This led to the 1998 recapitalization. In this restructuring of equity, family members and permitted transferees (Kohler Trusts, Kohler Foundations, ect. ) were given the option to exchange their stock for several different classes of stock, such as common stock, non voting stock, Series A and Series B. The shareholders not classified as a permitted transferee would either have to sell their shares for what an independent firm determines fair market value, or dissent and allow fair market value to be determined by a legal proceeding. The fair market price offered by Kohler in 1998 was $55,400.
Kohlers stock recently fetched between $100,000 to $135,000 and the two largest outside shareholders recently bought a combined 93 shares right around $100,000. So Gen, a mutual fund and largest outside shareholder, believed market value per share could be $400,000. Because of this discrepancy in price; outside shareholders decided to file suit against Kohler claiming the price of $55,400 undervalued the stock and was not fair market value. It is now April 2000 and Herbert Kohler Jr. must decide whether to settle with the plaintiffs or go to trail in 2 days.
It was very possible that the court would determine fair market value to be much higher than price offered. Herbert also must consider that the IRS will use a court determined share price to determine the tax liability of Herberts deceased brothers estate. The share price will also affect the way the Kohler Foundation could operate, since by law it must annually pledge %5 of its assets, which is mostly Kohler stock. Analysis: Much of the share price was driven by the speculation that Kohler might soon go public. Herbert thought this was the primary reason the shares were extremely overvalued.
However, the assumption of a future IPO was inaccurate. One of the core values and strengths of Kohler is the private classification of equity. Kohler considers it a competitive advantage to not have to disclose its financial position to the public. Not only does it give away proprietary information to competitors, but public reporting also affects the way a company can make decisions. Kohler feels that many of the business decisions that made Kohler a success, such as investing in cast iron production at a time when the industry was moving away from it, would not have been possible if they were accountable to pubic shareholders.
Without the possibility of an IPO a lower share price than what share prices recently traded for was could be justified. However, Herbert must also consider the effects of having the valuation be determined in court. The first drawback to this is how costly legal proceedings are. On top of lawyer fees and court costs, it could be very expensive to reconcile and audit all financial documents as well as pay for expert opinions concerning the valuation. Since there is no standard or correct metric to value a company, there is increased risk as to how the court will value the company.
If Kohler decides to continue with the trial they are leaving themselves, the Kohler Foundation, and the Kohler estate open to a lot of uncontrollable risk. Recommendation: I recommend Kohler offer to settle with the plaintiffs at $140,000. Kohler should settle outside of court to mitigate the risk and cost associated with the trial. While the price is not ideal, settling outside of court allows Kohler to control the price at a manageable level. This will be the best way to hedge against risk and lookout for the interests of Kohler, the Family, and its charities.
In order to settle Kohler must offer a price of $140,000 to give the mutual funds the return on investment they desire. Since the purpose of mutual fund is to create value for their investors, they are probably more than willing to take the matter to court if they feel they are not receiving a fair return. The per share price of $140,000 will give the mutual funds roughly a 20% return on investment which should be enough for them to consider the offer favorable.