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 as to whether or not the proposed stock price is fair to the selling or target company.
Understanding Fairness Opinions
A fairness opinion provides guidance to the parties involved in a merger, takeover, or acquisition. This could include the shareholders of the company being acquired or the acquiring company. It is essentially a professional opinion supported by collected data.
Fairness opinions are written by qualified analysts or advisors, usually of 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.
- A fairness opinion is a usually impartial report regarding a major financial action like a merger or takeover that an investment banker or other analyst may provide for a fee.
- Sometimes, but not always, fairness opinions can be required in 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 the risk associated with a merger, acquisition, carve-out, spin-off, buyback, or another type of purchase, 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.
Additional earnings metrics should be calculated depending on industry-specific needs.
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.