Lesssons from Zayo Group v. Latisys: Why Proper M&A Valuation Practices are Critical in Transactions

Zayo Group, L.L.C. v. Latisys Holdings, L.L.C., C.A. No. 12874-VCS (Oct. 26, 2018) serves as a cautionary tale for companies engaging in mergers and acquisitions, as it illustrates the importance of accurate and transparent valuation practices. The case involved a dispute over the valuation of Latisys, a data center services provider, in the context of its acquisition by Zayo Group. Zayo Group had engaged a valuation specialist to determine the fair value of Latisys, but the resulting valuation was found to be significantly overstated. The case provides several important lessons for companies and valuation specialists alike.

Lesson 1: Properly vet and select valuation specialists.

One of the key issues in the Zayo Group v. Latisys case was the selection of the valuation specialist. Zayo Group had engaged an accounting firm to perform the valuation, but the firm lacked experience in valuing data center companies. The court found that the firm did not have the requisite expertise to accurately value Latisys, which contributed to the inflated valuation.

Companies should ensure that they engage valuation specialists with the appropriate expertise and experience to perform accurate valuations. This may require conducting due diligence on potential valuation specialists, including reviewing their qualifications, experience, and track record in valuing companies in the relevant industry.

Lesson 2: Use appropriate valuation methodologies.

Zayo Group v. Latisys also highlighted the importance of using appropriate valuation methodologies. The valuation specialist in this case had used a discounted cash flow (DCF) analysis to value Latisys, but the court found that the analysis was flawed because it did not properly account for the risks and uncertainties associated with the business.

Companies and valuation specialists should carefully consider which valuation methodologies are appropriate for the specific company and industry being valued. This may involve using multiple methodologies and considering a range of inputs and assumptions.

Lesson 3: Ensure transparency and accuracy in the valuation process.

Zayo Group v. Latisys also underscores the importance of transparency and accuracy in the valuation process. The court found that the valuation specialist had failed to provide complete and accurate information to Zayo Group, which contributed to the inflated valuation.

Valuation specialists should ensure that they provide complete and accurate information to their clients, including any limitations or assumptions underlying the valuation. Companies should also take steps to ensure that they have access to all relevant information and that they understand the underlying assumptions and methodologies used in the valuation.

Lesson 4: Be prepared to challenge and defend the valuation.

Finally, Zayo Group v. Latisys highlights the importance of being prepared to challenge and defend the valuation. In this case, Latisys challenged the valuation after the acquisition had been completed, resulting in a protracted legal dispute.

Companies should be prepared to defend the valuation in the event of a challenge or dispute, including having a clear understanding of the valuation methodology and assumptions, and being able to provide supporting documentation and analysis.

The Zayo Group v. Latisys case provides valuable lessons for companies and valuation specialists engaged in mergers and acquisitions. Companies should take care to properly vet and select valuation specialists with the appropriate expertise and experience, use appropriate valuation methodologies, ensure transparency and accuracy in the valuation process, and be prepared to challenge and defend the valuation.

Valuation specialists should also take care to provide complete and accurate information to their clients and use appropriate methodologies and inputs. By following these best practices, companies and valuation specialists can help ensure accurate and transparent valuations and avoid costly disputes down the line.

How can Eton help?

Don’t let your business fall victim to the less than complete and transparent valuation analysis. Trust Eton Venture Services to guide you through an appropriate and transparent valuation process utilizing multiple methods to arrive at a defensible valuation. Our team of dedicated professionals is committed to upholding the highest standards of integrity, objectivity, and independence. With our extensive experience and expertise in valuation methodologies, we can help you navigate complex transactions and comply with fiduciary duties.

Partner with Eton Venture Services today and safeguard your business from costly legal battles and reputational damage. Contact us now to learn more about our valuation services and how we can help your business stay ahead of potential challenges. Together, we can pave the way for a successful and transparent valuation experience. Contact Eton today.