By Greg Ruel, Senior Research Associate
Ancestry.com (ACOM), the company whose headlines involve cluing in the public on how George Clooney is related to Abraham Lincoln and Justin Bieber is a distant cousin of Ryan Gosling, is attempting to end its three-year foray as a publicly-traded entity. On October 21, the board of Ancestry.com approved a buyout of its public stock to a private equity firm for $32 a share. The merger requires the requisite vote of a majority of stockholders, though 30 percent shareowner Spectrum Equity will clearly vote in favor of the merger.
The deal is a win for Spectrum Equity, which would continue as a key investor in the privately held combined entity if the deal is commenced. It also works out well for CEO Tim Sullivan and CFO Howard Hochhauser, who stand to keep a "significant majority" of ownership invested in the company after the merger. Said Mr. Sullivan of the deal, "This is a successful outcome for our public stockholders and a great day for Ancestry.com employees and subscribers around the world." His position is hardly universal judging by the exorbitant amount of potential litigation on behalf of shareholders tied to the proposed deal.
The day of the merger, GMI Ratings tracked eight investigations on behalf of investors regarding possible breaches of fiduciary duties and other violations. Through the start of November, we have noted 18 separate investigations alleging that Ancestry.com sold itself at the low end of its buyout range. At least one analyst from Piper Jaffray set a price target as high as $45 a share, according to Yahoo! Finance, with the stock trading at higher than the buyout figure of $32 only two months ago. Investors are questioning not only the price they are to receive per share, but the company's process in accepting the deal. Until this deal, Ancestry.com has not raised significant governance concerns as determined by its "B" ESG rating. However, it appears that this particular deal was not negotiated in the best interest of all shareholders. The litany of litigation surrounding the motives of the board is enough to further question the quality of governance.
There is little doubt that the company approached these negotiations from a position of strength. One potential lawsuit points to stock growth of $20.95 on March 22 to $33.23 on August 3, an increase of nearly 60 percent, as evidence of the company's recent success. In another filing, potential plaintiffs argue that increases in Ancestry.com's annual revenues and net income are evidence of its undervaluation in the merger. The complaint notes that Annual Revenue has climbed from $197.59 million in 2008 to $399.66 million in 2011 (102 percent increase) to go with a Net Income rise of $2.38 million to $62.90 million (2,543 percent increase) over the same period. The same lawsuit singles out August 15 ($32.90) and July 31 ($33.47) as recent trading days above the accepted offer from Permira Funds.
Yet another potential lawsuit points out that on July 25, Ancestry.com announced second-quarter sales and profit that topped analysts' estimates as well as the company's own expectations. On October 24, two days after agreeing to the buyout, Ancestry.com reported earnings that were 35 percent higher than last year, further fueling speculation that the company sold low at $32 a share.
Prior to this deal, the company's management team had showed a propensity for exceptional decision making to increase profitability. For example, Ancestry.com was able to boost subscriber figures by more than 40 percent after associating itself with the NBC Program "Who Do You Think You Are?", though the program was cancelled by the network earlier in 2012. The company also managed to swallow up competitor Archives.com for $100 million in April in a deal that was well-received and seen as a natural fit in eliminating strategic threats.
Potential litigation at Ancestry.com rests significantly on the board's role in considering and approving the Oct 22 buyout and whether or not the decision was made in the best interest of all shareholders. For instance, Ancestry investor John Heck stated that shareholders "are being unfairly cashed-out" in the deal. Lawyers for the Pontiac General Employees Retirement System, one of the company's largest shareholders, contend that at the insistence of Spectrum Equity Investors, directors rejected a $35-a-share offer in favor of this inferior pact. The Michigan-based pension fund goes a step further, with claims that the company has used its position to dominate company directors to accept this deal. The fund's attorney contends that "The board entered an underpriced deal with the buyout group in violation of duties owed to the company's public shareholders," adding that "at least five of the nine members of the board have significant ties to Spectrum or senior management."
GMI Ratings lists only two of Ancestry.com's directors as outside related according to listing rules and each are among senior management at the company's largest shareholder. Ancestry's board chairman Victor Parker is a Managing Director at Spectrum Equity and controls more than 30% of the company's outstanding stock through his affiliation with Spectrum. Benjamin Spero, a 5th year director who has yet to acquire any shares of Ancenstry.com, also serves as Managing Director at Spectrum Equity Investors. Mr. Spero's lack of ownership in Ancestry stock is troubling, though not contrary to recent purchasing trends by company directors and officers.
Officer sales over the last year indicate a management team looking to get what it could for its shares in anticipation of a sale. In over 26 separate transactions, management team members sold 161,500 shares of stock for a profit of $4.3 million. There have been zero open market stock purchases by the company's management or director team in the past year.
With Ancestry's CEO and CFO each expected to benefit greatly from this merger, the larger shareholder pool needed the board's lead director to vet this deal on their behalf. However the company' lead director, Charles Boesenberg, is easily the board's most over-boarded director. He holds five directorships at companies covered by GMI Ratings, putting question the time he would have available to weigh a deal of this magnitude. In addition, Mr. Boesenberg chairs Ancestry's corporate governance and nominating committee as well as the compensation committee.
Typically restrained in terms of executive pay, the compensation committee decided to shower Mr. Sullivan with equity grants in the most recent compensation year. After receiving no equity grants in compensation years 2009 and 2010, Ancestry's CEO received a grant of 300,000 options and restricted stock units worth more than $10.5 million. The vesting of Mr. Sullivan's options accelerated upon a change in control, though he is expected to exchange or roll over a majority of his equity. While Mr. Sullivan typically earned similar amounts to other named officers in the past, and less in many cases, the internal pay equity figure for the 2011 compensation year was about 27. Indeed, Mr. Sullivan received $11.3 million in Total Summary Compensation for 2011 while remaining officers received a median of $414,845.
The recent spate of potential shareholder litigation does not come as a surprise to GMI Ratings. In fact, the GMI Litigation Risk Model has categorized Ancestry.com at "High Risk" for shareholder class action litigation since this time last year and in each month since.
Currently placing in the 6th percentile, Ancestry.com's Litigation Model Score indicated higher shareholder class action litigation risk than 94 percent of all rated companies in North America. The company's litigation risk is largely the summation of its "Very Aggressive" AGR Rating, a statistical analysis of accounting and corporate governance measures of risk. Directors and officers of Ancestry.com were most recently investigated in June for possible violations of federal securities laws by certain directors and officers.
The deal is not expected to be consummated until April 2013. Furthermore, the merger agreement contains certain termination rights, including Ancestry.com's right to accept a "Superior Proposal" as defined by the agreement. What's unclear is whether the company's interested parties would pursue another deal at all, regardless of its superiority, given Mr. Sullivan, Mr. Hochhauser, and Spectrum Equity's apparent fondness for the deal at hand. Meanwhile, remaining shareholders continue to scratch their collective heads as to why the board would accept a deal at a price far below the company's perceived intrinsic value.