Putting the ìFairî into Fairness Opinions

By Tom Taulli

Traditionally, fairness opinions have been somewhat of an afterthought. If there is a major transaction or problems with conflicts of interest (especially in going-private transactions), it is typical to see a fairness opinion.

A fairness opinion is not a recommendation or endorsement of a particular transaction. Rather, it is ultimately the decision of the board, management and shareholders as to whether to move forward on a deal.

Then again, a fairness opinion can provide some protection. In fact, with the scandals of 2002, there is certainly an increased use of fairness opinions because of liability concerns.

Some Changes with Fairness Opinions?

A fairness opinion analyzes the price, terms and transaction details. It looks at different valuation metrics and then makes comparisons to the current deal. There is lots of wiggle room in these valuations. But, for the most part, you will see the three main approaches: comparative, discounted cash flow, and net asset value.

As a dealmaker or board member, what are some strategies for fairness opinions? Well, keep in mind that the SEC is likely to analyze these documents. So, it is a good idea to read them (yes, many principals in a deal do not read the fairness opinions, but instead listen to the oral presentation of the main points).

Something else: In many cases, it is the investment bank that drafts the fairness opinion. So far, there are no court rulings against this. However, with heightened scrutiny, there could be future cases that cast doubt on such fairness opinions. Is the investment banker really in the best position to offer an objective judgment?

Perhaps, instead it is a better idea to have an independent third-party provide the fairness opinion.

MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the managing editor of our MergerPlace M & A Advisor™ E-zine.

Tom Taulli is an expert in the M&A process. He is the author of the critically acclaimed The Complete M&A Handbook (Random House) as well as six other books written for publishers such as Bloomberg and McGraw-Hill. Tom also teaches M&A at the USC School of Business.

Tom has been quoted extensively in the press, including the Wall Street Journal, USA Today, Barron's, and The Los Angeles Times, and has provided commentary on CNBC, CNN, and Bloomberg TV, as well as appeared on a variety of top radio stations across the country.

Tom's books are available for purchase in our bookstore.

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