officer. The agreement was part of a transaction in which the company repurchased the former officer s minority equity interest in the company. However, the noncompete agreement was not assigned a specific value at the time of the transaction. Recognizing that traditional valuation techniques were of limited use, our expert conducted a Monte Carlo simulation to estimate the value of the noncompete agreement at the time the company repurchased the interest held by the officer. Statutory Committee of Unsecured Creditors of Iridium LLC, et al. v. Motorola, Inc. Retained by Kirkland & Ellis In litigation arising from the high-profile bankruptcy of Iridium, a global provider of satellite telecommunications services, plaintiffs alleged that the more than $2 billion that Iridium paid Motorola to design, develop, and launch 66 satellites and related ground equipment was avoidable as a fraudulent conveyance under bankruptcy law and should be returned to the estate. Counsel for Motorola retained Cornerstone Research and Professor Paul Pfleiderer of Stanford University to analyze whether Iridium was solvent and adequately capitalized at various times prior to its bankruptcy. After carefully analyzing the public and private information available about Iridium and evidence provided by the prices of securities and the ability of Iridium and its competitors to raise capital, Professor Pfleiderer testified that Iridium was solvent and adequately capitalized during the relevant timeframe. He also showed that the failure of plaintiffs experts to account for contemporaneous market information led to severe hindsight biases in their assessment of Iridium s historical viability. After a trial lasting several months, U.S. Bankruptcy Judge James M. Peck found that plaintiffs had failed to meet their burden of proving Iridium s insolvency and unreasonably small capital at the times of the contested transactions. Relying significantly on Professor Pfleiderer s analysis, Judge Peck dismissed plaintiffs fraudulent conveyance and other bankruptcy claims, noting that he was an especially credible witness of great candor. 5

6 Cornerstone Research Cornerstone Research provides economic and financial consulting and expert testimony in all phases of complex litigation and regulatory proceedings. The firm works with an extensive network of prominent faculty and industry practitioners to identify the best-qualified expert for each assignment. Cornerstone Research has earned a reputation for consistent high quality and effectiveness by delivering rigorous, state-of-the-art analysis for over 25 years. The firm has 700 staff and offices in Boston, Chicago, London, Los Angeles, New York, San Francisco, Silicon Valley, and Washington. Boston Chicago London Los Angeles New York San Francisco Silicon Valley Washington cornerstone.com 2017 by Cornerstone Research. All rights reserved. Cornerstone Research is a registered service mark of Cornerstone Research, Inc. C and design is a registered trademark of Cornerstone Research, Inc.