Boardroom Briefing: Mergers & Acquisitions - Directors & Boards

Second Opinion on Fairness Opinions
By Bruce Bingham
Opinions of value can provide the board with another level of M&A due diligence
A
fairness
opinion
prepared
by a party fully
independent to
the transaction
should leave
no doubt that
a director has
Bruce Bingham covered all
professional and legal bases. But in
today’s environment, how safe is safe?
In order to prove that a director has
met his or her obligations under the
business judgment rule in today’s
expanded litigious environment, that
director must be adequately informed
before making any decisions. Because
of the increased scrutiny given to
fairness opinion independence, more
and more directors and their legal
Opinion of Value
What is the difference between a
fairness opinion and an opinion
of value? While the analytical
processes are quite similar, the big
difference is that an opinion of value
does not include an assessment
on the part of the valuator as to
whether or not a transaction is
fair to a party to a transaction. As
such, an opinion of value leaves the
determination of fairness solely to
the directors and, therefore, provides
less protection to the board.
Next, a valuation firm will typically
apply approaches to value and
professional valuation standards
that are mandated by the Uniform
Standards of Professional Appraisal
Practice (USPAP). This set of standards
business are the market approach,
the income approach, and the cost
approach; all of which use different
sources of quantitative data that
result in indications of value.
The cost approach considers the net
asset value, and is relevant primarily
to holding companies and asset
intensive businesses. The market
approach is an ex ante valuation
looking back at publicly available
historical data of comparable
companies to correlate performance
into indications of value. The
income approach is forward looking,
using company prospective financial
information to get to a net present
value indication. The results of
the individual approaches are
then reconciled into the opinion
of value. Many investment banks
Increasingly, boards are seeking a higher level of due diligence, thus soliciting the help
of independent valuation firms to perform either a second, parallel fairness opinion or
prepare a business valuation opinion for the private use of the board.
counsel are concerned that the legal
requirement of being adequately
informed should not rely simply on
having a fairness opinion, but in
making sure that its creation was
truly independent of any financial
beneficiaries to the transaction.
Increasingly, boards are seeking a
higher level of due diligence, thus
soliciting the help of independent
valuation firms to perform either a
second, parallel fairness opinion or
prepare a business valuation opinion
for the private use of the board.
is promulgated by The Appraisal
Foundation’s Appraisal Standards
Board, founded in 1987 as one of the
Federal government’s responses to the
savings and loan crisis.
USPAP mandates consideration of
each of three traditional approaches
to value, and, if information exists
with which to apply an approach,
that approach must be utilized
unless clearly not applicable. The
three methods commonly used to
arrive at an objective opinion of
value for the acquisition or sale of a
use aspects of these approaches
such as a discounted cash flow or
performance multiples (price to
earnings, etc.), but they may not
go through each approach in its
entirety, thereby possibly missing a
key piece of the analysis.
Analytical Comfort
The analytical capabilities of
valuators may also be of valuable
service to a board. A major source
of comfort in bringing in
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2 8 B o a r d r o o m B r i e f i n g : M e r g e r s & A c q u i s i t i o n s