Nearly every public deal comes with a fairness opinion, a letter from an investment bank stating that the consideration is "fair, from a financial point of view" to the shareholders. Boards obtain them to discharge their duty of care (in the US, the Delaware standard; in India, as part of the scheme and takeover process). You must understand exactly what it is worth as evidence, which is less than it looks.
What a fairness opinion is, and is not. It is not a valuation, a recommendation on whether to do the deal, or a promise the price is the best obtainable. It is a narrow statement that the price falls within a defensible range produced by standard methods (comparable companies, precedent transactions, DCF, sometimes a premiums-paid analysis). The opinion is the conclusion; the supporting analyses in the proxy/scheme document are where the information actually lives. Read those, not the letter.
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What conflicts of interest does a fairness opinion have?
The conflicts you must weight.
- Contingent (success) fees. The bank writing the opinion is very often the same bank advising on the deal, paid a fee that is contingent on the deal closing. An adviser paid tens of millions if and only if the deal happens is being asked to opine that the deal is fair — a structural conflict disclosed in the proxy and routinely ignored by everyone reading it.
- Staple financing. When the seller's adviser also offers to finance the buyer ("stapled" financing), the adviser can profit on both sides, a conflict the Delaware courts criticized sharply (the In re El Paso and Del Monte cases turned on exactly this).
- Relationship capital. The bank wants the next mandate from this acquirer or this board; independence is a professional aspiration held against a commercial reality.
How do you read a fairness opinion?
The assumptions most often bent. Because the DCF inside a fairness opinion can be tuned to reach almost any answer, look at: the projections (usually management's, the same management that wants the deal, so their optimism is baked in); the discount rate (a small change moves the value a lot); the terminal growth rate (ditto); and whether the analysis conveniently excludes synergies when justifying a price to a seller (so the buyer keeps them) or includes them when justifying a price to a buyer. The tell is a valuation range whose midpoint lands suspiciously close to the agreed price.
The analyst's checklist for reading one. (1) Who wrote it, and are they the deal adviser? (2) Is the fee contingent on closing, and is there staple financing? (3) Whose projections drive the DCF, and how do they compare to the last three years of the company missing or beating its own guidance (the C7 credibility read)? (4) How wide is the range, and where in it does the price sit? (5) What methods were used, and which convenient one was left out? A fairness opinion handled this way stops being a rubber stamp and becomes what it should be: one more piece of evidence, weighted for the incentives of the person who produced it. That is the same discipline you brought to management rebuttals in M2.08: grade the claim on whether it reconciles the numbers, not on the eminence of the letterhead.