Fairness Opinion

What is Fairness Opinion?

An opinion of fairness is an independent third party professional evaluation. This is a fairness opinion made by an independent third party like an investment bank or financial advisor, analyzing the fairness of terms of a financial transaction such as a merger, acquisition, or sale, to shareholders of a company. It is neither an approval nor a rejection recommendation but rather a fact-finding opinion of whether the transaction is financially reasonable.

Key Components in a Fairness Opinion

1. Valuation Analysis: It offers an analysis connected with the price paid or received of the transaction that incorporates financial considerations.
2. Comparisons to Market: The transaction should be compared to similar transactions existing in the respective industry.
3. Financial Metrics: Checking the basic metrics such as price-to-earnings, discounted cash flow, and even asset valuations.
4. Legal/Regulatory aspects: The relevant legislation and regulations should be complied with by the concerned transaction.

Why is Fairness Opinion Important?

1. Saves the Interests of Shareholders: Shareholders are treated fairly and reasonable value is given.
2. Helps in Decision Making: The opinion provided to the board of directors is from an independent source that helps in informed decision making.
3. Reduces Liability in Law: This prevents the granting of lawsuits by shareholders who claim the transaction is unfair.
4. Increases Credibility: Adds transparency to the process of a transaction and gives it legitimacy.

When are Fairness Opinions Used?

• Merger and acquisition (M&A)
• Asset sales or divestitures
• Leveraged buyouts (LBOs)
• Recapitalizations or restructuring

Fairness Opinion Example

If Company A is buying Company B, the board of Company B may retain an investment bank to obtain a fairness opinion. The bank would evaluate whether the purchase price paid to Company B's shareholders is fair using financial information, market data, and similar transactions.

Limitations of a Fairness Opinion

• It does not ensure success or that it is a fair deal in the long term.
• It involves elements of judgment and assumptions with the data collected.
• It's pricey to acquire an opinion about the fairness, especially for small firms.