Ceradyne Directors Sued Over 3M’s $860 Million Purchase

Ceradyne Inc.’s directors didn’t get enough for the defense contractor’s shares in an $860 million buyout by 3M Co. and didn’t make proper disclosures about how the deal was negotiated, investors said in a lawsuit.

Executives of Costa Mesa, California-based Ceradyne, maker of ceramic body armor for the U.S. Army and foreign militaries, didn’t solicit other bids for the defense firm before accepting a $35-a-share offer from 3M, lawyers for a Ceradyne shareholder said in the Delaware Chancery Court suit.

“The board engaged in a flawed sales process involving neither a market check nor an auction, instead negotiating only with 3M, a longtime business partner of the company,” attorneys for Ceradyne investor Dennis Henderson said in the suit, filed yesterday. 3M makes products ranging from dental braces to commercial sealants.

The purchase, the biggest announced by St. Paul, Minnesota-based 3M this year, will help the company expand into ceramics as the material becomes more popular across several industries, such as energy and aerospace.

Ceramics are more frequently used because they are more heat-resistant and harder than metal, Nick Heymann, an analyst with William Blair & Co. in New York, said when the Ceradyne acquisition was announced Oct. 1. 3M needs acquisitions to spur growth amid weak European markets and China’s slowdown, he added.

Neither Phil Bourdillon, a Ceradyne spokesman, nor Donna Runyon, a 3M spokeswoman, immediately returned calls yesterday seeking comment on the suit over the buyout.

Deal Mechanics

3M uses Ceradyne’s ceramic material to make orthodontic brackets, according to Henderson’s suit. 3M officials approached Ceradyne executives in May to inquire about buying the company, the investor contends.

Instead of seeking other offers, Joel Moskowitz, Ceradyne’s founder and chief executive officer, negotiated solely with 3M and then structured the deal with the conglomerate in a way to discourage new bidders from coming forward, Henderson’s lawyers contend.

The Ceradyne board’s backed 3M’s offer in a filing with the U.S. Securities and Exchange Commission that misled investors about the negotiations, the investors’ attorneys also allege in the suit.

The statement omits or presents misleading information about Citigroup Inc.’s valuation of the company. New York-based Citigroup served as Ceradyne’s financial adviser on the deal.

This month, 3M scrapped an agreement to buy Avery Dennison Corp.’s office-products business. The company gave up on the $550 million deal because of U.S. Justice Department’s antitrust concerns about the acquisition. 3M already makes offices supplies, such as sticky notes sold under the Post-it brand.

The Ceradyne case is Dennis Henderson v. Ceradyne Inc., 7968, Delaware Chancery Court (Wilmington).

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