Longpath Capital, LLC v. Ramtron International Corporation

In this appraisal action, the petitioner asks the Court to determine the fair value of

its shares in the respondent. On November 10, 2012, a third party acquired the

respondent in a hostile cash merger for $3.10 per share. The deal had an equity value of

approximately $110 million and paid a 71% premium over the respondent's unaffected

stock price of $1.81.

The petitioner acquired its shares after the announcement of the merger and

demanded appraisal pursuant to 8 Del. C. § 262. The respondent contends the merger

price less synergies offers the most reliable measure of the fair value of its shares. That

methodology, as applied by the respondent's expert, yields a value of $2.76 per share.

The petitioner's expert, relying on a combination of a discounted cash flow (―DCF‖)

analysis and a comparable transactions analysis, contends that the fair value is $4.96 per

share.

For the reasons that follow, I conclude that a DCF analysis is not an appropriate

method of determining fair value in this instance. The utility of a DCF ceases when its

inputs are unreliable; and, in this instance, I conclude that the management projections

that provide the key inputs to the petitioner's DCF analysis are not reliable. The parties

agree that there are no comparable companies. The petitioner relies, in part, upon a

comparable transactions approach, but I conclude that his two-observation data set does

not provide a reasonable basis to determine fair value. Although the petitioner

thoroughly disputes this point, I conclude that the sales process in this instance was

thorough and that the transaction price less synergies provides the most reliable method

2

of determining the fair value of the petitioner's shares. The respondent, however, has not

shown that the synergies in fact amounted to $0.34 per share, as it claims. Instead, I

adopt the petitioner's estimate of $0.03 per share in synergies, resulting in a fair value of

$3.07 per share.

I. BACKGROUND

I begin by providing a brief overview of the parties, the respondent and its

business, and the process leading up to the merger.1

I delve more deeply into several of

these and related topics in subsequent Sections.

A. The Parties

Petitioner, LongPath Capital, LLC (―LongPath‖), is an investment vehicle that

began acquiring shares of the respondent in mid-October 2012, about a month after the

announcement of the merger.2

Overall, LongPath timely demanded and perfected its

appraisal rights as to 484,700 shares of common stock in the respondent.3

Respondent, Ramtron International Corporation (―Ramtron‖ or the ―Company‖), is

a fabless semiconductor company that produces F-RAM. A ―fabless‖ semiconductor

company is one that does not manufacture the silicon wafers used in its products, but



1

The factual record is drawn, in part, from the testimony presented at trial.

Citations to such testimony are in the form ―Tr. # (X)‖ with ―X‖ representing the

surname of the speaker, if not clear from the text. Exhibits will be cited as ―JX #‖

and facts drawn from the parties' pre-trial Joint Stipulation are cited as ―JS ¶ #.‖

2

Tr. 10 (Davidian).

3

JS ¶ 1.

3

instead, outsources that task to a separate company known as a ―fab‖ or a ―foundry.‖4



RAM stands for random access memory, a ubiquitous component of computers. F-RAM

is ferroelectric RAM.5

The benefits of F-RAM are that it has fast read and write speeds,

can be written to a high number of times, and consumes low power.6

Importantly, FRAM

will retain memory when power is lost.7

Nonparty Cypress Semiconductor Corporation (―Cypress‖) issued a bear hug letter

to Ramtron on June 12, 2012, offering to buy all of its shares for $2.48 per share.

8

After

Ramtron's board rejected the offer as inadequate, Cypress initiated a hostile tender offer

on June 21, 2012, at $2.68 per share.9

Ramtron and Cypress eventually reached an

agreement on a transaction price of $3.10 per share and signed a merger agreement on

September 18, 2012.10

Following a subsequent tender offer—apparently in an

unsuccessful effort to acquire 90% or more of the outstanding stock or at least solidify



4

Id. ¶ 4.

5

Tr. 184 (Davenport).

6

JS ¶ 2.

7

Tr. 281 (Rodgers).

8

JS ¶ 11.

9

Id. ¶ 13.

10 Id. ¶ 18.

4

Cypress' stock holdings—and a stockholder vote, the long-form merger closed on

November 20, 2012 (the ―Merger‖).

11

B. Ramtron's Operative Reality

Throughout this litigation, Respondent has portrayed Ramtron as a struggling

company unlikely to be able to continue as a business had the transaction with Cypress

not concluded successfully. Petitioner, by contrast, describes Ramtron as a company

with strong patent and intellectual property protection of its core products, a successful

new management team, and excellent business prospects. Indeed, in relying on the

management projections, Petitioner characterizes Ramtron as a company on the verge of

taking off like a rocket. Perhaps unsurprisingly, I find that Ramtron's operative reality at

the time of the Merger was somewhere in between these practically polar opposite

characterizations.

1. Ramtron's foundry situation

As a fabless semiconductor company, Ramtron's relationships with its foundries

were vitally important. Indeed, Ramtron depended on its foundry to manufacture its

products. At the time of the Merger, Ramtron's primary foundry was Texas Instruments

(―TI‖).12

Ramtron's contract with TI provided that, if TI decided to terminate the

contract, it would have to provide three additional years of products to Ramtron. By



11 Id. ¶ 23.

12 Id. ¶ 5.

5

contrast, in the event of a change-in-control transaction at Ramtron, TI could stop

providing foundry services after only ninety days.13



Semiconductor foundries were the subject of a substantial amount of testimony at

trial. As will be seen, the subject of foundries relates to both the reliability of the

management predictions and the disputed cause of Ramtron's poor performance in 2012.

Gery Richards, Ramtron's CFO at the time of the Merger,

14 testified that Fujitsu

previously served as the Company's primary foundry. In 2009, Fujitsu gave Ramtron a

―last-time buy‖ notice under the relevant contract, indicating that Fujitsu intended to

terminate its foundry relationship with Ramtron in two years.15

The testimony at trial made clear that transitioning foundries is not a simple

process. Semiconductors are complex products. In fact, even the silicon wafers from

which the semiconductors are created are not commodities but instead vary by

company.

16

Additionally, each foundry's technology differs and F-RAM, being a

relatively unique product, complicates the process further. Thus, transitioning to a new



13 JX 322, JX 324.

14 Before assuming the CFO position, Richards previously had served as the

Company's controller. He appears to have started working at Ramtron in 2004.

Tr. 49. After the Merger, he worked for Cypress for five months until March

2013. Id. at 22-23.

15 Id. at 48-49. Apparently Fujitsu did not definitively terminate the foundry

relationship, but instead, was moving its plant to a new location and Ramtron

determined that the expense of transitioning to the new location outweighed the

benefits.

16 Id. at 291 (Rodgers).

6

foundry requires understanding the foundry's manufacturing technology and how it

interacts with the semiconductors as designed, then modifying the product design to

eliminate any resulting errors, then completing several rounds of product testing followed

by further design modifications to eliminate any previously undiscovered errors, and then

allowing the customers to evaluate the product before finally moving to full-scale

production.17

Unlike, for example, consumer RAM that one could purchase at an

electronics store for a PC and then, depending on the model, simply ―plug and play,‖

Ramtron's F-RAM often was designed into the product being created by another

manufacturer, thus inhibiting Ramtron's ability to unilaterally change its products in any

significant way. According to T.J. Rodgers, the CEO of Cypress, even for a

noncontroversial shift of ―going to a different foundry, to change one of your products,

you're looking at two years plus.‖18

In fact, Ramtron's own track record of foundry transitions suggests that two years

probably is a significant underestimate. When Fujitsu gave Ramtron a last-time buy

notice in 2009, Ramtron already had been attempting to develop a second foundry

relationship with TI. The effort of transitioning to TI had begun in 2004 and took seven



17 Id. at 291-92 (describing the process of transitioning foundries). The Company's

products primarily, if not entirely, were for commercial customers. The F-RAM

often was ―designed into‖ the customer's end product.

18 Id. at 292. Rodgers also suggested that Ramtron's products had design flaws that

increased the difficulty of transitioning.

7

years to complete.19

That transition was not smooth, resulting in product shortages that

caused Ramtron to place its customers on allocation.20

Despite the difficulty of

transitioning from Fujitsu to TI, Ramtron succeeded, eventually, in obtaining a reliable

new foundry.

To increase its flexibility and reduce its dependence on TI, Ramtron sought to

develop a second foundry relationship with IBM. That effort, however, never succeeded.

Thomas Davenport, Ramtron's Vice President of Technology at the time of the Merger,21

described the Company's attempt to work with IBM. Davenport headed up a team of six

people that worked from 2009 until spring 2012, attempting to get IBM up and running as

a second Ramtron foundry. They incurred $17 million in direct costs in addition to $16

million in capital equipment purchased by Ramtron and provided to IBM to enable it to

produce F-RAM.22

But, in what Davenport considered a ―huge personal

disappointment,‖23 the integration project failed and Ramtron never achieved a single



19 Tr. 49 (Richards).

20 Id. at 50-52 (Richards); id. at 187-88 (Davenport).

21 Davenport began working for Ramtron in 1986. He started as an equipment

engineer and worked his way up to the Vice President position. He currently is

employed by Cypress as the Vice President of Technical Staff. Tr. 183.

22 Id. at 198-99; JX 128.

23 Tr. 198.

8

milestone. To put the IBM investment in context, in 2011 Ramtron had approximately

$66 million in revenue.24

The witnesses at trial uniformly attested to the difficulty of transitioning

foundries.

25 Ramtron's own experience with transitioning to TI and its failed attempt to

develop IBM as a foundry confirm this fact. Nevertheless, on July 20, 2012, about a

month after Cypress launched its hostile bid for Ramtron, Ramtron entered into a

manufacturing agreement with ROHM Co., Ltd. (―ROHM‖), a Japanese company, to act

as Ramtron's second fab.26

Ramtron's management's five-year forecasts incorporate the

purported cost savings that would derive from having ROHM operate as a second, or

even the primary, foundry for Ramtron.

2. Ramtron's business and finances

Ramtron's board of directors installed Eric Balzer as the Company's new CEO in

January 2011.27

He hired Pete Zimmer to lead the Company's sales department. At

Zimmer's recommendation, Scott Emley was hired to lead Ramtron's marketing

department. Both Zimmer and Emley had worked at TI and joined Ramtron sometime in



24 JX 215 [hereinafter ―Jarrell Rpt.‖] Ex. 8.

25 Tr. 49-50 (Richards); id. at 198 (Davenport) (noting that the difficulty and risk of

transitioning foundries is ―substantially higher‖ in the case of transferring a

specialty process like F-RAM if the new foundry has no experience with F-RAM);

id. at 291 (Rodgers) (stating that ―in general, switching foundries is a big deal‖

and that the process requires a company to ―in effect, change the product‖).

26 JS ¶ 5.

27 Id. ¶ 6.

9

2011.28

Richards officially became CFO in late 2011 or 2012.29

Thus, as of the time of

the Merger, most of Ramtron's executives had been in their positions for less than two

years and, in the case of Emley and Zimmer, about a year.

The difficult transition from Fujitsu to TI caused problems for Ramtron's day-today

business throughout 2011 and into 2012. A brief overview of Ramtron's sales

process is required in order to understand that effect. Ramtron sold some of its product

directly to customers, but the majority was sold to distributors who in turn sold the

products to the end users.30

Ramtron also recognized revenue on a point-of-purchase

basis instead of a point-of-sale basis. Under the point-of-purchase system, revenue is

recognized when the product is shipped to a distributor. By contrast, under the point-ofsale

method, revenue is only recognized when the product is sold to the end user, whether

directly by the Company or indirectly by the distributor.31

Theoretically, the two systems should arrive at the same results. Unless the

distributors are buying exactly the same amount of inventory as they are selling during

each financial reporting period, however, the systems will result in revenue being

recognized at different times. To take a simplistic example, suppose a company sells

100% of its products through distributors and that the company develops a new product



28 Tr. 63-64 (Richards).

29 Id. at 22.

30 Id. at 158 (Richards).

31 Id. at 30-31 (Richards).

10

in the first quarter. The following chart provides an example of how the company would

recognize revenue under the two different regimes assuming the company sold 100 units

of the product to the distributors at $1 each over the course of a year:

Revenue Recognition Comparison

Revenue Recognized

Quarter

Distributors

Point-of-Purchase Method Point-of-Sale Method

Buy Sell

Q1 20 0 $20 $0

Q2 30 10 $30 $10

Q3 40 20 $40 $20

Q4 10 30 $10 $30

This comparison deliberately highlights an important dispute between the parties in this

case: the point-of-purchase method makes it difficult to forecast actual demand because

the distributors provide a buffer. Indeed, in this example, under the point-of-purchase

method, demand appears to be falling, while under the point-of-sale method, it appears to

be rising.

Several of the witnesses testified that they believed Ramtron's point-of-purchase

revenue system made it more difficult accurately to forecast future sales.32

The revenue

recognition system matters for two reasons. First, as already mentioned, distributor



32 Id. at 30 (Richards); id. at 192 (Davenport); id. at 299-302 (Rodgers); id. at 396-97

(Buss).

11

activity can mask actual demand. The difficult transition from Fujitsu to TI forced

Ramtron to place its customers on allocation in or around 2011. Because Ramtron's FRAM

already was designed into many of their customers' products, those customers

needed to ensure that they would have a sufficient supply of F-RAM. After they were

placed on allocation, many customers apparently increased their orders accordingly.33



For example, a customer that was allocated 80% of its ordered amount potentially would

order five units for every four that it actually needed. This increase in orders led

Ramtron to increase the number of wafers it was ordering from TI. The upshot of this

chain of events was a massive inventory bubble, over-recognition of revenue, and a

resulting cash crunch for Ramtron because it then had to pay for the extra inventory it

ordered.34

Because of its point-of-purchase revenue recognition, Ramtron recognized

these additional distributor orders as revenue, even though the over-ordering was not

reflective of ―real‖ underlying demand, but instead, at least in part, was an effort of the

customers to game the allocation system.

The second reason that Ramtron's point-of-purchase revenue recognition system is

relevant is because it allows management to alter the Company's revenue by forcing

more inventory into the distribution channels. This practice is known as ―channel

stuffing.‖ As discussed in more detail in Section III.A infra, I find that Ramtron's



33 Id. at 50-51 (Richards); id. at 187-88 (Davenport).

34 Id. at 52 (Richards) (describing the resulting difficulty when TI would not extend

credit for the over-order of wafers).

12

management did stuff the channel in the first quarter of 2012, thereby distorting the

company's revenue.

The combination of over-orders from customers that were placed on allocation and

Ramtron's stuffing of the channel led to a massive build-up of inventory. The chart

below35 shows the amount of inventory Ramtron had accumulated as of the time of the

Merger. Because of its point-of-purchase accounting system, Ramtron already had

recognized this inventory as revenue. As this chart shows, in the first quarter of 2012,

Ramtron had 3.6 times as much inventory as a year earlier.

Ramtron Inventory

6.8 7 5.8 5.4 7

10.7

16.7

22.8

25.5 24.1

21

0

5

10

15

20

25

30

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

Inventory ($ millions)

This inventory needed to be financed, which took a serious toll on Ramtron's cash

position. Ramtron's primary lender was Silicon Valley Bank (―SVB‖). Throughout 2011



35 The data in this chart is drawn from Exhibit 5 to the Jarrell Report.

13

and 2012, the years affected by the inventory bubble, Ramtron either missed or needed to

renegotiate its loan covenants repeatedly. For example, the Company missed its April

2011 liquidity covenant and received a forbearance for May of that year.36

A July 7,

2011 Form 8-K filing states that on June 30, 2011, Ramtron entered into a Default

Waiver and Fifth Amendment to its loan agreement with SVB, an amendment that cost

the Company $20,000.37

Around this time, Cypress began expressing an interest in Ramtron. On March 8,

2011, Cypress made a non-public written offer to Ramtron for $3.01 a share.38

Ramtron

rejected the offer as inadequate later that month. The offer represented a 37% premium

over the March 8 closing price of Ramtron's stock.39

Rodgers described the offer as

including ―a high market premium to say we were serious and not to try to squeeze on

them.‖40



After rebuffing Cypress and renegotiating its bank covenants, Ramtron still

needed capital. SVB apparently had shifted to lending to Ramtron on an asset-backed

basis, meaning that its loans were collateralized by the Company's receivables instead of

being unsecured. Ramtron considered borrowing from other lenders, but concluded that



36 JX 22; Tr. 25 (Richards).

37 JX 24.

38 JS ¶ 8.

39 JX 14.

40 Tr. 285.

14

the cost was too high.41

So, in July 2011, Ramtron launched a secondary public offering

of 4,750,000 shares, which was roughly 20% of its outstanding shares.42

The secondary

offering occurred at $2 per share, with a net to Ramtron of $1.79 after underwriting

commissions and other charges.43

The Company used the proceeds of this equity raise

largely for working capital to pay off its excess inventory.44



As the above chart shows, Ramtron's inventory continued to increase throughout

2011. Despite the recent equity raise, Ramtron soon fell short on cash again. At least

one internal Company email from January 2012 suggests that the first quarter covenants

would be tight.

45 And, by spring 2012, the Company was in a cash crunch of sorts.

Richards emailed Davenport on March 3, 2012, that ―we are basically running on fumes

in regards to cash management and related bank covenants, which we just announced

new ones yesterday.‖46

These cash management problems continued after Cypress

announced its hostile bid for Ramtron on June 12, 2012. Shortly after the merger

agreement was signed, Richards provided Brad Buss, Cypress' then-CFO, with cash



41 Id. at 54-55 (Richards).

42 Id. at 54 (Richards).

43 JS ¶ 9.

44 Tr. 55 (Richards).

45 JX 35.

46 JX 43; Tr. 28 (Richards: explaining that this reference to the new bank covenants

related to the fact that Ramtron recently had renegotiated its covenants yet again).

15

forecasts that showed the Company would go cash negative on October 26, 2012.47

In

response, Cypress promptly began funding Ramtron.

48



Overall, the evidence shows that Ramtron continually had difficulty meeting its

bank covenants, but that SVB seemed willing to renegotiate those covenants. There is no

evidence that SVB ever sought to call its loans or that the Company actually faced a

serious risk of foreclosure. Richards concisely summed up Ramtron's relationship with

SVB as ―rocky in regards to the covenants‖ but that he ―had a good relationship with the

bankers.‖49

From the evidence of record, therefore, I conclude that the Company was

cash-strapped and struggling from a liquidity standpoint at the time of the Merger, but

that Ramtron was not, as Cypress suggests, a bankruptcy waiting to happen.

C. The Merger

On June 12, 2012, Ramtron issued a public letter declaring its intent to acquire

Ramtron for $2.48 a share.50

Interestingly, the $2.48 offer reflected the same 37%

premium to market as Cypress' March 2011 offer; the decrease in price corresponded to



47 JX 151.

48 Tr. 410 (Buss).

49 Id. at 30.

50 JS ¶ 11.

16

the fall in Ramtron's stock price.

51

Ramtron rejected that offer as inadequate in a June 18

press release and announced that it had begun exploring strategic alternatives.52

Only two days after Cypress announced its public bid, Balzer, Ramtron's CEO,

ordered the creation of new long-term management projections (the ―Management

Projections‖). While, as discussed infra, the parties vigorously dispute the accuracy of

Ramtron's prior forecasts, there seems to be no dispute that the Company's management

had not previously created multi-year forecasts and instead generally only created fivequarter

forecasts.53

Balzer oversaw the team in charge of creating the new management

projections, which consisted of Richards, Brian Yates, who worked for Richards,

Zimmer, and Emley.54

A June 14, 2010 email chain among those five individuals shows a team

undertaking a new and unfamiliar project. As if emphasizing that the projections were

not being prepared in the ordinary course of Ramtron's business, Balzer wrote that he

wanted a ―product by product build up, with assumptions, for it to hold water in the event



51 Tr. 294 (Rodgers).

52 JS ¶ 12.

53 The sole exception appears to be a set of projections created by Richards in

February 2012 and sent to the Company's auditors in an effort to corroborate the

extent of Ramtron's net operating loss tax assets. JX 40. Interestingly, the 2013

forecasts included a confidence factor of 80% and the 2014 forecasts had a

confidence factor of only 50%. Richards did not even bother providing a

confidence factor for the 2015 forecasts. Id. (native file).

54 Tr. 59 (Richards).

17

of a subsequent dispute.‖55

Indeed, Richards testified that he understood the purpose of

the projections to be twofold: marketing the company to a white knight and creating

inputs for a DCF analysis.56

The Ramtron management team had never done long-term

projections before.57

Zimmer, the head of sales, wrote that not even the automotive

industry, which he apparently considered more predictable than the semiconductor

industry, ―can do a line item 4 year forecast.‖58

He also suggested that for ―[o]ut years I

would simply plug in 30% CAGR,‖

59 a comment that reinforces the inference that these

projections were not produced in the ordinary course of business based on reliable data.

Additionally, Balzer wanted the projections done using a point-of-sale approach, as

opposed to Ramtron's standard point-of-purchase methodology. Ramtron's management

team had never done point-of-sale projections.60

I describe the resulting projections in

significantly more detail in Section III.A infra.



55 JX 60.

56 Tr. 59 (―Needham was going to market our company. . . . [O]ne of their tactics

was to put us out to bid so hopefully maybe a white knight would come in. And,

two, I think they used [the projections] for a discounted cash flow to come up with

a basis to value the company, if you will.‖).

57 Id. at 63.

58 JX 60.

59 Id. By recommending use of a 30% CAGR, which generally stands for compound

annual growth rate, Richards understood Zimmer to be advocating multiplying a

base value by 1.3 for each year of the projection period.

60 Tr. 63 (Richards).

18

Meanwhile, Cypress' hostile offer continued. On June 21, 2012, Cypress

commenced a hostile tender offer for Ramtron at $2.68 per share.61

Ramtron's Board

rejected the $2.68 price as inadequate and not in the best interests of the Company's

stockholders. Accordingly, the Board recommended that the stockholders not tender

their shares.62

Shortly thereafter, Ramtron issued its second quarter 2012 earnings, which

were significantly below expectations. In the first quarter of 2012, Ramtron had reported

$15 million in revenue and reaffirmed its public guidance for entire-year 2012 revenue of

―approximately $70 million.‖63

On July 24, 2012, Ramtron reported $14.2 million in

revenue for the second quarter and projected revenue of $14 to $14.5 million for the third

quarter.64

These results and projections placed the Company on track to undershoot its

full-year 2012 estimate by at least $10 million. On July 26, 2012, shortly after Ramtron's

announcement, Merriman Capital, the only analyst covering Ramtron, downgraded the

Company from ―buy‖ to ―neutral.‖

65

Merriman also suspended its target price and

observed that ―were Cypress to pull its offer for Ramtron, these shares might very well

return to the $2.00 range or perhaps lower.‖66



61 JS ¶ 13.

62 Id. ¶ 14.

63 JX 47.

64 JX 96.

65 JX 97.

66 Id.

19

The witnesses at trial agreed that Ramtron's second quarter performance was

disappointing.67

The parties, however, vigorously dispute the reasons for that. Petitioner

assigns basically all of the blame for the poor second quarter to Cypress and denies that it

resulted from any inherent weakness in Ramtron. According to Petitioner, the

distributors pulled back their orders dramatically in light of Cypress' hostile bid, because

they feared being terminated after the merger. For this proposition, LongPath relies

mostly on Balzer's deposition testimony.

68

Respondent argues that Ramtron's second

quarter results reflected Ramtron's own operational failures.

It is conceivable that Cypress' offer may have had some negative effect on second

quarter sales, but the weight of the evidence shows that operational shortcomings of

Ramtron were the primary cause of the decline in sales. Ramtron appears to run on a

calendar fiscal year. As such, less than three weeks remained in June (and the second

quarter) when Cypress issued its bear hug letter on June 12 and at most ten days remained

after Cypress initiated its hostile tender offer. The most probable explanation for the

poor second quarter is that Ramtron's management had stuffed the Company's



67 Tr. 73 (Richards); id. at 302 (Rodgers); id. at 397 (Buss).

68 JX 245 [hereinafter ―Balzer Dep.‖] at 106 (―Part of the reason that sales fell off as

soon as Cypress announced the acquisition is distributors that we had. . . . If these

distributors were not distributors of Cypress product, it was their belief—and I

heard this from Pete [Zimmer]—their belief then that Cypress would probably not

protect them if they consummated the deal and they could be stuck with a whole

bunch of product and, hence, they just stopped buying.‖). There is a potential

hearsay problem with this testimony, but Respondent did not press any such

objection in its briefing.

20

distribution channel with inventory in the first quarter of 2012, and that caused the

Company's distributors to order less product in quarter two. I discuss channel stuffing in

Section III.A infra. Here, it suffices to note that, as of the first quarter of 2012, Ramtron

had $25.5 million in inventory, a 264% increase over the previous year. Even assuming

Ramtron's optimistic 2012 projection of $70 million in revenue, Ramtron had roughly

nineteen weeks worth of inventory, for which it already had recognized revenue, at the

beginning of the second quarter of 2012.

69

A fiscal quarter contains only thirteen weeks.

Other factors support the conclusion that Cypress' hostile bid did not drive

Ramtron's poor second quarter performance. First, Davenport disagreed with the

allegation that the distributors were pulling back because of Cypress. Davenport viewed

Zimmer's comments to that effect as excuses for not hitting his sales targets.70



Considering that Balzer admittedly based his assertion that the distributors were

withholding orders on out-of-court statements made by Zimmer, who did not testify at

trial, I accord it little weight. Second, it appears from the record that a significant number

of Ramtron's products are ―designed into‖ the final products, meaning that the end users

would need the semiconductors to complete their own products and thus would have

relatively stable, long-term demand. This makes it unlikely that demand dipped sharply

at the end of Q2 because of Cypress' bid.71 For all of these reasons, I find that, although



69 A $70 million year would equate to weekly sales of, on average, $1.347 million.

70 Tr. 209.

71 Id. at 402-04 (Buss).

21

Cypress' bid may have contributed slightly to Ramtron's poor performance in the second

quarter of 2012, the main cause of that performance was Ramtron's own business reality.

Notwithstanding the poor second quarter, Cypress increased its offer price to

$2.88 per share on August 27, 2012, and extended the term of the tender offer.72

On

September 10, 2012, Ramtron's Board again concluded that the offer was inadequate and

recommended that the stockholders not tender their shares.73 During the time Cypress

was pursuing its hostile tender offer, Ramtron actively canvassed the market looking for

other buyers. In fact, Ramtron contacted over twenty potential suitors, a process I discuss

in more detail in Section III.C infra. None of those other companies, however, ever made

a firm offer, even though the most serious of them had access to Ramtron's internal

management projections.

Beginning on September 12, 2012, representatives of Cypress and Ramtron

engaged in active negotiations. Cypress increased its offer to $3.01 per share on

September 16 and then again to $3.08 on September 17. Later that same day, Ramtron

and Cypress agreed on the final transaction price of $3.10 per share.74

The parties signed



72 JS ¶ 15.

73 Id. ¶ 16.

74 Id. ¶ 17.

22

the merger agreement on September 18,

75 and the Merger was approved by a stockholder

vote on November 20, 2012.76

D. Procedural History

LongPath filed this appraisal action on December 11, 2012. After the parties

engaged in discovery, the Court presided over a three-day trial from October 7 to 9, 2014.

Eight witnesses testified, including the parties' experts. After extensive post-trial

briefing, I heard final argument on March 3, 2015.

I also note, for completeness, that a stockholder class action challenging the

Merger was filed on October 15, 2012. Those plaintiffs moved to preliminarily enjoin

the Merger, but that motion was denied. Thereafter, the defendants in the class action

moved to dismiss. On June 30, 2014, I issued a memorandum opinion granting those

motions and dismissing the stockholder class action with prejudice.77

E. Parties' Contentions

Both parties base their positions on expert testimony. Petitioner called David

Clarke as its expert; Respondent relied upon Gregg Jarrell. Not surprisingly, the experts

arrived at widely disparate conclusions. Clarke contends that the fair value of Ramtron's

stock as of the Merger was $4.96 a share. Jarrell opines that the stock was worth only



75 Id. ¶ 18.

76 Id. ¶ 23.

77 Dent v. Ramtron Int'l Corp., 2014 WL 2931180 (Del. Ch. June 30, 2014).

23

$2.76. Petitioner's fair value of $4.96 a share is more than 274% of Ramtron's

unaffected stock price of $1.81.

Clarke bases his conclusion of $4.96 per share on a combination of a DCF analysis

and a comparable transactions analysis, which he weighted at 80% and 20%,

respectively. Clarke relied on Ramtron's management projections and a three-stage DCF

analysis to arrive at a value of $5.20 per share. He based his comparable transactions

analysis on a dataset consisting of only two transactions and obtained a fair value of

$3.99 per share. Because Clarke found no comparable companies, he did not rely on that

valuation method.

Jarrell rather unusually began his analysis with two premises: (1) that the Merger

price was the result of a fair and competitive auction; and (2) that the management

projections were overly optimistic. Based on these predicates, Jarrell opted to examine

the transaction price and back out any synergies in order to determine fair value. This

approach resulted in a fair value of $2.76 per share. In addition, Jarrell conducted a DCF

analysis, in which he relied upon the management projections he earlier concluded were

overly optimistic. Based on that analysis, Jarrell opined, apparently in the alternative,

that the fair value of the Company's shares was $3.08 each, a number coincidentally only

two pennies from the Merger price. As a result of his analysis, Jarrell also concluded that

there were no comparable companies or comparable transactions.

24

Much has been said of litigation-driven valuations, none of it favorable.

78

Here,

the parties have proffered widely disparate valuation numbers which differ, at the

extremes, by $2.44 as compared to an unaffected stock price of $1.81 and a deal price of

$3.10. LongPath asks this Court to adopt its $4.96 figure and conclude that the market

left an amount on the table exceeding Ramtron's unaffected market capitalization. This

would be a significant market failure, especially in the context of a well-publicized

hostile bid and a target actively seeking a white knight. But, LongPath itself is a market

participant. It bought its shares after the announcement of the Merger, thereby

effectively purchasing an appraisal lawsuit. Although such arbitrage can be profitable on

the merits when flawed deals undervalue companies, LongPath invested an amount so

small that, even if I accepted its position and concluded that Ramtron's true value at the

time of the Merger was somewhere in the range of $4.96 per share, this lawsuit is likely a

less-than-break-even proposition for LongPath after considering its litigation expenses.

Respondent, on the other hand, has submitted an eyebrow-raising DCF that, based on

projections its expert presumed were overly optimistic, still returns a ―fair‖ value two

cents below the Merger price.



78 E.g., In re Dole Food Co., 2014 WL 6906134, at *11 (Del. Ch. Dec. 9, 2014) (―In

appraisal proceedings, the battling experts tend to generate widely divergent

valuations as they strive to bracket the outer limits of plausibility.‖); Finkelstein v.

Liberty Digital, Inc., 2005 WL 1074364, at *13 (Del. Ch. Apr. 25, 2005) (―Men

and women who purport to be applying sound, academically-validated valuation

techniques come to this court and, through the neutral application of their

expertise to the facts, come to widely disparate results, even when applying the

same methodology.‖).

25

II. STANDARD OF REVIEW

In a statutory appraisal action brought pursuant to 8 Del. C. § 262, the Court is

tasked with ―determin[ing] 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 amount determined to be the fair value.‖79

The

Delaware Supreme Court has held that ―fair value‖ is ―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.‖80

―Accordingly, the corporation must be valued as a going concern

based upon the ‗operative reality' of the company as of the time of the merger.‖81



Section 262 directs that, in making this determination, ―the Court shall take into account

all relevant factors.‖82

Our case law has made clear that ―[a]ny ‗techniques or methods

which are generally considered acceptable in the financial community and otherwise

admissible in court' may be used.‖83



79 8 Del. C. § 262(h).

80 Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214, 218 (Del. 2010).

81 M.G. Bancorporation, Inc. v. Le Beau, 737 A.2d 513, 525 (Del. 1999) (quoting

Cede & Co. v. Technicolor, Inc., 684 A.2d 289, 298 (Del. 1996)).

82 8 Del. C. § 262(h).

83 Gholl v. eMachines, Inc., 2004 WL 2847865, at *5 (Del. Ch. Nov. 24, 2004)

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

26

As is well-known, the Delaware appraisal statute places the burden of proof on

both parties.84

―If neither party satisfies its burden, however, the court must then use its

own independent business judgment to determine fair value.‖85

III. ANALYSIS

A survey of the case law reveals that there are four main, or at least recurring,

valuation techniques generally presented in an appraisal action: a discounted cash flow or

DCF analysis, a comparable companies approach, a comparable transactions approach,

and an examination of the merger price itself, less synergies. Like all tools, each has its

own strengths and weaknesses. The parties agree that there are no comparable

companies. Jarrell and Clarke disagree about whether there are comparable transactions,

but the universe of potential comparables, even according to Clarke, is limited to two.

Both sides conducted a DCF analysis, but disagree about certain issues in addition to the

reliability of the Management Projections, such as the proper size premium, the

appropriate method of modeling future capital expenditures, and whether a two-step or

three-step DCF is more appropriate, as well as several more minor issues. The parties

strongly disagree about the appropriate weight, if any, to give the Merger price, which

Respondent weighs at 100%. Petitioner places the most weight on its DCF analysis.



84 M.G. Bancorporation, Inc., 737 A.2d at 520 (―In a statutory appraisal proceeding,

both sides have the burden of proving their respective valuation positions by a

preponderance of the evidence.‖).

85 Gholl, 2004 WL 2847865, at *5.

27

Accordingly, I begin there and then address the utility of a comparable transactions

approach before turning to the transaction price.

A. A Discounted Cash Flow Analysis Is Inappropriate Because the Management

Projections Are Unreliable

A discounted cash flow analysis ―involves projecting operating cash flows for a

determined period, setting a terminal value at the end of the projected period, and then

discounting those values at a set rate to determine the net present value of a company's

shares.‖86

―Typically, Delaware courts tend to favor a DCF model over other available

methodologies in an appraisal proceeding. However, that metric has much less utility in

cases where the transaction giving rise to appraisal was an arm's-length merger, [or]

where the data inputs used in the model are not reliable . . . .‖87

The foundational inputs

of a DCF are the company's cash flows.88

In determining those inputs, this Court has

placed substantial weight on the projections of the incumbent management. Indeed, ―this

Court prefers valuations based on management projections available as of the date of the



86 Doft & Co. v. Travelocity.com Inc., 2004 WL 1152338, at *5 (Del. Ch. May 21,

2004).

87 Highfields Capital, Ltd. v. AXA Fin., Inc., 939 A.2d 34, 52-53 (Del. Ch. 2007).

88 Cf. Laidler v. Hesco Bastion Envt'l, Inc., 2014 WL 1877536, at * 8 (Del. Ch. May

12, 2014) (―Though DCF is more prominently employed in Delaware appraisal

litigation, both parties' experts opine that employing a DCF is not feasible here

because [the company's] management never made cash flow projections in the

ordinary course of its business.‖).

28

merger and holds a healthy skepticism for post-merger adjustments to management

projections or the creation of new projections entirely.‖89



The reason that ―Delaware law clearly prefers valuations based on

contemporaneously prepared management projections‖ is ―because management

ordinarily has the best first-hand knowledge of a company's operations.‖90

These

projections are useful in appraisals, because they ―by definition, are not tainted by postmerger

hindsight and are usually created by an impartial body. . . . When management

projections are made in the ordinary course of business, they are generally deemed

reliable.‖91

By corollary, projections prepared outside of the ordinary course do not

enjoy the same deference. In fact, management projections can be, and have been,

rejected entirely when they lack sufficient indicia of reliability, such as when they were

prepared: (1) outside of the ordinary course of business; (2) by a management team that

never before had created long-term projections; (3) by a management team with a motive

to alter the projections, such as to protect their jobs; and (4) when the possibility of

litigation, including an appraisal action, was likely and probably affected the neutrality of



89 Cede & Co. v. JRC Acq. Corp., 2004 WL 286963, at *2 (Del. Ch. Feb. 10, 2004).

90 Doft & Co., 2004 WL 1152338, at *5.

91 Cede & Co. v. Technicolor, Inc., 2003 WL 23700218, at *7 (Del. Ch. Dec. 31,

2003), revised (July 9, 2004), aff'd in part, rev'd in part, 884 A.2d 26 (Del. 2005).

29

the projections.

92

These factors go to the reliability of the projections. In this case, the

Ramtron management projections suffer from all of these problems.

1. A new Ramtron management team prepared projections not in the ordinary

course using a methodology they never had employed before

The team in charge of creating the new Management Projections consisted of

Richards and one of his employees, Zimmer, and Emley, with oversight by Balzer.93



According to Richards, the projections started with the numbers provided by the sales

department, because most of the Company's costs either were fixed or a percentage of



92 Gearreald v. Just Care, Inc., 2012 WL 1569818, at *4 (Del. Ch. Apr. 30, 2012)

(listing these four factors as reasons not to afford deference to the projections); see

also Huff Fund Inv. P'ship v. CKx, Inc., 2013 WL 5878807, at *9-11 (Del. Ch.

Nov. 1, 2013) (rejecting management projections prepared out of the ordinary

course that included substantial speculative elements), holding left unmodified,

2014 WL 2042797 (Del. Ch. May 19, 2014), both aff'd, 2015 WL 631586 (Del.

Feb. 12, 2015) (TABLE); Doft & Co., 2004 WL 1152338, at *5-6 (finding

management projections unreliable because: (1) management themselves did not

regard them as reliable; and (2) the company, and seemingly the industry, was

deemed nearly impossible to forecast in the short term, much less the long-term).

Recent cases continue to evaluate the reliability of management projections on

similar grounds. See, e.g., Merlin P'rs LP v. AutoInfo, Inc., 2015 WL 2069417, at

*8 (Del. Ch. Apr. 30, 2015) (refusing to rely on management projections where:

(1) management never before had prepared similar projections; (2) the projections

were so ―indisputably optimistic‖ that the petitioner's own expert testified that a

discount would have been appropriate; and (3) management ―itself had no

confidence in its ability to forecast‖); Owen v. Cannon, 2015 WL 3189204, at *19-

21 (Del. Ch. June 17, 2015) (rejecting an attack on the management projections

when those projections did not include speculative business items, were not

inconsistent with historical performance, were not ―created by novices,‖ and

instead generally resulted from a ―deliberate, iterative process over a period of

three years to create, update and revise multi-year projections for the Company‖).

93 Tr. 59 (Richards).

30

revenue, so the revenue numbers were the most important inputs.94

Zimmer and Emley

were the lead individuals responsible for developing the sales (and, hence, revenue)

numbers. Both had been with the Company at most a year when they began creating the

new projections.95

Aside from having relatively new employees tasked with creating the inputs, the

team that developed the Management Projections utilized: (1) a new product-by-product

build-up method; (2) a point-of-sale instead of the usual point-of-purchase methodology;

and (3) a multi-year projection period.96

The Ramtron management team previously had

not created projections using any of these methods, much less all three.

Additionally, the projections were not prepared in the ordinary course of business.

There is no evidence Ramtron ever had prepared forecasts for more than five quarters,

with the exception of Richards's deferred tax asset projections.

97

Balzer ordered the

projections created immediately after Cypress issued its bear hug letter. Thus, these

projections were prepared in anticipation of potential litigation, or, at least, a hostile

takeover bid. Balzer explicitly wrote that he wanted a ―product by product build up, with

assumptions, for it to hold water in the event of a subsequent dispute.‖98

Furthermore, at



94 Id. at 60.

95 Id. at 64.

96 Id. at 63 (Richards); see also JX 60.

97 See supra note 53.

98 JX 60.

31

least Richards understood one of the purposes of the projections was to serve as a

marketing tool in Needham's hunt for a white knight.99

This knowledge gave the

management team an incentive to err on the optimistic side.

In sum, Ramtron's new management team employed a new methodology to create

long-term projections, which they were not accustomed to doing, out of the ordinary

course of business, with knowledge that the projections could or would be used: (1) in a

subsequent dispute; (2) in marketing the Company; (3) as the inputs for Needham's DCF

analysis;100

or (4) any combination of those three possibilities. These projections,

therefore, facially lack the indicia of reliability that generally have led Delaware courts to

defer to management projections. I now turn to more specific problems with the

Management Projections that reinforce the conclusion that the Projections are unreliable.

2. Management's forecasting capabilities

The parties vigorously dispute Ramtron management's forecasting accuracy. One

dispute, for example, involves Respondent's contention that Ramtron often missed its

publicly issued guidance for annual revenue going back to 2007, four years before

Zimmer and Emley even joined the Company. This line of attack is something of a red

herring. The proper focus should be on the forecasting accuracy of the management team

that actually made the projections. Whether other, prior executives had or lacked the gift

of seeing into the Company's future and predicting the success of its business is less



99 Tr. 59.

100 Id.

32

relevant and barely probative of the forecasting capabilities of the pre-Merger

management team. Accordingly, I would assign little weight to Ramtron's alleged

historic forecasting prowess, even assuming it was proven.

The record is surprisingly unclear on exactly what projections were made by the

then-current Ramtron management team, aside from the occasional public guidance.101



The parties' main disagreement over management's forecasting abilities concerns a

waterfall chart. The chart shows forecasts by quarter. Respondent contends that the chart

represents management's ongoing internal forecasts. Petitioner argues that it depicts

nothing but ―stretch goals.‖ The answer is somewhat important. If the waterfall chart in

fact represents actual forecasts, then Ramtron's ability to forecast its own business more

than two quarters out was quite poor. On the other hand, if the chart merely reflects

stretch goals, then it loses much of its impact. The weight of the evidence convinces me

that the waterfall chart represented actual forecasts, but I still accord that chart only

moderate weight in my evaluation of the Management Projections. Before explaining

why, I have included below a portion of the waterfall chart.

102



101 E.g., JX 47 (forecasting, on April 19, 2012, $70 million in total 2012 revenue).

On February 22, 2011, Ramtron forecasted between $65 and $70 million in total

2011 revenue. JX 294. Actual revenues for 2011 were $66.4 million. JX 215

Ex. 3. The 2011 forecast likely was not made by exactly the same management

team and neither the 2011 nor the 2012 forecasts utilized a point-of-sale or a

bottoms-up line-item methodology. Thus, the relevance of the 2011 and 2012

forecasts, as predictors of the accuracy of the Management Projections, is

marginal, at best.

102 JX 39. This chart was included in a presentation to the Ramtron Board and is

dated February 9, 2012. The first two columns indicate the month and the quarter

33

Date Qtr Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

Q4

2012

Apr.

2010

Q2

2010

$21,000

July

2010

Q3

2010

$21,000 $23,000

Oct.

2010

Q4

2010

$21,000 $23,000 $24,000

Dec.

2010

Q1

2011

$21,000 $22,000 $24,000 $25,000

Jan.

2011

Q1

2011

$10,000

$10,440

$15,000 $20,000 $22,000

Apr.

2011

Q2

2011

$15,000

$16,537

$20,000 $22,000 $20,000

July

2011

Q3

2011

$21,500

$21,736

$22,532 $18,000 $21,500

Oct.

2011

Q4

2011

$22,300

$16,905

$20,000 $22,000 $21,500

Feb.

2012

Q1

2012

$14,000

$15,000

$15,000

$14,200

$18,000 $20,000

Respondent's argument is straightforward: the waterfall chart appears in a

presentation to the Board,103 and there is no indication that the numbers are anything

other than ordinary-course forecasts. LongPath relies on a pair of ―Sales Update‖

presentations that refer to the numbers in the waterfall chart as ―stretch goals.‖104





when each particular forecast was made. The remaining columns are the quarters

being forecasted. For unknown reasons, there are two sets of forecasts in the first

quarter of 2011. The bolded number represents the actual results in thousands of

dollars for each quarter. For example, the cell Q2 2010 by Q1 2011 represents

management's forecast, as of the second quarter of 2010, for revenue in the first

quarter of 2011. I have added the actual results for Q1 and Q2 2012, which were

not yet known as of February 9, 2012.

103 Indeed, an earlier version of the same chart appeared in an October 18, 2011 board

presentation entitled ―Financial Outlook.‖ JX 31. That chart similarly was

entitled ―Sales Forecast Waterfall Chart,‖ as in JX 39, and it contained no

indication that the figures presented were ―stretch‖ goals.

104 JX 313 (Oct. 18, 2011); JX 314 (Feb. 13-14, 2012).

34

Respondent advances the theory (and urges the Court to infer) that Zimmer, as the Vice

President of Sales, referred to the forecasts as stretch goals because, as the head of sales,

he primarily was responsible for failing to meet revenue targets. At trial, Ramtron's Vice

President of Technology, Davenport, similarly suggested that Zimmer blamed Ramtron's

poor second quarter on Cypress as an excuse to cover up his own poor performance.105

More practical reasons lead me to the conclusion that the waterfall chart likely

represented management's actual forecasts. First, contemporaneous emails suggest that

the management team saw these numbers as goals they should hit. In a late January 2012

email chain, Balzer writes to Zimmer, Richards, and Yates that the Company ―really

need[s] to find a way to hit $14.5. That is what we said we would do.‖106

The first

quarter 2012 forecast for that quarter was $14 million, as the chart above shows. Second,

the very idea of ―stretch‖ or ―reach‖ goals requires targets that are, as the names imply,

actually within reach.107

Many of these forecasts were wildly incorrect. In December

2010, for example, the Company forecasted $21 million for the first quarter of 2011 (the

very next quarter), a quarter in which actual revenue was $10.4 million, less than half of

the forecast. Relatedly, as the actual quarter drew closer, management generally reduced



105 Tr. 209, 232.

106 JX 36.

107 See Gholl, 2004 WL 2847865, at *9 (rejecting contention that management

projections were unrealistic reach goals and noting: ―If the 2002 budget

represented management's wildest dreams come true, it would be illogical and

callous to key the Bonus Plan to even higher targets that were not achievable‖).

35

its forecasts to better approximate the actual revenue. As the quote from Balzer suggests,

the management team treated these numbers as real targets, not lofty stretch goals.108



Third, if these are not actual forecasts, then the record lacks evidence of regularly created

and updated management forecasts, i.e., if the waterfall chart only contains stretch goals,

then management's publicly issued guidance would be the only basis for assessing its

forecasting.

I find it most likely that management began with high aspirations for future

quarters and reduced those expectations toward the actual expected results as the quarter

drew nearer. This suggests that management's near-term forecasting abilities were

mediocre at best. Even so, the waterfall forecasts and the public guidance forecasts were

done with a different methodology than the Management Projections. Accordingly, I

conclude that management, even under its traditional forecasting system, was of middling

quality when it came to forecasting Ramtron's future business. Several witnesses at trial

testified that, in general, the semiconductor business is difficult to forecast.109

Indeed,

after Ramtron issued its weak second quarter 2012 earnings, Merriman Capital issued a

report that suspended its target price for the Company and stated: ―We simply can't



108 The February 2012 projections cumulatively estimate $67 million in revenue for

2012. This is the same number used by Richards in a set of projections prepared

to justify the Company's deferred tax assets to its auditors. JX 40. Richards's use

of the waterfall chart forecast numbers for projections provided to the Company's

auditors further supports my finding that these were not ―stretch‖ goals.

109 Tr. 31-32 (Richards); id. at 320-21 (Rodgers: explaining that rigorous competition,

technological change, and macroeconomic factors make the industry difficult to

forecast); id. at 378-80 (Buss).

36

figure out how to model this company consistently at the current time.‖110 Ramtron's

management also recognized its own limited success in forecasting.111

In sum,

management's lack of success in accurately projecting future revenue in the past provides

another reason to doubt the reliability of the Management Projections.

3. The projections incorporate unrealistic assumptions regarding ROHM

I also note that the Management Projections assume cost reductions, over time,

associated with the transition to ROHM's foundry. The projections reflect an assumption

that production of F-RAM at ROHM would to begin in January 2013 at 150,000 units a



110 JX 97.

111 Balzer candidly conceded the Company was mediocre at forecasting:

Q: What was the quality of those forward-looking

projections when you took over as CEO?

A: Probably mediocre.

Q: Did you attempt to make improvements in the quality

of the projections?

A: Yes.

Q: Did you succeed?

A: I'd say no.

Q: Why not?

A: . . . [Y]ou need to understand the market . . . . And

while we were working very hard on that, we weren't

there.

Balzer Dep. 50. These comments temper the reliability of Balzer's position that

the Management Projections ―were the most likely of what would happen if

Cypress walked away.‖ Id. at 83.

37

month and increase by 50,000 units per month thereafter.

112

These assumptions are too

speculative to merit any deference.113



Ramtron entered into a manufacturing agreement with ROHM in late July 2012

pursuant to which ROHM would serve as a second foundry for Ramtron.114

According to

a July 23, 2012 press release, ―Initial low-density F-RAM products have already been

qualified for commercial production and Ramtron expects to receive and begin selling the

first devices produced on ROHM's manufacturing line within approximately 60 days.‖115



As already described, it took Ramtron seven years to transition entirely from Fujitsu to

TI. That process went so poorly that it forced Ramtron to place its customers on

allocation in 2011. Ramtron's earlier efforts to develop IBM as a second foundry took

place over three years and caused it to incur more than $30 million in direct costs and

equipment expenses. That endeavor failed entirely. Additionally, the evidence shows

that, in July 2012, Ramtron was not flush with cash. The IBM venture suggests that

establishing a new foundry requires a substantial monetary investment, and Ramtron's

liquidity situation in the summer of 2012 makes it doubtful that Ramtron would have



112 JX 170 native file.

113 See Gearreald, 2012 WL 1569818, at *5-6 (concluding that the requirement that a

company be valued as a going concern based on its operative reality at the time of

the merger required the exclusion of ―speculative costs or revenues‖); see also

Huff Fund Inv. P'ship, 2013 WL 5878807, at *11 (finding the inclusion or

exclusion of significant contract revenues so speculative as to render the

management projections unreliable).

114 JX 95.

115 Id.

38

been able to finance the continued development of ROHM as a foundry.

116

In light of

this evidence, as well as the uniform testimony on the difficulty of transitioning

foundries, I do not find credible the proposition that Ramtron reasonably could expect to

begin commercial production at ROHM in sixty days and start enjoying cost savings

within six months.117

Additionally, evidence presented at trial buttresses this conclusion. Consistent

with the other testimony on the lead time for getting a product from concept to fullfledged

commercial sale,118 Davenport testified the term ―initial low-density F-RAM

products‖ referred to sample quantities that Ramtron was ―going to take over ROHM's

design and try to commercialize them as samples. They weren't cost-effective but they

would seed the market.‖119

In fact, Ramtron never got further than this initial sample

stage. Davenport further testified that Ramtron ―never got so far as transfer[ing] our

designs to the ROHM foundry‖ before the Merger closed.120

It also appears that ROHM



116 E.g., Tr. 410 (Buss: commenting that, upon acquiring Ramtron, Cypress

discovered that the Company still had unpaid legal bills from the beginning of

2012). Indeed, Ramtron was on pace to go cash negative before the end of

October 2012. JX 151.

117 JX 170 native file (assumption of per part cost reductions).

118 See supra notes 16-18 and accompanying text.

119 Tr. 225.

120 Id. at 205.

39

technologically lagged behind both TI and IBM as a foundry.121

I do not question the

strategic judgment of Ramtron's management in seeking to implement the Company's

manufacturing agreement with ROHM, but the record as a whole leads me to find that the

ROHM assumptions built into the Management Projections were speculative and further

undermine the reliability of those projections.

4. The Management Projections rely on 2011 and 2012 revenue figures that

were distorted because of customer allocation issues and channel stuffing

As discussed in the next Subsection, the Management Projections for revenue

assume a constant growth rate of 24% for 2014, 2015, and 2016.

122

This is an arbitrary

method of predicting revenue growth if not supported by reasonable assumptions. Such

simple modeling makes the reliability of the base year numbers crucially important—i.e.,

if a set of projections assumes constant growth from a starting number, the inaccuracy of

that foundational input affects the reliability of the entire enterprise. Substantial evidence



121 Id. at 207-08 (Davenport: discussing ROHM's wafer yield of 20% to 60%, as

against a ―good‖ yield of 97%, which TI could achieve, all of which bears on

supply costs); id. at 348-51 (Rodgers: testifying that ROHM lagged behind TI

technologically, was not competitive in the marketplace against TI's products, and

had a very different technology than TI that would make the foundry transition

difficult, all of which raised questions about the economic viability of

manufacturing microchips there); id. at 395 (Buss: stating that TI and IBM ―are

probably two of the best, well-run, capable fabs in the world,‖ and that

successfully introducing ROHM as a second foundry ―was definitely a long shot‖).

The testimony of Cypress' officers and employees is obviously self-serving, but

their remarks on the technological status of ROHM versus TI or IBM is not

contradicted by any other evidence and comports with Ramtron's own difficult

history in transferring foundries.

122 JX 170 native file (year-over-year growth rates of -12%, 19%, 24%, 24%, and

24%, for 2012 through 2016, respectively).

40

in the record supports the conclusion that Ramtron's revenue in 2011, the last full year

before Cypress' offer, is an unreliable figure.

In Section I.B.2 supra, I discussed the massive inventory build-up that Ramtron

experienced beginning in 2011. During no quarter in 2010 did Ramtron have more than

$7 million in inventory. Over the course of 2011, however, Ramtron shipped a huge

amount of inventory into its distribution channels until, in the first quarter of 2012,

Ramtron had $25.5 million in inventory. Even under favorable assumptions for Ramtron,

that amounts to about nineteen weeks of inventory in the channel and it consists of

product for which Ramtron already had recognized revenue.123

In describing Ramtron's

background, I found that this inventory build-up resulted at least in part from the supply

shortages the Company faced as a result of its foundry transition. Those shortages forced

the Company to place customers on allocation; the customers responded by over

ordering. Because Ramtron recognized revenue when it shipped to distributors, it is

reasonable to infer that an unknown, but not insignificant amount of Ramtron's revenue

in 2011 actually reflected this over-ordering by customers, as opposed to a genuine surge

in demand. In addition, because of the backlog of inventory that existed in the first

quarter of 2012, it is logical that less revenue would be recognized later in 2012 as the

inventory bubble was burned off, unless there was a significant uptick in demand.

Ramtron's management, however, expected to hit their reduced forecasts for the

first quarter of 2012. Although I already have discussed the difficulties with the point-of-



123 E.g. Tr. 415 (Buss: describing Ramtron's inventory problem).

41

purchase revenue recognition system, there is another pitfall not yet discussed: channel

stuffing. Channel stuffing is the practice of stuffing inventory into the channel in order to

recognize the attendant revenue sooner, notwithstanding the fact that the revenue does

not correspond to underlying increases in demand. Hence, it is a form of revenue

manipulation.

I find that Ramtron's management pushed excess inventory into the Company's

distribution channels in the first quarter of 2012. In an already referenced email chain

from late January 2012, Balzer remarked that the Company ―really need[ed] to find a way

to hit $14.5‖ million.124

Zimmer responded: ―I'll die trying. We'll for sure stuff channel.

Next Qtr will suffer.‖125 There is no persuasive evidence that Balzer disagreed.

Although Petitioner fights the channel-stuffing conclusion,

126 the combination of

Zimmer's contemporaneous comments and the massive inventory buildup strongly

support the conclusion that Ramtron stuffed the channel in order to make its first quarter

revenue forecast.

All of this matters for two reasons. First, forcing excess inventory into the channel

in early 2012 meant that there would be a corresponding fall off in revenue at some point



124 JX 36.

125 Id.

126 LongPath cites to statements by Balzer regarding other time periods that the

Company should avoid stuffing the channel. JX 10; JX 242.

42

in the future absent a demand spike.127

As Zimmer predicted, the next quarter, Q2 2012,

did suffer. Petitioner's efforts to attribute those disappointing results to Cypress' hostile

offer, rather than weaknesses in Ramtron's own business practices, are unavailing.128



Second, Ramtron's revenue figures for 2011 and the first half of 2012 do not accurately

map to actual demand for the Company's products. LongPath argues that the

quantification of the point-of-purchase versus point-of-sale issue reveals that, at most,

Ramtron over-recognized 3.7% of its total revenue from 2010 through 2012.129



Assuming Petitioner's math is correct, that is an over-recognition, in three years, of $6.6

million for a company that only once in its history had had more than $70 million in

revenue in a single year.

The problem, however, goes beyond just the amount of improperly recognized

revenue. The timing of the revenue also is affected significantly. If 2011 and 2012 are

used as base years in forecasting, but those years include inflated revenue because of



127 The evidence suggests that many or most of Ramtron's products were ―designed

into‖ its customers' products. This long-term supply nature of Ramtron's business

reduces the likelihood of dramatic short-term demand fluctuations.

128 See supra notes 70-72 and accompanying text.

129 Pet'r's Post-Trial Br. 34. My rather simplistic comparison of point-of-purchase

versus point-of-sale revenue recognition supra suggested that the use of one

system over the other affects only the timing of the revenue, not the amount.

There are various reasons why using the point-of-purchase approach also may lead

to over-recognition of revenue. The distributors may return inventory because, for

example, they ordered too much or the products are obsolete. Distributors also

may sell to the end-user for less than the list price, leading to a reduction in the

actual revenue received. See Tr. 299-302 (Rodgers: comparing the two revenue

recognition systems).

43

either over-ordering by customers placed on allocation or channel stuffing, then the

reliability of the projections is affected. Thus, customer allocation issues in 2011 and

channel stuffing in the first quarter of 2012 throw significant doubt on the accuracy of the

underlying revenue figures for those periods. In that regard, I do not consider it

productive (even assuming it is feasible) to attempt to quantify how much in extra

revenue Ramtron recognized in 2011 or 2012 based on these factors.

130

5. The projections defy historical trends

Historical performance does not control a company's future performance. It is,

however, a red flag when projections suggest a dramatic turnaround in a company despite

no underlying changes that would justify such an improvement of business. This is the

classic ―hockey stick‖ problem. The Management Projections, prepared days after

Cypress made its bid and with knowledge that Needham would use the Projections to

market the Company, fall into this category. Both revenue growth and gross margins are

shown as undergoing dramatic improvements. The following chart shows Ramtron's

historical revenue (for the ten years before the projection period) versus its projected



130 Moreover, because Ramtron's management moved to a new revenue-recognition

approach for the Management Projections, it is not clear what steps the Company

took to avoid double counting revenue. As of the end of January 2012, Ramtron

had about $21 million in inventory in its distribution channels. JX 34 (Zimmer

email). That is more than a quarter's worth of revenue. But, the Company

apparently did track to some extent the differences between point-of-sale and

point-of-purchase revenues. JX 174.

44

revenue.

131

As the graphs make clear, the projection period suggests a period of

previously unknown prosperity for Ramtron. Not only is the Company's historically

volatile growth rate transformed into a consistently high growth rate, but the downward

trend in revenue is replaced by a sharp, unprecedented increase in absolute revenue.132

This sharp uptick in revenue is in contrast to the fact that, at least dating back to 1994, the

Company never has experienced four consecutive years of growth.



131 The historical figures are drawn from Exhibit 8 of Jarrell's Report. These figures

are for the years 2002 through 2011 and are in blue. The projected revenues are

drawn from the native excel spreadsheet of JX 170, which is the final iteration of

the Management Projections. The projection period is 2012 through 2016 and

those numbers are displayed in red.

132 By 2012, the Company had experienced two consecutive years of revenue

decreases. In fact, 2012 revenue was forecasted as less than 2008 revenue. 2016

forecasted revenue, by contrast, nearly would exceed Ramtron's 2010 and 2011

actual revenues combined.

45

Presented in another perspective, the following chart shows the Company's

compound annual growth rate (―CAGR‖) over various periods.133

Only under the

arbitrary 2005-2008 timeframe, which appears to be the Company's best-ever growth

period, does historic growth approach projected growth. When comparing the five or ten

years preceding the projections period, it is clear that the Management Projections

forecast incredible growth. Indeed, the five-year projection period implies a CAGR of

22.73%, which is roughly 3.36 times higher than the CAGR for the five years

immediately preceding the projection period (2007-2011) and approximately 2.46 times

greater than the ten-year period (2002-2011) before the management forecasts.

Time Period Years CAGR

2002-2006 5 7.79%

2005-2008 4 22.73%

2007-2011 5 6.77%

2009-2011 3 18.23%

2002-2011 10 9.23%

2012-2016 5 22.73%



133 The inputs are the same as the previous graph. CAGR provides the rate at which

an initial value would need to grow each year in order to achieve a final amount.

It is a measurement that smoothes out swings in growth over time. For CAGR, I

use the formula: CAGR = ((End Value / Start Value)^(1 / Number of Years)) – 1.

Note that, while, for example, 2002-2011 is a period of ten years, the input for the

CAGR formula would be nine, because there are only nine periods of growth

between year-end 2002 and year-end 2011. CAGR can be a misleading

measurement tool, as the selection of years can dramatically affect the implied

annual return. This is why multiple historical CAGR measurements are provided.

46

Petitioner attempts to justify the Management Projections as reasonable by

comparing the projections to a set of internal Cypress projections. In what was called the

President's Strategic Plan (the ―PSP‖), Cypress forecasted the potential F-RAM market in

terms of total available market, service available market (which was Cypress' term for a

product's core market) and predicted share of the market.

134

Petitioner argues that, if

Ramtron simply maintained the market share of the core F-RAM market that it had at the

time of the Merger, then the Management Projections would be accurate. There are

numerous problems with this argument: (1) Ramtron's management did not have the PSP

when they were creating the Management Projections, so this thesis is an entirely post

hoc justification for the Projections; (2) for the Management Projections to be accurate,

Ramtron would have had to increase its market share significantly, not just maintain it;

(3) to the extent that Cypress' predictions are relevant, the Management Projections

would require Ramtron to capture a substantially larger portion of the market than

Cypress predicted it would; and (4) perhaps most damaging to Petitioner's theory,

Cypress predicted that Ramtron, operating as an improved division of Cypress, would

lose market share.

The chart below compares Cypress' predictions for Ramtron, as a division of

Cypress, against the Ramtron Management Projections. Dollar values are in millions.



134 JX 199; Tr. 426-32 (Buss: explaining the various portions of JX 199, which is the

PSP).

47

2013 2014 2015 2016

Core Market $187 $218 $254 $288

Ramtron Share of Market, as Cypress Division $41 $55 $61 $67

Cypress F-RAM Market Share (forecast by Cypress) 22% 25% 24% 23%

Ramtron Management Projections $69 $85.6 $106.1 $131.6

Ramtron F-RAM Market Share (Petitioner's argument) 37% 39% 42% 46%

Market Share Gap

(Management Projections – Cypress Predictions)

15% 14% 18% 23%

Petitioner's argument is unpersuasive. The PSP forecasts Ramtron as a division of

Cypress—i.e., after a possible merger. That alone makes the comparison of market share

unavailing. More importantly, Cypress predicted a moderate, but falling market share for

Ramtron or, at best, that Ramtron would maintain its market share.135

The Management

Projections predict an entirely different trend under which Ramtron's market share would

increase by nearly 25%, i.e., Ramtron would capture another nine percent of the core FRAM

market. By the year 2016, for the Management Projections to be accurate,

Ramtron would need to hold twice as much of the core market as Cypress predicted it

would. Considering all the evidence of record regarding projections, I find it unlikely

that Cypress substantially would underestimate the potential of the very company it was

about to purchase. Thus, Petitioner's attempts to show the ―reasonableness‖ of the

Management Projections by comparing them to the Cypress PSP are unconvincing.

Rather, the Projections defy historical trends.



135 In 2017, for example, Cypress predicted a 22% market share.

48

6. Management utilized other projections for ordinary business purposes

The fact which I find to be the final nail in the coffin for the Management

Projections is that Ramtron did not rely on them in the ordinary course of its business.

Although Balzer suggested that the Management Projections were used for other

purposes, such as cash management,

136 the significance of those alleged uses is dubious.

Richards, the CFO, credibly testified that he used other sets of projections for managing

the Company's finances, such as providing estimated revenue and cash flow numbers to

SVB, the Company's bank.

The final version of the Management Projections utilized by Needham in

preparing its fairness opinion is from September 18, 2012.137

The Needham presentation

listed $58.2 million for estimated 2012 revenue, a slight discrepancy from the native

excel spreadsheet of the Projections, dated August 28, 2012, which listed $58 million for

2012.138

On July 17, 2012, however, Richards sent an email to SVB projecting $56.5

million for 2012 (the ―July SVB Projections‖).

139

On September 10, 2012, Richards sent

another update to SVB that reduced that projection to slightly less than $54 million (the

―September SVB Projections‖).140

Both the July and September SVB Projections pre-



136 Balzer Dep. 80-81.

137 JX 170.

138 Id. & native file.

139 JX 93 & native file.

140 JX 136 & native file.

49

date the Needham presentation. The September SVB Projections are nearly 6.9% lower

than the Management Projections. If the revenue growth assumptions from the

Management Projections were applied to the September SVB Projections, the

Management Projections would overstate five-year revenue by $31 million, even

ignoring all of the other problems with the Management Projections I have discussed.

Richards testified that he believed that the September SVB Projections ―were more

accurate‖ and that he provided those projections to SVB because it was the Company's

―sole source of borrowing‖ and he wanted to keep the bank ―apprised of the situation.‖141

7. There are insufficient reliable inputs to produce a reliable DCF analysis

In summary, the Management Projections suffer from numerous flaws.

Specifically, they: (1) were prepared by a new management team, (2) in anticipation of

future disputes and of shopping the Company to potential white knights, (3) using a new

methodology, and (4) were for a significantly longer period of time than previous

forecasts. In addition, I note the following problems: (5) management's track record at

forecasting was questionable even under their standard method of forecasting; (6) the

final projections incorporate speculative elements relating to ROHM, (7) rely on distorted

base year figures that resulted from customer allocation issues and channel stuffing, and

(8) predict growth out of line with historical trends; and, finally, (9) management itself

was providing other, ―more accurate‖ projections to the Company's bank. None of the

indicia that often justify deferring to management projections are present in this case.



141 Tr. 81.

50

Thus, Petitioner has not proven that the Management Projections are reliable, and I

conclude that they are too questionable to form the basis of a reliable DCF valuation.142

―[W]ithout reliable five-year projections, any values generated by a DCF analysis

are meaningless.‖143

Having found that the Management Projections are unreliable and

there are no other viable projections in the record,

144 I therefore conclude that it would be

inappropriate to determine fair value based on a DCF analysis in this instance.

B. The Comparable Transactions Method Does Not Produce a Reliable Value

The parties' experts agree that there are no comparable companies to Ramtron.145



Using another approach, Clarke, petitioner's expert, opined that there were two



142 My conclusion that the Management Projections are unreliable prevents me from

using those inputs. It is equally dubious to use either set of the SVB Projections,

because they extend only for the 2012 calendar year and one of the main problems

with the Management Projections is that they forecast an unrealistic rate of

growth. Thus, even if the SVB Projections provided a reliable 2012 input, it still

would not be clear what rate of growth to apply for future years. The parties,

perhaps, could have advised on this issue. Instead of arguing that the Management

Projections should be discounted a certain percentage, however, the parties took

the opposite tactic of wholesale adoption or rejection of the Management

Projections. This has forced the Court to choose one of those routes. Adopting

instead some sort of middle ground would require me to engage in impermissible

and unreliable speculation.

143 Huff Fund Inv. P'ship, 2013 WL 5878807, at *9.

144 Cypress prepared its own projections for Ramtron. JX 174. Those projections,

however, predict Ramtron's performance as a division of Cypress. Tr. 321-23

(Rodgers). Accordingly, they are not useful as a predictor of Ramtron's standalone

operating potential. Furthermore, Cypress predicted substantially more

conservative figures than Ramtron's management, even after accounting for

improvements that Cypress anticipated making to Ramtron.

145 JX 214 [hereinafter ―Clarke Rpt.‖] at 47; Jarrell Rpt. 84.

51

comparable transactions from which Ramtron's value could be derived.146

This analysis

resulted in an implied value for Ramtron of $3.99 per share, and Clarke accorded it a

20% weight in his ultimate fair value determination.

147

Jarrell concluded that there were

no comparable transactions.

148

For the following reasons, I conclude that Petitioner has

not proven that the comparable transactions method is an appropriate valuation technique

in this case.

A comparable transactions approach requires ―identifying similar transactions,

quantifying those transactions through financial metrics, and then applying the metrics to

the company at issue to ascertain a value. The utility of a comparable transactions

methodology is directly linked to the ‗similarity between the company the court is

valuing and the companies used for comparison.'‖149

―Reliance on a comparable

companies or comparable transactions approach is improper where the purported

‗comparables' involve significantly different products or services than the company

whose appraisal is at issue, or vastly different multiples.‖

150



146 Clarke Rpt. 51.

147 Id. at 58.

148 Jarrell Rpt. 87, 91.

149 Highfields Capital, Ltd. v. AXA Fin., Inc., 939 A.2d 34, 54 (Del. Ch. 2007)

(quoting In re U.S. Cellular Operating Co., 2005 WL 43994, at *17 (Del. Ch. Jan.

6, 2005)).

150 In re Orchard Enters., Inc., 2012 WL 2923305, at *9 (Del. Ch. July 18, 2012).

52

The purportedly comparable transactions are the acquisitions of Actel Corporation

(―Actel‖) and Virage Logic Corporation (―Virage‖), both of which Clarke concluded

were companies that produced memory products but, like Ramtron, operated without

their own foundry.151

Clarke computed multiples for the two firms based on the

transactions involving them for the following financial metrics: (1) equity value

(―EV‖)/last twelve months' revenue (―LTM‖); (2) EV/next twelve months' forecasted

revenue (―NTM‖); and (3) EV/NTM + 1.152

Clarke then averaged the Virage and Actel

multiples and derived an implied value for Ramtron from them.

Jarrell contests Clarke's choice of comparable transactions. He notes that the

proxy statement in the Virage transaction included a list of comparable companies from

two industries similar to Virage's and that Ramtron was not listed in either group.153

It is

unclear whether Jarrell believes that Actel is not comparable in and of itself, but he did

observe that the multiples for that company support the Merger price as evidence of fair

value. More importantly, Jarrell opines that the dispersion of the multiples for Actel and

Virage is too great to be reliable and violates the ―law of one price.‖

154

I agree with this

criticism.



151 Clarke Rpt. 50-51.

152 This is ―forecasted revenue for the one-year period after the next 12 months.‖ Id.

at 53.

153 JX 216 [hereinafter ―Jarrell Rebuttal Rpt.‖] at 38.

154 Id.

53

In the past, ―[t]his Court has found comparable transactions analyses that used as

few as five transactions and two transactions to be unreliable.‖155

This ―dearth of data

points . . . undermines the reliability‖ of the methodology.156

Here, there are only two

data points and the multiples (shown below) differ significantly.157

Target Company EV/LTM

Revenue

EV/NTM

Revenue

EV/NTM + 1

Revenue

Virage 4.43x 2.80x 2.25x

Actel 2.05x 1.72x 1.65x

Average 3.24x 2.26x 1.95x

Ramtron Financials $58.2M $69.0M $85.6M

Implied158

Equity Value

(Unadjusted

for Synergies)

$181.1M $148.4M $159.7M

Clarke then went on to: (1) subtract a 13% synergy discount from each of the implied

equity values; and (2) average the three figures to arrive at a comparable-transactionsbased

equity value for Ramtron of $141.9 million.



155 Merion Capital, L.P. v. 3M Cogent, Inc., 2013 WL 3793896, at *8 (Del. Ch. July

8, 2013) (citing In re John Q. Hammons Hotels Inc. S'holder Litig., 2011 WL

227634, at *5 (Del. Ch. Jan. 14, 2011) and In re U.S. Cellular Operating Co.,

2005 WL 43994, at *18).

156 Id.

157 Clarke Rpt. 54.

158 The implied equity value is not an exact multiple, because Ramtron's debt of $8.8

million is subtracted out and the Company's cash of $1.3 million is added into the

calculation. This results in netting out $7.5 million to obtain the implied equity

value that is shown.

54

Even assuming these two transactions qualitatively are comparable transactions, in

that the acquired companies operated similar businesses to Ramtron, the meager number

of data points and the range of multiples indicate that this valuation approach is of

questionable reliability in this instance. The EV/LTM multiple, for example, yields

synergy-adjusted per share values of $2.74 to $6.13, a range of $3.39, which exceeds the

Merger price of $3.10.

159

The EV/NTM multiple suggests equity values of $2.72 to

$4.55, a spread of $1.83.160

By contrast, the EV/NTM+1 multiple produces a tighter

range of $3.27 to $4.53.

I see little justification for Clarke's simple averaging method, particularly with

only two data points. His comparable transactions approach implies per share values

ranging anywhere from $2.72 to $6.13. Two of the multiples have high-low ranges

exceeding Ramtron's unaffected stock price. I am not convinced it is productive to

utilize a method that implies Ramtron's fair value is somewhere between 88% and 198%

of the deal price.161

Also, the EV/NTM and EV/NTM+1 multiples rely on the



159 This calculation is derived by applying the comparable transaction multiples to

Ramtron's financials, subtracting $7.5 million, discounting by 13%, and then

dividing by the number of shares, which I assume to be Clarke's figure of

35,528,425. Jarrell contends that the latter figure understates the number of shares

by about four million units because of restricted stock and stock options.

160 These numbers are inconsequentially different from Jarrell's calculations. The

deviation seemingly results from his rounding of Clarke's determination of shares

outstanding to 35,500,000.

161 Jarrell presents a colorable argument that Virage is not, in fact, a comparable

transaction. If correct, that provides yet another reason that the comparable

transaction methodology is not reliable here, but I need not decide that issue. If

55

Management Projections, which I already have concluded are unreliable. Finally, Clarke

himself attributed minimal weight to this approach—only one-fifth of his conclusion.

For all of these reasons, I conclude that Petitioner has not satisfied its burden of proving

that the comparable transactions approach provides a reliable indication of Ramtron's fair

value.

C. The Transaction Price Provides the Best Evidence of Fair Value

A DCF analysis attempts to value a company by looking within the company,

extrapolating its financials into the future, and then discounting these cash flows to

present value. A comparables approach instead looks outside the company and attempts

to value it by market analogy. The former method is only useful to the extent its inputs

are reliable; the latter is helpful only to the extent actual comparables exist. Neither

approach yields a reliable measure of fair value in this case. Instead, I conclude that the

Merger price offers the best indication of fair value.

A merger price does not necessarily represent the fair value of a company, as the

term ―fair value‖ is interpreted under 8 Del. C. § 262. For example, in a short-form

merger under Section 253, the merger price is set unilaterally by the controlling

stockholder; the minority stockholders are forced out of the company and left with

appraisal as their sole remedy. To presume that the merger price represented fair value in

such a situation would leave the minority stockholders effectively without the remedy



Virage is not comparable, the Court would be left attempting to value Ramtron on

the highly questionable basis of a single allegedly comparable transaction.

56

offered by Section 262 of an independent analysis of a company's fair value. In 2010,

the Delaware Supreme Court in Golden Telecom, Inc. v. Global GT LP162 explicitly

rejected the argument that this Court should ―defer‖ to the merger price. Indeed, the

Supreme Court concluded that such deference would be contrary to the statutory

language of Section 262, which requires consideration of ―all relevant factors‖ in

determining a company's fair value.163

Nevertheless, in the situation of a proper transactional process likely to have

resulted in an accurate valuation of an acquired corporation, this Court has looked to the

merger price as evidence of fair value and, on occasion, given that metric one-hundred

percent weight.164

In an oft-quoted passage, then-Vice Chancellor Jacobs wrote: ―The

fact that a transaction price was forged in the crucible of objective market reality (as

distinguished from the unavoidably subjective thought process of a valuation expert) is

viewed as strong evidence that the price is fair.‖165

Similarly, Chief Justice Strine, then

writing as a Vice Chancellor, noted: ―[O]ur case law recognizes that when there is an



162 11 A.3d 214 (Del. 2010).

163 Id. at 217-18.

164 In re Appraisal of Ancestry.com, Inc., 2015 WL 399726 (holding that the merger

price was the most reliable indication of fair value and performing confirmatory

DCF analysis); Huff Fund Inv. P'ship, 2013 WL 5878807 (finding the merger

price to be the best indication of fair value in light of the lack of other reliable

methods); The Union Illinois 1995 Inv. Ltd. P'ship v. Union Fin. Gp., Ltd., 847

A.2d 340 (Del. Ch. Jan. 5, 2004) (concluding that the merger price offered the best

indication of fair value and also performing a confirmatory DCF analysis).

165 Van de Walle v. Unimation, Inc., 1991 WL 29303, at *17 (Del. Ch. Mar. 7, 1991).

57

open opportunity to buy a company, the resulting market price is reliable evidence of fair

value.‖166

The inquiry here is whether the Merger process resulted in a price indicative of

Ramtron's fair value or, as the parties have framed it, whether there was a ―competitive

and fair auction‖167 for Ramtron.

At the outset, I note that I am not aware of any case holding that a multi-bidder

auction of a company is a prerequisite to finding that the merger price is a reliable

indicator of fair value. Here, unlike in Union Illinois or Huff Fund, only one company,

Cypress, made a bid. This case also differs in that the Merger was a hostile deal. As

detailed below, however, I conclude that ―the process by which [the Company] was

marketed to potential buyers was thorough, effective, and free from any spectre of selfinterest

or disloyalty,‖

168 and that the resulting price accordingly provides a reliable

indication of Ramtron's fair value.

Ramtron could, and repeatedly did, reject Cypress' overtures. Simultaneously,

Ramtron actively solicited every buyer it believed could be interested in a transaction.

The Company provided several of those potential buyers with the much-vaunted

Management Projections. No one bid. LongPath contends that the lack of other bidders

indicates a flawed process. I disagree. Any impediments to a higher bid resulted from

Ramtron's operative reality, not shortcomings of the Merger process.



166 Union Illinois, 847 A.2d at 357.

167 Id. at 358.

168 Huff Fund Inv. P'ship, 2013 WL 5878807, at *13.

58

1. TI and Ramtron's operative reality

Much already has been said about Ramtron's operative reality as of the Merger.

Petitioner focuses on one particular factor that it contends irredeemably corrupted the

sales process: Ramtron's foundry relationship with TI. Under Ramtron's manufacturing

agreement with TI, Ramtron was guaranteed three additional years of production if TI

terminated the agreement.169

But, in the event Ramtron experienced a change in control,

TI had the right to terminate the agreement upon ninety days notice.170

LongPath argues

that this change-in-control provision deterred prospective bidders. I reject this contention

as contrary to the evidence.

The parties do not dispute that Cypress began preparing for its hostile bid well in

advance. Part of that diligence involved predicting potential interlopers. Another aspect

of Cypress' preparation involved essentially seeking TI's blessing for its potential bid.

Because of the change-in-control provisions, Cypress sought to get some form of

assurance from TI in advance of issuing its bear hug letter that TI would not exercise that

right in relation to an acquisition by Cypress. Rodgers testified that he called TI's

president to discuss a potential acquisition of Ramtron. In that regard, Cypress offered to

avoid competing with one of TI's F-RAM products if TI agreed not to terminate the

foundry relationship with Ramtron. Cypress never received a contract or other written



169 JX 322 (TI Mfg. Agreement); JX 324 (TI Mfg. Agreement Amendment No. 2)

§ 13.1.

170 JX 322 § 14.8(b).

59

agreement from TI—in fact, it appears that TI never explicitly agreed to support Cypress'

bid. Cypress did receive, however, enough of an informal assurance that it deemed the

risk of proceeding with the acquisition acceptable.171

As Petitioner emphasizes, Rodgers began discussing this issue with TI in March

2011, over a year before Cypress' bid for Ramtron.172

Even so, the record is clear that

Cypress never obtained a contractual commitment from TI. In an undated internal

Cypress presentation analyzing the potential bid for Ramtron, the possibility of TI

dishonoring its commitment is listed as a low risk, but Cypress (twice) listed the lack of

TI support as a major risk to any potential deal.173

LongPath argues that Cypress had an unfair tactical advantage and that other

bidders were unlikely to get TI's support. This appears to be nothing but speculation.

Ramtron's relationship with TI was part of its operative reality. A Cypress planning

document, titled ―Potential Interlopers,‖ listed five such plausible interlopers. For three

of them, Cypress predicted that TI would not extend foundry support because those



171 Tr. 287-90; id. at 289 (Rodgers: ―They explicitly refused to say ‗we will support

you' to the point that I didn't even try to get them to sign a document, but my

inference was that they wouldn't harm us if we didn't attack them.‖).

172 JX 320.

173 JX 236 at 7. Because the presentation includes actual numbers for 2011, I infer

that it must be from sometime in 2012.

60

companies directly competed with TI.174

A different document predicted the same as to a

sixth possible interloper.175

I find these predictions and Petitioner's reliance upon them somewhat puzzling.

Even though Cypress offered not to encroach on one specific TI product line, ―low power

microcontrollers,‖176 in order to get an informal assurance that the manufacturing

agreement would continue, the uncontradicted evidence shows that TI and Cypress

directly competed in several markets and that the two companies had significant bad

blood between them as a result of two previous intellectual property lawsuits.177

Thus,

applying the reasoning underlying Cypress' advisor's predictions, TI likely would not

have extended foundry services to Cypress either. But, TI did make at least a nonbinding

commitment to continue foundry services for Cypress.

Petitioner has not shown that any other company that wanted to acquire Ramtron

was in a worse position than Cypress in terms of getting TI's assent. Indeed, some may



174 JX 67.

175 JX 65.

176 Tr. 287 (Rodgers).

177 Id. at 286 (Rodgers: ―They're a company with many divisions, like us, and they

compete broadly in the market.‖); id. at 287 (―TI and Cypress have a history of

conflict, and they sued us twice about 15 years ago. We won both trials, but

there's not good blood.‖); id. at 237 (Kaszubinski: testifying that TI and Cypress

competed); id. at 389-90 (Buss: ―So the challenge for us is that TI does not like

Cypress. TI and T.J. [Rodgers] do not get along. . . . I believe he had been in two

prior lawsuits with them prior to my tenure, and I think he beat them both times.

So there is a lot of animosity between the two companies, and it was the number

one issue we wrestled with.‖).

61

have been better positioned than Cypress. Construed most favorably to LongPath, all

bidders were in the same boat as Cypress vis-à-vis TI. Ramtron's manufacturing

agreement with TI simply was part of the Company's operative reality at the time of the

Merger.

Furthermore, there is no evidence that the change-in-control provisions in the TI

manufacturing agreement actually deterred any of the potential bidders.178 Ramtron

apparently proceeded the furthest in discussing alternative transactions with three

companies: Atmel Corp., SMART Modular, and ROHM. Nothing suggests that the TI

agreement caused any of those companies to back out. Davenport testified that SMART

Modular was ―very hesitant due to our supply-side cost structure and the tenuousness of

our supply‖ and also did not like the Company's ―sole sourcing.‖179

Atmel similarly

declined because of Ramtron's ―cost structure [and] in particular our wafer supply,

[which] they were very, very concerned about.‖180

ROHM seems to have been

contemplating a minority investment, discussed in the next Subsection, which would not

have implicated the TI concerns. In short, Petitioner has not demonstrated that the

change-in-control provisions in the manufacturing agreement with TI materially impaired

Ramtron's sales process. Instead, Ramtron's sole or primary reliance on TI as its foundry

was part of the Company's operative reality.



178 Id. at 65 (Richards); id. at 202 (Davenport).

179 Id. at 201.

180 Id.

62

2. Ramtron tries to sell itself to anyone but Cypress

Ramtron authorized Needham, its financial advisor, to market the Company to

other potential acquirers and explore strategic alternatives. According to an August 30,

2012 Needham presentation, Needham had: (1) contacted twenty-four third parties,

including Cypress; (2) sent non-disclosure agreements (―NDAs‖) to twelve of those

entities, again including Cypress; (3) received executed NDAs from six interested parties,

which did not include Cypress; and (4) remained in discussions with two companies other

than Cypress.181

This market canvass reveals that six companies were intrigued enough

to enter into NDAs. It appears that those companies received or at least had access to

Ramtron's Management Projections.182

In addition, by August, Ramtron had announced

its new manufacturing agreement with ROHM. Yet, despite this sales effort, not one

company besides Cypress ever made a firm bid for Ramtron.

SMART Modular and Atmel were two of the companies with which talks

proceeded the furthest. As noted, both companies declined to pursue a transaction

because of what they viewed as problems with Ramtron's cost structure. The evidence

does not reveal why each and every other company declined to bid for Ramtron. At least



181 JX 125 at 8.

182 The Management Projections were in the Company's data room. E.g., JX 84.

Needham's call log shows that five companies who had signed NDAs accessed the

data room, though one company that executed an NDA is missing from that log.

JX 88.

63

one that executed an NDA saw no synergies in the transaction.183

A second did not see

the acquisition fitting with the potential bidder's strategic priorities.184

Another that

apparently did have familiarity with Ramtron's technology was advised by its engineers

not to move forward.185

That company was sent, but did not sign, an NDA.

Not one of the specific explanations in the record relates to TI. Instead, what

evidence there is suggests that these other companies did not see value in Ramtron

exceeding Cypress' bid. The importance of this point is amplified by the fact that

Needham's call log indicates that the NDAs all were executed in late June,186 when

Cypress' bid was only $2.68 a share. According to Petitioner's position in this litigation,

at that point in time, the Company was being undervalued by $2.28. Ramtron's hostile

bid caused a significant spike in trading volume, as revealed by Needham's stock price

analyses.187

Aside from the prospective purchasers that Needham contacted, therefore,

the fact that Ramtron was in play was known in the market. Purely financial purchasers

theoretically could have stepped in and made unsolicited bids and, according to

LongPath's position in this litigation, snatched up Ramtron at a fire sale price. None did.



183 JX 114.

184 JX 70.

185 JX 76.

186 JX 88.

187 JX 125.

64

Indeed, no one even bid, including those with inside information, even when Cypress'

offer was $0.42 below the final Merger price.

Petitioner focuses at length on Ramtron's discussions with ROHM. On July 17,

2012, Ramtron's management proposed two alternative transactions to ROHM: (1) a

purchase of seven million shares of Ramtron common stock at $3.50 per share together

with a board seat; or (2) seven million shares of Ramtron convertible preferred stock at

$4.00 per share and a board seat.

188

Three days later, on July 20, Ramtron and ROHM

announced their new manufacturing agreement.189

ROHM apparently also was interested

in the potential purchase of Ramtron's common stock and, on August 11, 2012,

communicated to the Company that any such purchase would be at $3.00 per share.190



According to Petitioner, ROHM's interest in a minority investment at a price

slightly below the deal price indicates that the Merger price undervalued Ramtron. If

ROHM in fact had made such an investment, I might be inclined to agree.

191

But, even in

its email countering at $3.00, ROHM explicitly stated the following:

Actually, one of our concerns at this time is the legal and

financial risk for purchasing stocks of a public company with



188 JX 90.

189 JS ¶ 5.

190 JX 109.

191 Clarke's report, for example, suggested that the average acquisition premium in

the semiconductor industry is about 30%, with roughly half of that amount

attributable to a control premium and the remainder attributable to synergies.

Clarke Rpt. 56. An additional 15% on top of $3.00 would imply a minimum

acquisition price of $3.45, exclusive of synergies.

65

a price above the market price. Since we have to justify the

purchasing price to achieve the accountability to our

shareholders, we have to seek profit that can make up for the

paid premium. And we have to be careful to decide the

purchase price in order to avoid impairment loss of assets.192

ROHM itself, it seems, was concerned with justifying the above-market premium.

Perhaps, because of the manufacturing agreement between it and Ramtron, ROHM might

have been able to exploit synergies between the two companies or otherwise unlock value

in Ramtron not available to other bidders. Ultimately, however, ROHM backed away

from pursuing a deal for Ramtron at the end of August. Citing ―growing apprehension in

ROHM's own business environment,‖ ROHM determined that it was ―not in a position to

make an investment under present business outlook.‖193



3. Ramtron extracts a substantial premium from Cypress

Finally, LongPath criticizes Cypress' hostile approach, arguing that Cypress

pounded Ramtron into submission at a below-market rate. I already have found that, to

the extent Cypress' hostile bid negatively altered Ramtron's performance, such effects

were dwarfed by Ramtron's own business problems, which included channel stuffing

earlier in the year. Those flaws are part of Ramtron's operative reality. On the other

hand, there is support in the case law for disregarding temporary distortions in

determining a company's fair value.194

In theory, then, it could be acceptable to back out

any negative effects caused by Cypress' hostile offer. The parties, however, have offered



192 JX 109.

193 JX 126.

66

no practical way to quantify those effects, particularly as against the larger effects from

Ramtron's own business problems.

In that regard, there is no evidence that Cypress' hostile approach hampered the

ability of other companies to bid for Ramtron or otherwise affected the Merger process.

Only one company contacted by Needham stated that it did not wish to bid against

Cypress.195

By contrast, six other companies went so far as to execute NDAs. Even if

Cypress was attempting to wear Ramtron down,196 Cypress had every right to do so and

there is no evidence that it acted improperly in this regard. Furthermore, the history of

the Merger runs contrary to LongPath's argument. Ramtron's Board had the ability to

say no to Cypress and repeatedly did so. The Board advised Ramtron's stockholders on

several occasions not to tender into Cypress' bid and, over the same time period, Cypress

raised its bid five separate times. The price Cypress ultimately paid—which was

negotiated by the Ramtron Board and Cypress—was 25% higher than Cypress' starting

offer.

4. Conclusion

The Merger resulted from Cypress' hostile bid. Cypress spent three months

attempting to acquire Ramtron, during which time the Company actively shopped itself to

other conceivable buyers, several of which indicated serious interest. None of those



194 See Glassman v. Unocal Exploration Corp., 777 A.2d 242, 248 (Del. 2001).

195 JX 88.

196 See JX 89 (―Wear them down and wait is working.‖).

67

potential alternative buyers made a firm offer. Cypress, however, repeatedly raised its

price until it and Ramtron's Board agreed on final Merger price of $3.10 per share. This

lengthy, publicized process was thorough and gives me confidence that, if Ramtron could

have commanded a higher value, it would have. ―For me (as a law-trained judge) to

second-guess the price that resulted from that process involves an exercise in hubris and,

at best, reasoned guess work.‖197

As such, I conclude that the Merger price is a reliable

indication of Ramtron's fair value.

D. Transaction Price Less Synergies

Thus far, I have concluded that the Management Projections are unreliable,

making the use of a DCF inappropriate. Additionally, the parties agree that there are no

comparable companies and I concur with Respondent that the comparable transactions

approach does not provide a reliable indication of fair value here. By contrast, the

Merger process was thorough and supports my reliance on the Merger price as an

indication of Ramtron's fair value. In the absence of alternative methodologies, I weigh

the Merger price at 100% in determining the fair value of Petitioner's shares.

In an appraisal action, however, it is inappropriate to include merger-specific

value. Accordingly, I must exclude from the $3.10 Merger price any portion of that

amount attributable to Cypress-specific synergies, as opposed to Ramtron's value as a



197 Union Illinois, 847 A.2d at 359.

68

going concern.198

Respondent argues that the synergies amount to $0.34 per share.

Petitioner contends that the net synergies are only $0.03.

Preliminarily, I reject LongPath's contention that synergies should be subtracted

not from the Merger price, but instead from the value that Cypress attributed to Ramtron,

which, according to Petitioner, is between $3.90 and $5.44. Those valuations estimated

Ramtron's worth as a division of Cypress. Petitioner's requested approach is contrary to

the language of Section 262, which commands that I ―determine the fair value of the

shares exclusive of any element of value arising from the accomplishment or expectation

of the merger or consolidation.‖199

There is no basis to deduct synergies from the

idiosyncratic value attributed to a company by its purchaser, because it is not clear that

value would provide insight into the fair value of the target company as a going concern.

Instead, the proper way of applying a merger-price-less-synergies approach is to

determine the value paid for a company and then subtract that portion of the purchase

price representing synergies.

200

As to the synergies in this transaction, I find Respondent's argument that over

10% of the transaction price represented synergies to be without merit. Jarrell first



198 Huff Fund, 2014 WL 2042797, at *2.

199 8 Del. C. § 262(h) (emphasis added).

200 Cf. Huff Fund, 2014 WL 2042797, at *5 (providing the example of the urban

cornfield auction and the eccentric farmer, and noting that, ―In an auction setting,

it makes little sense to determine whether a bid incorporates information about the

value of certain opportunities by considering only the idiosyncratic weight

attached to that information by any particular bidder, even the winning bidder‖).

69

provided a market-wide analysis of the premia paid by financial versus strategic buyers

and from this approach concluded that average synergies could be removed from the

purchase price by applying the ratio of the average financial buyers' premium to the

average strategic buyers' premium, i.e., effectively multiplying the Merger price by 0.73,

which results in a fair value of $2.75.201



This general data, however, does not tell me anything about this specific

transaction, which must be the focus in a Section 262 action. With respect to Cypressspecific

synergies, Jarrell compared the Management Projections to a set of Cypress

projections202 and quantified the cost savings, which Jarrell determined to be $0.69 per

share. He then assumed that Ramtron's stockholders captured between 25% and 75% of

these synergies and took the midpoint of those calculations, resulting in a fair value of

$2.76.203

In addition to its back-of-the-envelope feel, this approach focuses solely on cost

savings, which are positive synergies, and neglects the possibility of negative synergies,

which Clarke asserts would exist here.

204

Although Clarke rejected the transaction-price-less-synergies approach, he opined

that negative revenue synergies and transaction costs would have to be added back to any

value based on Jarrell's estimate of synergies. I find this approach to be reasonable and



201 Jarrell Rpt. 43-44.

202 JX 174.

203 Jarrell Rpt. 46.

204 JX 217 (Clarke Rebuttal Rpt.) at 26-27.

70

supported by the record. The testimony at trial indicates that Cypress expected

significant negative synergies from the Ramtron acquisition.205

While Petitioner's

approach may understate the net synergies, I find that it better conforms to the evidence

adduced at trial than Ramtron's position. Accordingly, I adopt LongPath's approach to

synergies and exclude $0.03 from the Merger price. This results in a fair value

determination of $3.07 per share.

E. Reality Checks

As a final step, I consider it appropriate to touch briefly on some of the ―real

world‖ evidence that Petitioner contends undermines the Merger price as a reliable

indicator of fair value. Some of these items are entitled to zero weight. Balzer, for

example, testified at his deposition that he told Cypress at the time of its nonpublic offer

in 2011 that he believed Ramtron's stock would be worth $6 to $8 ―several years out.‖206



This speculation, of course, is not informative as to what Ramtron was worth at the time

of the Merger. Similarly, Ramtron's Chairman of the Board testified that he ―personally

would have paid more than $3.10.‖207

The usefulness of a transaction price, however, is

that ―buyers with a profit motive [are] able to assess [company-specific] factors for

themselves and to use those assessments to make bids with actual money behind



205 Tr. 358-61 (Rodgers: testifying about negative synergies in the range of ten to

fifteen percent of revenue); id. at 268-70 (Kaszubinski: same).

206 Balzer Dep. 19.

207 JX 246 at 76.

71

them.‖208

By contrast, hypothetical statements about how much money someone

allegedly would have paid, if they actually had the money to do so, which they apparently

did not, are significantly less probative.

Similarly, I give no weight to the $4 target trading price Merriman Capital

announced in January 2012,209 and reiterated in April 2012.210

By late July, Merriman

Capital had pulled its target price and admitted it could not model Ramtron accurately.211



And, as already discussed, I do not find informative the fact that Cypress' internal

documents suggest a value for Ramtron above the deal price; those documents model

Ramtron as a division of Cypress and are not indicative of the fair value of Ramtron as a

stand-alone company.

The one factor that does cause me some pause, however, is the ROHM potential

investment. The fact that ROHM apparently was seriously considering a minority equity

investment at $3.00 per share casts some doubt on the Merger price of $3.10. Ultimately,

however, ROHM did not make this investment and, in fact, expressed serious concern

about paying an above-market price for Ramtron stock. Because ROHM had extensive

information about Ramtron and ultimately decided not to pursue the minority investment,

I discount its importance. ROHM made exactly as many actual bids as the rest of the



208 Union Illinois, 847 A.2d at 359.

209 JX 38.

210 JX 48.

211 JX 97.

72

market: zero. In that regard, the ROHM equity ―investment‖ is simply another nonevent.

Indeed, I suspect that, rather than the Merger price being low, it was more likely

that the ROHM proposal was inexplicably high. Recall, for example, that, in 2011, long

before Cypress made its public offer, Ramtron executed a secondary public offering in

which it diluted its equity holders and sold about 20% of its shares for $2.00 each, with a

net to itself of $1.79. By July 2012, based on the findings in this Memorandum Opinion,

Ramtron's financial condition was no better than it was when it made the secondary

public offering. For these reasons, I conclude that the ROHM investment, which never

actually occurred, does not cast doubt on the Merger price as a reliable indicator of fair

value.

For the foregoing reasons, I determine the fair value of Ramtron as of the Merger

date to be $3.07 per share. Counsel for Petitioner shall submit, on notice, an appropriate

final order to that effect, including provisions for pre- and post-judgment interest.