What Is a Fairness Opinion?
A fairness opinion is a report that evaluates the facts of a merger, acquisition, carve-out, spin-off, buyback, or another type of business purchase. It provides an opinion about whether or not the proposed stock price is fair to the selling or target company.
- A fairness opinion is a report regarding the fairness of a major financial action like a merger or takeover that an investment banker or an analyst may provide for a fee.
- Sometimes fairness opinions are required in the sales of public companies.
- Fairness opinions are most often requested as part of a merger or acquisition.
- Fairness opinions are not always required in transactions involving public companies, but they can be helpful in reducing litigation risk.
Understanding Fairness Opinions
A fairness opinion provides guidance through expertise to the parties involved in a merger, takeover, or acquisition. This could include the shareholders of the company being acquired or the acquiring company or their respective advisors in the transaction. It is essentially a professional opinion supported by collected data or market expertise through experience.
Fairness opinions are written by qualified analysts or advisors, usually from an investment bank, and are provided to these key decision-makers for a fee. The analysts examine the specifics of the deal, including any possible business synergies that benefit the target/seller if applicable, the terms of the agreement, and the price offered for the stock of the target/seller.
Fairness opinions are not always required in transactions involving public companies, but they can be helpful in reducing the risk associated with major financial actions or purchases, including the risk of litigation. While they are not required, they can also be a good way to facilitate communication between the various involved parties.
Fairness opinions are a particularly good idea if the transaction is pending as the result of a hostile takeover, if there are multiple offers for the company at different prices, if company insiders are involved in the transaction, or if board members or shareholders have concerns about the fairness of the transaction.
Example of a Fairness Opinion
ABC Company has made an offer to purchase XYZ Corp. for $10 million. XYZ Corp.'s board of directors is interested to know whether this is a fair offer from ABC Company. They have no other offers on the table at this time. XYZ Corp, as the target company in this scenario, hires an advisor at Independent Investment Bank to conduct an analysis and weigh in on the fairness of this offer.
The advisor reviews three comparable transactions. In line with best practice, the three comps involve companies in the same industry with a similar business model to XYZ Corp., and all transactions have taken place recently, within the last six months. The advisor calculates the EV-to-EBITDA multiple for the three comps. In this formula, EV is enterprise value and EBITDA is earnings before interest, taxes, depreciation, and amortization; a 12-month period is used for EBITDA.
As a result of the analysis, the advisor informs XYZ Corp. that $10 million is a fair value for this transaction. XYZ Corp.'s board of directors then approves the sale of the company for this amount. Furthermore, a fairness opinion is needed often in international cross-border transactions provided by local market experts.