Hedge funds lose court bid over Ancestry.com deal price

By Tom Hals

By Tom Hals

Wilmington, Del. (Reuters) - Hedge funds lost a court bid to get extra cash for their shares of online family research site Ancestry.com Inc, in a ruling involving an increasingly popular hedge fund strategy.

A Delaware judge ruled on Friday that a private equity firm paid a fair value of $32 per share in 2012 to acquire Ancestry.com and rejected hedge fund claims the price should have been as high as $47 per share.

The case involves "appraisal arbitrage" in which investors vote against a proposed deal and then ask a judge to determine the fair value of the stock after a trial.

Ancestry.com was sold to European private equity firm Permira Advisers. The private equity firm paid 40 percent above the market price for the stock, according to the 56-page opinion from Sam Glasscock, a judge on Delaware's Court of Chancery.

After the deal closed, Merion Capital, Merlin Partners and Ancora Merger Arbitrage Fund exercised appraisal rights and sought a better price for their 1.4 million shares. Their expert argued for between $42.81 and $47 per share, while Ancestry.com's expert put the fair price at $30.63 per share, according to the opinion.

One lawyer who specializes in appraisals said he would not be deterred from bringing the cases because, while Glasscock arrived at the merger price, he made a detailed analysis of the presentations from both sides.

"I’m not at all thinking less of bringing claim because of this decision," said Steven Hecht, of Lowenstein Sandler.

Glasscock said reviewing both detailed financial analyses was like "eating chicken gizzards: plenty of chewing but mighty little swallowing."

Earlier this month, Glasscock issued a ruling that would make it easier for funds to pursue appraisal arbitrage cases.

Merion, founded by securities class action lawyer Andrew Barroway, has been a leader in bringing appraisal arbitrage cases, which can take years to resolve.

While the investors failed to increase the amount, the judge also declined to find fair value below the deal price. The funds will also collect interest, limiting their potential losses.

The appraisal arbitrage strategy has produced big returns. In 2012, Orchard Enterprises Inc was ordered to pay Merlin Partners and others $4.67 per share for their stake in the company, more than twice the $2.05 per share merger price.

Ancestry.com declined to comment. Attorneys for the investors did not immediately respond to a request for comment.

(Editing by Matthew Lewis. Editing by Andre Grenon)