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Are You Playing the M&A Game Fair and Square?

The merger and acquisition (M&A) market finally seems to be recovering from the recession. Last year, global deal volume was up 47 percent over 2013 — and brokers and investment bankers are optimistic about the outlook for 2015. But many investors and lenders who were burned by bad deals during the recession remain understandably gun shy.

Formal fairness opinions can help achieve shareholder and lender buy-in for your M&A plans. They can also preempt lawsuits, because managers and directors who obtain fairness opinions demonstrate that they acted in good faith, without fraud or any conflicts of interest and in accordance with the business judgment rule. Here are some FAQs about fairness opinions to consider if you’re planning to buy (or sell) a business in 2015.

What is a Fairness Opinion?

A fairness opinion provides an independent, objective analysis of a proposed deal. After looking at pricing, terms and other considerations, the expert expresses a formal written opinion — usually about 3 pages or shorter — about whether the transaction appears to be “fair” from a financial point-of-view to all parties involved.

A fairness opinion letter typically describes the opinion’s scope, including the procedures completed, sources used and assumptions made by the expert. Review the information underlying the opinion carefully. An expert’s conclusion is only as reliable as the data and assumptions upon which it’s based.

In a fairness option, value is typically expressed as a range of values, rather than providing a specific dollar value. To arrive at this range, valuators consider the cost, market and income approaches, similar to other business valuation assignments. But estimating fairness can be especially challenging if a deal includes earnouts or noncash terms, such as stock-for-stock transactions.

A fairness opinion is not an endorsement of the company’s planned course of action or an affirmation that its strategic decision is better than other investment alternatives. More importantly, obtaining a fairness opinion is never a substitute for professional legal advice or comprehensive due diligence by the parties to a merger.

Fairness opinions are not required by law in most cases, and they provide no guarantee against shareholder litigation. But courts generally look more favorably upon managers and directors who obtain fairness opinions before making major strategic decisions. And some banks may request fairness opinions before agreeing to finance M&As.

If an outside expert concludes that a deal is “unfair” from a financial perspective, it may be renegotiated. Or the parties may decide to walk away from the deal entirely.

Who Needs a Fairness Opinion?

Whenever an owner or director is about to enter into a major strategic decision and is concerned about liability risks, he or she should obtain a formal fairness opinion. In M&As, buyers and sellers of both public and large private companies can benefit from obtaining a formal fairness opinion.

For example, if your company is making an acquisition, you might obtain a fairness opinion to show fellow shareholders that your offer is reasonable in the eyes of an objective third party.

Fairness opinions are traditionally used in M&As when control changes hands. But there’s a growing trend toward obtaining fairness opinions in other high-risk, non-merger transactions, such as corporate divestitures, liquidations and restructurings, exchanges of debt for equity and administration of employee stock ownership plans (ESOPs).

Who Should Issue Your Fairness Opinion?

Objectivity is key when obtaining a fairness opinion. Investment bankers customarily offer this service to clients, because they’re already familiar with the company and the deal’s terms. But the price-based success fees that investment bankers receive at closing may compromise their perceived objectivity.

Ideally, a fairness opinion expert should have no financial interest to the parties involved in the transaction, including financial ties to any of the company’s managers or directors. As a result, many companies hire independent business valuation professionals to provide fairness opinions.

It’s also important to select an expert with experience testifying before judges and juries, because many of these deals wind up in court.


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