Full opinion text
MEMORANDUM AND ORDER WEBBER, District Judge. This matter is before the Court on Plaintiffs’ complaint under R.S.Mo. § 351.455 seeking the Court’s “fair value” determination of their shares in Siegel-Robert, Inc., a Nevada corporation. Hereinafter, the reference to Siegel-Rob-ert, Inc. shall be the “Company.” The Court makes Findings and Conclusions pursuant to Fed.R.Civ.P. 52. I. This is, in its most basic sense, a proceeding to determine the “fair value” of the shares of minority interest shareholders who were “squeezed-out” in a corporate merger on the 31st day of July, 1997, when Siegel-Robert, Inc., a Missouri Corporation, became merged with Siegel-Rob-ert, Inc., a Nevada Corporation. The minority interest shareholders were forced to sell their shares to the newly formed Nevada corporation at the price of $20.00 per share. While they could not refuse to surrender their shares, receive stock in the newly formed Nevada corporation, or reject the price of $20.00 per share offered by the Company for their shares, R.S.Mo. § 351.455 provides a procedure whereby they can, through a judicial proceeding, determine the fair value of the shares as of the day before the merger date of July 31, 1997, and force the Company to pay the fair value for those shares. Plaintiffs provided written notice to Siegel-Robert, Inc., a Missouri corporation, of their objection to the merger proposal before the shareholders voted on the proposal, and voted in opposition to the merger. They made the required written demand upon the newly formed Siegel-Robert, Inc., a Nevada corporation, for the fair value of their respect tive shares. When the parties were unable to agree on a sum to be paid for the shares beyond the $20.00 per share amount, this lawsuit followed. The history of the Company reflects a true American success story. The original Company was formed in 1946 by Mr. Bruce Robert as a part time enterprise, operating in a make-shift room where objects were chrome-plated for a very limited market. Mr. Robert was a wise businessman who recruited capable associates who had a major impact on the Company’s successful development. O.W. Schneider, Jr., deceased, worked for the Company for 40 years. He helped build the Company through his technical expertise. He had a working knowledge of factory building and acquisition and disposition of the equipment, and he was very adept at supervising people. Mr. Schneider was permitted to acquire an ownership interest in the business which he had helped build. His shares were acquired in the 1970’s and 1980’s. The Company began to experience substantial growth in the 1980’s when it began to diversify. The Company began an aggressive diversification program because the Siegel-Robert Automotive and Appliance Division is engaged in a very cyclical business where demand for its products varies with the fortunes of the economy and where profit margins are lower than for companies in the technology field. In this very competitive industry, customers for its products accept the lowest bids, and the Automotive and Appliance Division continuously is required to lower its prices and become more productive. In 1993, 74% of gross revenues were attributable to the automotive industry component of the Company. By contrast, in 1997, the subsidiaries accounted for 42% of the gross revenue. Management’s plans to spread risks and enhance profitability of the Company have succeeded. In 1981 annual sales of sixty million dollars were comprised of fifty-five million dollars from automotive products. Business was cyclical, and at that time was adversely impacted by the grain embargo. Management saw the importance of considering diversification of the Company and began looking at acquisition candidates in manufacturing that sold to customers other than retail. They were looking at companies in a relatively close geographic area involved in unsophisticated technology, typically in a radius of 400 miles from St. Louis. The Company wanted to maintain close personal relationships with management of acquired companies on a long-term basis. The Company is now primarily composed of the following six business units: 1. Siegel-Robert Automotive and Appliance Division — Founded in 1946, it is located in St. Louis, Missouri, and is involved in the auto part industry, producing grilles, consoles, exterior mirrors, shift indicators, decorative decals, and interior moldings to original automotive manufacturers. It produces “value added parts.” 2. Advantek — Founded in 1978 and acquired in 1992, this company is involved in packaging material for semi-conductors. It is located in Minnesota and sells carrier tape, cover tape, and integrated circuit test handlers. 3. Continental Disc Corporation — Established in 1965 and acquired in July, 1988, this company produces custom rupture discs and over pressure release devices and vacuum relief devices used in industrial environments. 4. Correl, Inc. — Founded in 1969 and acquired in 1982, this company, located in Charleston, Arkansas, manufactures stacking chairs, multi-pur-pose folding tables, bookcases and computer furniture. It is classified in the furniture industry. 5. Dolch Computer Systems, Inc.— Founded in 1987 and acquired in February, 1996, located in Freem-ont, California, this company manufactures a specialized line of industrial portable computers. It also packages for resale touch-screen flat panel displays. It is classified in the portable industrial computer industry. Dolch Computer Systems is the Company’s largest acquisition. 6. Sensidyne, Inc. — Founded in 1983 and acquired in 1990, this company is located in Clearwater, Florida and manufactures toxic gas detection systems. It is in the analytical instrumentation and measurement industry. ' The first Company acquisition, occurring on May 17, 1982, was Correl, Inc., a small company manufacturing a very simple product line consisting of a folding leg table. This office furniture division has little leverage in pricing because its primary customers are chain stores. The company had $3 million in sales in 1982 and over $20 million in 1997. It now employs approximately 190 persons. The division has competent management. O.W. Schneider, Jr., was brought in to help with the manufacturing methods at Correl. There is little, if any, efficiency to be gained in the manufacturing process at Correl. Customers of Correl are Office Depo — 68% of revenue; Sam’s Wholesale — 17-18% of revenue; and Sam’s International — 2% of revenue. Costs have escalated at a time when the company has been unable to gain price increases for its products. Revenues have increased from 18.2 million dollars in 1993 to 23 million dollars in 1997. Growth will likely slow because of the loss of one significant customer. Sensidyne manufactures gas detection and air sampling equipment including transmitters, sensors, and a pump used by industrial hygienists. Sensors are an important part of the gas detection business, and they are readily available in many markets. Recently, revenues have increased, but management believes it has hit a plateau because of market saturation. The company also distributes gas detection tubes that are made in Japan. Until recently, Sensidyne had exclusive distribution rights for the Japanese products. In 1997, the company distributed 40% of the Japanese products that accounted for 70-80% of its products. There is no long-term distribution agreement in place. The agreement made in August, 1996, was terminated. Sensidyne’s toxic gas detection systems, produced and distributed by 94 employees, monitor areas for protection of workers and the public, mostly in the health and safety industry. These devices it produces may be reproduced by most competent electrical engineers. There are no patents protecting any of the products. Carl Mazzaca, president of this division, expects sales for that division to improve at the rate of 1 to 1/6% over the next two years. He believes Sensidyne was purchased at peak performance and that its future sales are likely to decline. Aero Molded Products, Inc., manufacturers cellular phones and other communication products including wire harnesses that connect electrical systems of mirrors which the automotive division manufacturers for cars. It also does business in the medical industry. Its sales have decreased about 10% since 1997. Motorola, its biggest customer, is decreasing its market share. Revenues increased from 14 million dollars in 1993 to 19.5 million dollars in 1997, with a spike of 22.1 million dollars in 1996. Pre-tax income in 1997 of 1.9 million dollars is highest for the period from 1993 - 1997. Advantek was purchased at a time when its business was increasing. Its primary product is embossed carrier tape. It produces custom packaging products for original equipment manufacturers. Basically, the product is a mylar strip that it stamped to create a compartment for integrated circuits or for other products placed in the compartments. A cover tape is heat activated and placed on top of the carrier tape to hold the product in the compartment. Advantek distributes the product and does not manufacture it. The reels that control the tape are manufactured by Advantek. It also distributes integrated circuit test handlers and silicon wafer protection equipment. Facilities have been expanded in four other states and in Japan, Taiwan, Singapore, and Germany. In 1992, Advantek had the exclusive right to purchase material manufactured by a Japanese company. Since 1992, other manufacturers have developed competitive processes. Now, a German company has acquired a manufacturing advantage in this area. Additionally, an Arizona company and a Wisconsin company produce similar embossed products. Economic risks facing Advantek after July, 1997, are anticipated reductions in growth. After the Asian crisis, currency was devalued in many of those countries making U.S. products more expensive and allowing manufacturing firms in the Far East to gain an economic advantage, including 3M, which operates there. Until recently, Ad-vantek has been primarily involved in producing wider tapes, while 3M has manufactured narrower tapes. Advantek employs approximately 700 persons. Management at Advantek is in turmoil at the present time because of the retirement of the company’s founder, Jim May. Management views its prior market strengths to be weakening as other companies, including 3M, dilute its market share. There has been a 17 - 18% total operating income decrease at Advantek. The competitive environment in which Advantek operates is described by Halvor V. Anderson, Chief Executive Officer of the Company, as “brutal.” Several other people have also vacated management positions at Advantek. Management has fore-casted lower gross margins of 3% in the future. There have been severe price ero-sions reflected since 1988. Prices have been continually decreasing in this “surface-mount niche.” Competition is now a significant factor in the company’s future profitability. Among its major customers are Motorola, Phillips, and National Semiconductor. It is anticipated that these companies will continue to become less significant purchasers in the future, and with increased competition, it becomes more difficult to align replacement customers. In the past, the unique manufacturing process, which served as a major advantage for Advantek, is being consistently diminished. No plant or office expansion is planned at the present time. Earlier, management anticipated that a 200,000 square foot facility would be built, but when the business did not materialize, the plan was discontinued. Contrary to the bleak business forecast for this division by Defendant’s evidence, revenues have increased from 32 million dollars in 1993 to 98.6 million dollars in 1997. Dolch Computer Systems, Inc., manufactures very rugged, smaller computers used on-site in manufacturing companies designed to tolerate direct sunlight and the customary trauma of an industrial work site. The portable computers have expansion slots and bays to accommodate many applications. Approximately 160 people produce the Dolch products for the manufacturing sector, military application, medical use, and financial customers. They are used in factories to interface with large factory automation systems. The company paid $42.6 million for Dolch Computer Systems, Inc., which represented the enterprise or control value of Dolch. Defendant projects continued sales decline for Dolch. Dolch has accounted for 12% of the operating income for the Company as a whole. A sales decrease is attributable to availability of competitive products and loss of its primary customer. The division has been very profitable, showing revenues increasing from 17.3 million dollars in 1994 to 57.8 million dollars in 1997. Continental Disc Corporation, with headquarters in Liberty, Missouri, manufactures custom rupture discs and overpressure and vacuum relief equipment for protection of workers and equipment from dangerous pressurization environments. The largest users of these products are companies involved in the safety industry with large customers from the oil fields and the brewery industry. Costs are increasing in a competitive environment where it is difficult to gain price increases. It is not the largest company in the business. Growth in the chemical industry has been restrained; activity in the oil patch has not been robust for some time; and demand in the brewing industry has been “flat.” There are many new products in this industry being manufactured outside the United States by other companies. Most of the Continental Disc Corporation’s 200 employees are located in Missouri. Revenues increased from 19.6 million dollars in 1993 to 25.4 million dollars in 1997. Pre-tax profits have been impressive. The Siegel-Robert Automotive and Appliance Division had net sales of $318,264,-000 in 1997. It is primarily involved in manufacturing grille products and exterior mirror products and other trim products including name plates for the automotive industry. It is the world’s largest custom plater, molder and finisher of plastics. The largest segment of growth has been attributed to the pick-up truck and sports utility vehicle (“SUV”) lines in the automobile industry. At one time Siegel-Robert Automotive and Appliance Division had virtually all the pick-up, van and SUV business of Ford. Management knew in 1995 that it was losing business to Ford because contracts are awarded in the industry 3-5 years in advance of production. Generally, vehicles industry-wide have become more aerodynamic and include fewer injection molded products manufactured by Siegel-Robert. The major automobile producers have designed products that can be more readily supplied by many companies on a global basis. The Company believed in July of 1997, based upon projected contracts, that revenues would be fiat during the next twelve months and that revenues would decline by approximately $30 million dollars. From 1988 -. 1991, revenues declined 20% for this division. In 1993, the Siegel-Robert Automotive and Appliance Division accounted for 74.8% of total revenues. Since the Company made extensive plans to acquire new companies, it has become less reliant upon the highly competitive automotive industry. The Automotive and Appliance Division has gradually became less dominant in the Company’s structure. This division also produces name plates for automotive companies. 3M has developed the “dimensional graphics” process which is being widely adopted in the industry. Its products are less expensive to produce. Name plate production has accounted for 12 - 15% of the revenues of Siegel-Robert Automotive and Appliance Division in the past. The demand trend since 1997 for this division’s products has been unfavorable. Mr. Anderson admitted that while the division lost Ford business in 1992, and the outlook was bleak, yet in 1993, 1994, 1995, 1996, and 1997, the division grew and was profitable. While the Company has experienced phenomenal growths since.its beginning, the Court does not believe that this trend is likely to continue. If Defendant’s witnesses’ testimony is accepted literally, this Company is headed for certain collapse. While this apocalyptic view is exaggerated in the Court’s view, the evidence in the case suggests that the very impressive growth the Company has experienced in the last five years is unlikely to continue. Many of the divisions operate in an internationally competitive environment with constant pressure to reduce prices to hold market share. No patent rights exist to assure resistance from competition. Some of the divisions were acquired when they were operating near maximum levels of profitability. It is unreasonable to believe that the Company can expect to grow at the same rate it has in the past, without a continued aggressive acquisition policy. Since that proposition lies in the realm of speculation at this time, the Court can only consider that the Company has been successful in the part in its diversification/acquisition efforts and that there is no stated policy suggesting it will not continue that practice; however, no quantitative values can be assigned to this consideration. In its successful attempt to diversify, the Company moved into the technology field at a time when its acquisitions held competitive advantages which have consistently been lost in the competitive global marketplace. None of the divisions maintain significant protected proprietary advantages. The Court concludes that Plaintiffs’ expert has failed to adequately account for these considerations in his growth projections. Mr. Anderson has been Chief Executive Operating Officer of the Company since October, 1996. He was a non-family member shareholder who accepted the $20 amount for his shares when non-family members were squeezed out. He has been associated with the Company since August, 1981. In November, 1981, he was named vice president and treasurer. In 1995, he became executive vice president and treasurer. He continued his ascension in the Company as administrative assistant to the Chairman and CEO, Bruce Robert. Mr. Anderson’s salary and bonus for 1995 was $1,419,169.00; for 1996, $1,398,618.00; and for 1997, $1,480,306.00. Mr. Anderson is a very aggressive CEO in his day-to-day approach to management of all divisions. While there has been testimony that the individual divisions are “stand-alone” companies; obviously, Mr. Anderson is the management head of all divisions whose presidents report directly to him. He visits locations regularly. He reviews weekly and monthly financial information submitted by the divisions, each of which maintains separate books. He acknowledges that he maintains current financial information on all divisions. Financial information was available to him in July, 1997, for all divisions. Divisions submit annual budgets, incorporating weekly and monthly forecasts, a couple of months in advance of the expiration of the fiscal year. He receives that information immediately. The Company provides centralized management systems to all divisions through in-house corporate counsel and a human resources department. The central office also provides input into operational issues of each division and has general management oversight of all divisions. Mr. Anderson deals with all phases for planning of the divisions and of the Company as a whole. The central office has an internal audit staff which reviews financial data of the divisions, assuring all adhere to acceptable business practices. He wants to assure effective internal control systems at all levels. In 1981, Mr. Anderson was the sole person in the acquisition department. He made financial analyses of potential aequi-sition candidates, considering earnings, and applied multiples, including net after-tax income, earnings before interest, taxes, and depreciation. Earnings are one of the best ways, according to him, to determine whether a decent rate of return on investment is likely. Generally, an earnings multiple of 8 times after-tax earnings would meet his criteria and 4 times the EBIT-DA would be an acceptable range for risk assumption. Additionally, he looked at book value and considered dividends of the target company. If the stock is not readily tradeable on a market basis, it becomes necessary, according to Mr. Anderson, to look at intrinsic criteria. Mr. Anderson was asked to determine the value of the shares that would be paid to minority shareholders by the Company as of the merger date. He calculated- a $20 share price. He did not consult the Board of Directors, any appraiser, any evaluation professional, any accountant, any member of senior management, or the president of Siegel-Robert Automotive and Appliance Division. He consulted no family or non-family members, nor did he consider appointing a committee to determine a fair value. He did not consider whether there was a duty to protect the interest of minority shareholders. He consulted with no one as to whether the $20 price was fair. The only thing Mr. Anderson referenced in letters to the shareholders concerning valuation consideration was a “fair market value” appraisal that he claims to have performed. None of the intrinsic analysis that he claims he did was provided to the shareholders. He mentioned that a prior arm’s-length transaction had been concluded, and he enclosed a copy of the Missouri statute which provides for minority shareholders to receive fair value for their shares. He made no distinction between fair value and fair market value. He acknowledges a fiduciary duty to pay shareholders a fair value. He believed, in July, 1997, that fair value and fair market value represented the same thing in giving a standard of value. Mr. Anderson understands that Mr. Patton, Defendant’s expert, says that the fan-value is either $30 or $46.20 and acknowledges that there is a “range.” Mr. Anderson recommended the merger two days before the Board of Directors’ meeting which was held on July 21, 1997, the same date the notice of vote to the shareholders on the merger proposal was mailed. The Board held a meeting to determine whether to recommend the merger to the shareholders. The meeting of the shareholders followed and the merger proposal was approved. The assigned reason by Mr. Anderson for expeditiously scheduling the Board of Directors’ meeting and consequently the calling of the shareholders’ meeting was to consider making, a Subchapter S election for Internal Revenue Service purposes to avoid direct income tax payments by the Company. In 1997, actual corporate taxes were $41 million. In 1998, taxes are projected to be five million dollars. This difference is the decision to adopt the Sub-chapter S corporate status. Under that arrangement, income is allocated directly to the shareholders, who then pay the tax rather than paying tax at the corporate level. The Subchapter S election was made prior to the July, 1997 time period. It was anticipated that there would be a downturn in the business cycle, and the Subchapter S election was made in anticipation of the less favorable business environment. It was apparent, because of the Company’s fiscal period, that the election had to be made prior to August 1, 1997. Mr. Anderson recommended to the Board of Directors that the best interest of the Company would be served by making the Subchapter S election, and they accepted the recommendation. Mr. Anderson realizes that the law allows up to 75 shareholders in a Company for Subchapter S status to be achieved and maintained. At the time of the Board Meeting, there were 63 shareholders, 40 of which were Robert family members and 23 of which were non-family members. Mr. Anderson recognizes that it would have been possible to get Subchapter S status without squeezing out the minority shareholders. He acknowledges that the minority shareholders who were squeezed out will receive none of the benefits of the Subchapter S election. Mr. Anderson explained to the Board of Directors the scope of the net savings to the Company by making the Subchapter S election, which savings could be distributed to the shareholders. He understood that it would be possible to get the Subchapter S status with up to 75 shareholders, but it was his concern, with non-family members in the Company, that the Company would be at risk of re-opening the tax issue, because 100% of shareholders had to agree to the election. Mr. Anderson wanted to be assured that the election could be made and preserved into the future without being repealed. The merger action, according to Mr. Anderson, was taken to reduce this risk and put control in the family that owned 93% of the shares before the merger. He asked no minority shareholders if they would agree to the Subchapter S election. He acknowledges that it would be possible to amend the bylaws to provide that no person could transfer their shares in violation of the Subchapter S election. Mr. Anderson assigns no other reason for eliminating non-family members, other than to obtain the Subchapter S status in a timely fashion and to protect it in the future from intentional or non-intentional acts that would jeopardize that status. Mr. Anderson recommended to the Board of Directors that the Company convert to a Subchapter S corporation and that minority shareholders be cashed out at $20 per share. He has, as CEO, frequent contact with all people in the Company. Of the 23 non-family members, 15 of those shareholders voted against the merger and five abstained or were not present. Only 3 of the 23 shareholders voted in favor of the merger, one of whom was Mr. Anderson. The other two held small blocks of stock and were employed by the Company. Mr. Brockland was a minority shareholder on July 31,1997, who objected to the merger. He asked Mr. Anderson to reconsider the $20 share price, but Mr. Anderson demurred. Mr. Brockland suggested that Mr. Anderson hire an appraiser. Mr. Anderson did not accept that advice. Mr. Anderson stated that there was no market for the stock and that the shares had traditionally been sold at 65% of book value level, the price he paid when he purchased his 28 shares in the Company. That was the practice from November, 1981, and at all times thereafter, according to Mr. Anderson. Before the merger in 1997, Ms. Morris had some discussion with Mr. Anderson over valuation of the Schneider estate shares. Mr. Anderson said that $18 per share is as much as could be offered at that time. Ms. Morris asked if the Company could pay more than $18 per share and if it would be possible to sell part of the shares rather than selling all at the same time. Mr. Anderson said that a partial sale was not permitted and that it would have to be an all or nothing deal. Ms. Morris believed that the share were worth more than $18 at the time and did not agree to sell. Mr. Anderson advised her to hold onto the shares because there would be a restructuring and that she would be hearing more soon. Ms. Morris was willing to sell 200,000 share at $18 per share. Thomas A. Swope, age 57, was employed by the Company in 1962. He was Executive Vice-President and was on the Board of Directors from 1990-1996. Mr. Swope knew, in 1995, that the Board was authorized to buy stock for $16.25 per share, and he thought that was a fair price at the time. The Board of Directors accepted Mr. Anderson’s recommendation, called a shareholder’s meeting, and directed that the proper notices be sent. Letters advised shareholders that non-family shareholders would be cashed out. Mr. Anderson reported that before the merger, the corporation had recently concluded a transaction by purchasing some shares for $19.70 per share. Intrinsic factors Mr. Anderson said he considered in arriving at a $20 valuation were book value of the shares, earnings per year, the dividend history, and the rate projected to pay those dividends. He knew that the book value was in the neighborhood of $34 or $35 per share. Since the shares to be purchased were minority shares in a family-held corporation, he applied a discount. He calculated a 45% discount which would result in an evaluation of approximately $19 per share. Before he made the computation, he deducted $79 million for “intangibles,” leaving $400 million in shareholder equity. He believed that the Company’s practice had been to pay 65% of the value of shares in purchasing offered shares. (There is inadequate explanation for the additional 10% discount.) No intangibles were deducted under that practice. Therefore, by using the $400 million figure for shareholder equity, and multiplying by 45%, the analysis comes in as slightly less than $19 per share. He claims to have considered after-tax net income of $67 million and to have applied an EBIDTA analysis. He claims to have aimed at a range of value of -$450 - 530 million for the Company. By dividing $450 - 530 million by the number of outstanding shares, the result is $34 - 38 per share. He also claims to have considered a lower income projection for the following year, which he projected at $60 million in after-tax net income, and to have arrived at a value for the Company of $420 - 480 million or a share value of $32 - 36. Mr. Anderson also says that he considered some multiples applied to the Dolch acquisition which were a little lower. The third intrinsic factor he considered was historical dividend figures. Dividends for the following year were projected at $.82 a share. He capitalized dividends at 5%, a very low liquid saving rate, and arrived at a value of $14.40 a share. Under that calculation, he applied no minority interest discount. Mr. Anderson believed that his valuation was reasonable and that the conclusion that $20 per share was fair value for the shares was reasonable. The Court is not convinced that he conducted the in-depth financial analysis outlined. The Court is further persuaded that while an evaluation of $20.00 per share may have been warmly embraced by majority shareholders in this squeeze-out process, it is reasonable to call into question Mr. Anderson’s credibility, based upon all of the evidence in this case, because he claims to remain convinced that his $20.00 per share valuation is reasonable. II. Experts’ Valuations of the Company The Court will now make a determination of fair value for the minority shareholders’ shares as of July 30, 1997, the day before the merger. During the course of the hearing, each party attempted to substantiate their respective conclusions or to vilify opposing appraisers, based upon conclusions reached in other reported cases. The Court neither adopts nor rejects all of the conclusions of any expert who testified herein. Some testimony was helpful, while some was detracting to the Court’s ultimate responsibility in arriving at fair value for the subject shares. The conclusions reached herein rely upon reasonable testamentary statements and all evidence which, in the Court’s judgment, logically and reasonably supports the evaluation process and final fair value calculation. The parties agree that there are three levels of value: (1) the highest value is control value or enterprise value; (2) the next lower value is the marketable minority interest value; (3) and the lowest level of value is non-marketable minority interest value. A business entity may be valued by many methods, but generally these are expressed in three approaches called the (1) asset-based approach; (2) the market approach; and (3) the income approach. Businesses may have (1) value as a going business or a continuous concern; (2) value in place but not in use — business assets are aggregated, but not calculated as an operating company; (3) value in exchange for an orderly disposition— piecemeal sale in a secondary market; and (4) value in exchange in a forced liquidation — assets are sold at less than minimum value. The asset-based approach is an indirect method whereby the business units are appraised, accumulated and reduced by all liabilities, resulting in a value for the owners’ equity in the business entity. The market approach commonly recognizes the (1) guideline merged and acquired company method — compares the company being investigated with companies bought or sold in an acceptable time frame and the (2) guideline publicly traded company method — companies publicly traded on recognized exchanges are selected and compared to the company being valued. The income approach attempts to value a business entity at a given time based on present value of future economic income estimated to be realized by owners of the company. Two common methods of this approach are (1) yield capitalization method — calculation of present value of projected economic income and (2) direct capitalization method — capitalization of a period estimate of economic income by a direct capitalization rate. A common yield capitalization method is the discounted cash flow method. In determining a value for the enterprise or control value, it is common to look at merger and acquisition values. The second most common method in arriving at a value for the enterprise or control value is to conduct an income-approach analysis according to yield capitalization or direct capitalization methods. The third approach is by indirect methods starting with the minority interest valuation and adding a control premium. Plaintiffs’ expert, Robert Reilly, made a control or enterprise valuation for the fair value of equity of the Company of $98.40 per share and determined the second level of value, or marketable minority interest value to be $72.90 per share for the fair value of equity of the Company. He determined the third level, the non-marketable minority interest value to be $72.90, the same value he placed on the marketable minority interest value. He works in the transactional section of Williamette Company, structuring and facilitating transactions. He was formerly with a general management consulting firm before affiliating with the Deloit & Touche Accounting Firm as a partner, where he was national director of valuation services. He terminated that employment and joined the Williamette Company in 1991. He is a member of the American Society of Appraisers and is on the examination committee of the organization. He has been Certified Public Accountant since 1977. He lectures on the subject of Business Evaluations and is a Certified Real Estate Appraiser. Mr. Reilly has had experience in evaluating many kinds of companies. He first became aware of the engagement to provide professional services in this case in late December 1997. He was asked to estimate the fair value of the stock of the Company as of July 30, 1997. He believed that the primary source of the standard of value is the Missouri statutes. According to Mr. Reilly, standard of value is a term of art with a specific meaning that is “definition of value.” There are many standards of value. The most common is fair market value, which is the price a willing buyer would pay and a willing seller would receive. Another example of standard of value would be investment value — “what is the business worth.” Another example is collateral value — “value to the bank.” Mr. Reilly arrived at fair value as the value of the “stock” before the merger transaction that gave rise to the court proceeding. Mr. Reilly derived his definition from the Missouri statutes, the Missouri Bar Association Law Journal, cited court cases, and the general work in the area of considering fair value. It is common to consider fair market value first because it has the most protracted definition. In the fair market value analysis, it is assumed that both parties are informed, are able to protect their respective self-interests, and are meaningfully negotiating. That analysis involves voluntary entry into the market place where neither party is under duress. If the price is not attractive, there is no compulsion to enter into bargaining. In such an environment, both parties seek to maximize their self-interests. Fair value involves an entirely different analysis, because of the absence of a market. There is no implication that both parties have entered the market place, or that all of the parties are equally well-informed of the circumstances involved in the transaction. Additionally, one of the parties lacks the ability to back out or withdraw from the transaction, and one of the parties cannot negotiate the best price. Mr. Reilly suggests that an appraisal of a business entity is preceded by establishment of an appropriate premise of value derived either as (1) value in exchange, on an asset-by-asset basis, or (2) value in use, as part of a going-concern enterprise. Here, the premise of value on a going-concern enterprise basis represents, in his judgment, the highest and best use of the Company. Mr. Reilly concluded that the level of value for the shares of the non-family members should be calculated according to the enterprise or control level of value because the Missouri statutes and literature relating to this evaluation suggests that this is the appropriate analysis. A purchaser-of a company, under this analysis, would receive facilities, ■ employees, and, among other things, future income. This approach attempts to determine what investors would pay for a business. It is Mr. Reilly’s view that any other approach, where a controlling shareholder would cash out minority shareholders, would result in the majority shareholders becoming unjustly enriched and minority shareholders becoming unjustly deprived. Additionally, he points out, other economic considerations are relevant, because after minority shareholders are cashed out, they are deprived of economic benefits; e.g., majority shareholders could take the company public or merge the company. Additionally, Mr. Reilly believes that a marketability discount should not appropriately be considered because the transaction that creates the court proceeding creates a market. After the merger the controlling shareholders have created an internal market because there are new shares or cash, but in any event, shares will change hands. A squeeze-out of the minority shareholders is a compulsory transaction insofar as minority shareholders are concerned. The minority shareholders do not want to sell but are required to do so. In determining that the enterprise or control level evaluation was appropriate, Mr. Reilly concluded that after the merger, the majority shareholders gained additional control. Control has a value associated with it, and ownership of 100% of the shares by its nature provides a greater power structure than owning proportionately less than the total. Minority shareholders typically suffer from lack of control and lack of marketability. Before the cash-out merger, minority shareholders, with other shareholders, had the right to appoint management, to set policy, to sell or buy assets, to select vendors, to liquidate, to dissolve, to acquire new companies, to buy or sell treasury stock, to change bylaws, or to pay dividends. They could hold their shares absent a squeeze-out, receive dividends, participate in company-wide benefits, and participate in any activity to increase the value of the company- Since the evaluation date was July 30, 1997, one day before the merger, Mr. Reilly concluded that it is not appropriate to consider actual results of the Company after the evaluation date, because as of the date of valuation, one day before the merger, those facts would not have been known, nor should they have been considered. All of the data he considered was generated before the evaluation date, as well, except management’s projections for the future. Mr. Reilly concluded that the Company is fairly well diversified as a holding company involved in several lines of business. At the time of the merger, the Company had assets of 532 million dollars, annual receipts of 553 million dollars, and a cash position of 202 million dollars which translates into slightly more than $15 per share of value. The cash value of the Company alone translates into three-fourths of the value Mr. Anderson assigned for the total value of the minority shares. Mr. Reilly observed that the Company’s cash reserves of $202 million is a high percentage of total assets (31.8%) which he believes to be a very positive factor that gives the Company more options for reducing risk. Mr. Reilly reviewed the Siegel-Robert’s Board of Director’s minutes and the 1993 - 1997 financial statements. Pre-tax income for the Automotive and Appliance Division was $47,582,000 in 1993, and $64,900,000 in 1997. Adjusted pre-tax income for the other subsidiaries combined was $16,649,-000 in 1993 and $46,823,000 in 1997. The trend, according to charts introduced in evidence, suggests that adjusted pre-tax income for the combined subsidiaries has gradually increased from 1993 through 1997. Adjusted pretax income for the automotive and appliance division has been maintained at a flatter rate. For 1994, adjusted pre-tax income was $53,792,000; for 1995, $52,669,000; for 1996, $51,033,-000; and spiked to $64,900,000 in 1997, which was an exceptional year for the automotive industry. This trend further demonstrates that the Siegel-Robert Automotive and Appliance division has performed exceptionally well in the described highly competitive internationally compressed market. It further suggests that Defendant’s predictions of poor performance for this division in the future are exaggerated. This division, since its organization, has been able to develop new products and acquire new customers. Its existence and growth is a demonstration of enhanced productivity in American business. Mr. Reilly’s next observation is that the Company has not been deterred in paying dividends and making charitable contributions over the years. The Company maintained its charitable contribution giving level at $8,000,200 per year for 1996, 1997, and 1998. That suggests to him that the Company is generating a lot of cash and is indicative of management’s positive analysis for the future. Mr. Reilly’s next observation is that there is insignificant long-term debt on the Company’s balance sheet. Total debt of less than $400,000 suggests no risk for investors or purchasers and a very high capacity for the Company to raise funds. Shareholder equity has increased because of internal controls making the Company less at risk in 1997 than it was in 1993. The Court believes that these observations seem well founded. Mr. Reilly’s next observation is that the book value of $455,000,000 translates into a per share value of $33.82 per share. This figure applies equally to majority and minority share interests. In a profitable business, he believes book value is a floor or minimum value per share, indicative of a valuation for liquidation but not for valuing an operating company. When compared to the $20 per share price offered to minority interest shareholders, it is clear in the Court’s view that the book value calculation demonstrates that the $20 amount is unreasonable. The book value analysis does not consider the Company as a going concern, and no one suggests this Company is ready to cease operations. Mr. Reilly notes that the Company has a strong management team in place with long-tenured senior executives with ample experience. The Company has maintained its ability to retain senior managers that use their skills to acquire profitable companies. He concludes that the Company’s managers are very knowledgeable. Particularly, he notes that Mr. Anderson, CEO, is very competent. As noted, Mr. Reilly explained that there are various approaches to valuing companies. The market approach applies given multiples to the subject company to get indications of value. The income approach estimates a measure of future income that the company would expect to receive. Mr. Reilly looked at the treasury share transactions and concluded that the price paid did not represent fair value transactions. Generally, he believes that the few transactions where the shares were purchased by the Company occurred after the Company suggested a price to shareholders who wanted to sell, and no negotiation process was involved. The price was set by the Company as a “take it or leave it” proposition. Mr. Reilly used three separate methodologies to value the Company: (1) the income approach method; (2) the direct capitalization method; and (3) the guideline publicly traded company method. First, he valued each of the six units separately, then aggregated the values. He described his approach as using two approaches, the market approach and the income approach. With the market approach, he used the guideline publicly traded company method, and with the income approach, he used the direct capitalization method and the discount cash flow method. Guideline publicly traded company data is available from many sources including the Securities and Exchange Commission, Standard and Poor’s Stock Guide, CompuServe, Trade-line and Moody’s financial resources. Use of the guideline publicly traded company method is designed to estimate a value for a company that is not publicly traded, as if it were so traded, and for that analysis, the company is compared to companies that are publicly traded. This method is used when very similar companies have not been bought or sold so that a more direct comparison can be made. The Court observes that the conclusions of any analysis by use of this method are only as reliable as the selection of the guideline companies used. Consideration of different approaches permits an examination of the Company from different perspectives. The income approach is considered to be an “internal approach.” The market approach looks at value of a company from the passive investor’s perspective. The guideline publicly traded method values all six units separately, then aggregates their values. Method number two, the direct capitalization method, is an income approach for all six businesses. The yield capitalization or an income approach is performed on a consolidated aggregated basis. At the mid-level of value or the marketable minority interest value, using the guideline publicly traded company method. Mr. Reilly concluded that the Company was valued at $1,008,100,000. For the mid-level value using the direct capitalization method, he concluded that the Company was valued at $849,000,000.00. For the mid-level value calculated under the discounted cash flow method. Mr. Reilly concluded that the value of the Company was $1,088,000,000.00. It is his belief that a stronger analysis can be made on a company by company basis because of data considerations. He found difficulty finding comparable public trading companies as a source of comparison on a consolidated basis. Here, 50% of value is represented by the Siegel-Robert’s Automotive and Appliance Division and 50% by the other companies. There is a mix of high tech companies, and he could not find guideline companies that would compare on a consolidated basis; therefore, he concluded that he could not do an effective evaluation under the guideline publicly traded method on a consolidated basis. A. Advantek Mr. Reilly first evaluated Advantek. Inc., concluding that it was a “stand alone” company, with its own management, employees, customers, suppliers, audited financial statements, and facilities. The Court concludes that none of the divisions are actually stand alone companies. All are centrally managed under a chief operating officer and are provided in house administrative, legal and financial services. None of the divisions operate totally independently of the Company. Under the guideline public traded method, Mr. Reilly searched for publicly traded companies that are good comparables or companies engaged in the same business as Advantek. Since he was unable to locate good comparable companies to his satisfaction, he relied upon six guideline companies which compared relative risk and levels of expected return. He-next adjusted pricing multiples by comparing financial statements for the five-year period before the evaluation date. He next selected six valuation pricing multiples: (1) price to earnings ratio (P/E); (2) earnings before interest and taxes (EBIT); (3) earnings before depreciation interest and taxes (EBDIT); (4) price to debt-free net income (DFNI); (5) price to debt-free cash flow (DFCF); and (6) price to revenues, sometimes called price to sales (P/R). After these pricing multiples are calculated for each guideline company, the mean and median of each multiple is calculated for each company. A subject specific pricing multiple taken from the sample pricing multiple is then applied to the appropriate financial data of the company being evaluated. By multiplying these pricing multiples by the financial data of the company being evaluated, a preliminary estimate of value of that company is calculated. The resulting value should estimate what informed national capital market investors would pay to own stock in the company being valued. Guideline companies are those publicly traded over organized capital market exchanges. This method’s measure of reliability is determined by selecting appropriate guideline companies based upon reasonable comparability and industry criteria. The preliminary estimate may be adjusted for lack of comparability between the company being valued and the guideline companies. Fair value analysis of the respective divisions made by Mr. Reilly is the mid-level of value or the marketable minority interest valuation. He adjusted prices, earnings, cash flow, and book value of the guideline companies to an invested capital basis to mitigate the differences in the financial leverage among the guideline companies. His objective is to compute market-derived pricing multiples consisting of the market value of a company’s total invested capital (MVIC) or market value of equity plus long-term interest bearing debt in relation to its earnings, cash flow, and book value. Interest expense is added to earnings and cash flow so the invested capital adjustments mitigate distortions in pricing multiples that result from different capital structures. Cash flow is defined for Reilly’s calculations as pre-tax income plus depreciations and amortization. Cash flow is adjusted to an invested capital basis by adding back interest expense resulting in earnings before depreciation, interest, and taxes (EB-DIT). This removes differences in financial leverage and alternative depreciation methods. The guideline publicly traded company method estimates a value for a hypothetically publicly traded equivalent value company. The pricing methods above mentioned are applied to the financial performance of the company to be valued based on its historical growth, risk, and profitability in relation to the guideline companies with adjustments for quantitative factors unique to the company to be valued. After calculating the six multiples for the six guideline companies, Mr. Reilly then arrayed them in a fashion to look at high, low, and median multiples. The low earnings multiple was 17.3 and the high was 20.1. The median was 19.1. He regards the next step as critical, because it requires making a judgment as to which multiple to select in a range from 17.3 to 20.1 to arrive at a valuation for Advantek. Advantek’s financial performance figure he used for the twelve months last reviewed was $13,916,000. He selected the earnings multiple of 17.5 which is just higher than the lowest for all of the guideline companies. He noted that Advantek was more profitable than any of the guideline companies. He observed that Advantek fell below the guideline companies’ growth rates, so he selected an earnings multiple at or near the bottom of the range. When applying the earnings multiple of 17.5 to the latest reviewed twelve month performance of $13,916,000, the indicated market value of invested capital (MVIC) is $243,523,000. The five year average of earnings is $9,828,000 and the MVIC is $250,617,000 when applying a multiple of 25.5. The average MVIC for the “earnings” multiple for the latest twelve months and for the five-year average is $247,070,000. Mr. Reilly conducted a similar analysis for the EBIT, the EB-DIT, the DFNI, the DFCF, and “revenues” comparing latest twelve-month figures with a five-year average. For his EBIT calculation, Mr. Reilly selected multiples for the latest twelve months available at the time of analysis. He considered a low of 8.9, a high of 12.2, and a median of 10.0, when comparing the guideline companies. He selected the median noting that Advantek, when compared to the guideline companies, revealed a low growth rate for Advantek. He therefore selected a multiple of 10 times the EBIT of $21,098,000 for the latest twelve months and arrived at a MVIC of $210,980,000. For the five-year average, the MVIC under the EBIT analysis is $217,652,000 using a multiple of 14.5 on performance of $15,010,000. The average MVIC under the EBIT calculations for the latest twelve months and for the last five years is $214,-316,100. For his EBDIT calculation, he selected the median multiple of 9 from the guideline companies multiplying that times the performance for the last 12 months of $27,228,000 arriving at a MVIC of $245,-052.000. For the five-year average, the performance figure was $19,355,000 and the multiple he selected was 11.5. The MVIC for the five-year average is $222,-582.000. The average MVIC under the EBDIT is $233,817,000. For the DFNI multiple, he selected 16.5, the mid-point figure which is just below the median for the guideline companies which was 16.7. The performance for the latest twelve months is $13,992,000, so the MVIC is $229,706,000. For the five-year average, the MVIC is $231,125,000. The performance figure was $9,835,000 and the multiple selected for the five-year average was 23.5. The average MVIC under the DFNI multiple calculation for the latest twelve months and for the last five years is $230,415,000. For his DFCF calculation, he selected a multiple of twelve. Advantek is slightly below the median in earnings for the last twelve months and about the same for the last five years. The MVIC for the last twelve months is $240,619,000 on earnings of $20,052,000. For the five-year average on earnings of $14,180,000 and a selected multiple of 16.5, the MVIC is $233,963,000. The average MVIC under the DFCF calculations for the latest twelve months and for the last five years is $237,291,000. His last calculation on a price to revenue multiple was 1.8 for the last twelve months. 1.8 is higher than the median because Advantek outperforms most of the guideline companies. On a selected performance figure of $98,629,000 and a multiple of 1.8, the MVIC is $177,532,000. For the five-year average on earnings of $64,-206,000 and a selected multiple of 2.90, the MVIC is $186,198,000. The average MVIC under the “revenues” multiple calculations for the latest twelve months and for the last five years is $181,865,000. Considering a low MVIC of $181,865,-000, for the “revenues” calculations and a high MVIC, based on the “earnings” calculation of $247,070,000, he took an average, getting the figure of $224,039,000 to arrive at an indicated market value of invested capital. "When market value of interest bearing debt was subtracted, he concluded that the indicated market value of equity on a marketable minority ownership interest basis would be $221,667,000 under the guideline publicly traded company method. All but one of the multiples used by Mr. Reilly were at or below the median resulting, according to him, in a conservative valuation. In revenue performance, Ad-vantek outperformed all of the guideline companies. Next, Mr. Reilly valued Advantek based under the “direct capitalization method,” which is used when current operations approximate expected future operations, assuming a normal growth rate. Current operations or next year’s projected operations are divided by a capitalization rate to arrive at an estimation of value. The first step is to secure financial statements for a designated period of time then make adjustments to mitigate errors. Then, calculations are made to arrive at adjusted net earnings after adjustment for state and federal income taxes. If the “benefit stream” is cash flow, it will be capitalized and additional adjustments for taxes will be made to arrive at a gross or a net cash flow. Next, a capitalization rate is determined for the “benefit stream” to be capitalized. The period of operations to be capitalized may be the last twelve months or a period of time into the future, or an average of several preceding years. Finally, an operating value of a company is determined by dividing net earnings or gross or net cash flow by the capitalization rate. In calculating a capitalization rate which is a by-product derivative of the present value discount rate, the formula is the present value discount rate less a long-term growth rate. The discount rate, referred to as the weighted average cost of capital (WACC) is a company’s blended required rate of return on equity and a rate of return on debt capital. The first of the two methods used by Mr. Reilly was the “build-up” method or what he called the “bottom up” approach to determine the cost of equity capital. Cost of equity capital was calculated by Mr. Reilly by averaging the “bottoms up” or build up approach that arrives at a rate using a risk free rate of return plus empirical evidence of equity rate of return data from financial services (Mr. Reilly used Ibbotson’s 1997 SBBI) and replacement cost of debt capital. Empirical evidence from Ibbotson’s includes a long-term equity risk premium representing incremental rates of return realized on large capitalization common stocks over the risk free rate historically reported from 1929 to 1996. Then, a small company equity risk premium is added representing additional expected incremental rates of return over the long-term equity risk premium realized by investors in those companies in the bottom quintile of the New York Stock Exchange based upon size. With that approach, it is necessary to assess the risks and income projection that will be capitalized. He adopted a risk free rate of return of 6.4%. He added a long-term equity risk premium of 7.5% and a small risk premium of 5%, arriving at a “build-up” approach yield capitalization rate / weighted average cost of capital (WACC) of 18.9%. He then averaged this rate with a rate calculated under the Capital Asset Pricing Model (CAPM). This second approach is to use the CAPM which is expressed in a formula whereby the cost of equity capital is designated Ke. The formula to arrive at the cost of equity capital is Ke — Rf + B (Rm - Rf) + Rps. Rf is the risk free rate of return (U.S. Treasury Bond rate). Here, it is plugged in at 6.35%. B is the beta factor for public companies, used to determine the subject company’s beta coefficient for the company’s risk relative to public companies. The Court shall discuss the importance of the selection of the beta factor subsequently. (Rm - Rf) is the long-term market equity risk premium. Rps is the small equity risk premium. Applying the formula to Advantek. Mr. Reilly subjectively adopted 0.94 as a beta factor, concluding the Company was at a lower level of systematic risk than the overall market. He adopted the market equity risk premium (Rm - Rf) from the Ibbotson financial service company at 7.5%, the average historical spread between common stocks and the long-term government bonds. He then adopted a 3.5% small equity risk premium from Ib-botson’s averaging the historical spread between small stock total returns and common stock total returns. The cost of equ