Investors take Veeco/Ultratech merger to court
On 2/3/17 we noted that Plainview based Veeco (VECO) has signed a definitive agreement to purchase Ultratech (UTEK) for $815m. San Jose based Ultratech is a semiconductor tool supplier with significant history in the photolithography business (~85% share) and laser annealing with the largest exposure to advanced semi packaging and front-end semi, while Veeco has exposure to advanced semi packaging, lighting, and data storage through its MOCVD and MBE tools. The deal is expected to close in 2Q and will be financed by both stock ($200m) and cash, with Veeco entering the 4th quarter with $336m in cash and ST investments and has recently completed a $335m convert deal, while Ultratech ended 2016 with $267m in cash.
Sounds reasonable, but last week a group of Ultratech investors filed a class action suit in the US District Court of Northern California to block the transaction. The complaint, which is focused on a violation of the Securities Exchange Act of 1934, alleges that the preliminary proxy statement filed by Ultratech omitted material with respect to the transaction, violating Sections 14(a) and 20(a) of the act. Simply, the complaint states that the participants agreed to a ‘no solicitation’ provision that prohibits Ultratech shareholders from soliciting alternative proposals and constrains their ability to communicate and negotiate with potential buyers, and, of course, the $26.5m that would have to be paid to Veeco by Ultratech, if Ultratech shareholders were to cause the deal to terminate.
Additionally, the suit states that the financial analysis made by Merrill Lynch, Ultratech’s financial advisor, showed a value as high as $35.90, and a DCF of $31.65, a bit higher than the deal’s $28.64/share valuation, and questioned why such information was omitted from the proxy. The suit also brings into question whether the officers of the company, who would receive $17.6m as a result of the proposed deal, have a conflict of interest in the matter, and under what circumstances Ultratech’s management discontinued discussions with other suitors or strategic buyers.
Statistics concerning merger deal litigation dating back over 15 years indicates that ~ 12% of merger deals involve class action litigation (although ~90% of major deals involve litigation), with the eventual outcome being a 5.8% decrease in deal completion on average, and a 9% increase in takeover premium. However in recent years the courts have taken a less favorable view of such suits by legal firms that matter-of-factly litigate mergers, commonly known as ‘litigation kennels’. By not routinely approving settlements, the courts, particularly those in Delaware, have shown law firms that it might not be in their best interests to litigate every major deal, with the lawyers hope of quick (and less expensive) settlements being eroded by the courts. How the Veeco/Ultratech suit proceeds might help to set the tone for other merger suits in the California courts.
Sounds reasonable, but last week a group of Ultratech investors filed a class action suit in the US District Court of Northern California to block the transaction. The complaint, which is focused on a violation of the Securities Exchange Act of 1934, alleges that the preliminary proxy statement filed by Ultratech omitted material with respect to the transaction, violating Sections 14(a) and 20(a) of the act. Simply, the complaint states that the participants agreed to a ‘no solicitation’ provision that prohibits Ultratech shareholders from soliciting alternative proposals and constrains their ability to communicate and negotiate with potential buyers, and, of course, the $26.5m that would have to be paid to Veeco by Ultratech, if Ultratech shareholders were to cause the deal to terminate.
Additionally, the suit states that the financial analysis made by Merrill Lynch, Ultratech’s financial advisor, showed a value as high as $35.90, and a DCF of $31.65, a bit higher than the deal’s $28.64/share valuation, and questioned why such information was omitted from the proxy. The suit also brings into question whether the officers of the company, who would receive $17.6m as a result of the proposed deal, have a conflict of interest in the matter, and under what circumstances Ultratech’s management discontinued discussions with other suitors or strategic buyers.
Statistics concerning merger deal litigation dating back over 15 years indicates that ~ 12% of merger deals involve class action litigation (although ~90% of major deals involve litigation), with the eventual outcome being a 5.8% decrease in deal completion on average, and a 9% increase in takeover premium. However in recent years the courts have taken a less favorable view of such suits by legal firms that matter-of-factly litigate mergers, commonly known as ‘litigation kennels’. By not routinely approving settlements, the courts, particularly those in Delaware, have shown law firms that it might not be in their best interests to litigate every major deal, with the lawyers hope of quick (and less expensive) settlements being eroded by the courts. How the Veeco/Ultratech suit proceeds might help to set the tone for other merger suits in the California courts.
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