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Fairness Opinions and Common Stock Valuations
Abstract
A fairness opinion is a special form of valuation report, usually a letter, that is often viewed as a "shield" against potential legal damages. It states that, in the view of the investment banker, based upon certain procedures followed and assumptions made, a specific transaction at a specific price is fair, from a financial point of view, to specific parties.
This chapter is organized in two major parts, (l) the definition of the engagement, and (2) valuation methodology. In most assignments, defining the valuation takes far less time than doing it. Nevertheless, a misunderstanding at the beginning of the engagement can •lead to wasted time and effort. At worst, it can cost the client millions of dollars and tarnish an investment banker's reputation.
... Until 1999, valuation literature seldom discussed the harmonic mean. 1 Recently, however, several academic studies have highlighted the merits of using the harmonic mean for averaging multiples. The landmark study is a 1999 working paper by Malcolm Baker and Richard Ruback which compared applications of the arithmetic mean, the harmonic mean, and the median to multiples. ...
This article discusses why harmonic means are statistically superior to arithmetic means in averaging data with price in the numerator.
... One-third of the fairness opinions employed the questionable ''premiums paid'' method. 15 ''Premiums paid'' are calculated by comparing transaction prices to target companies' market prices prior to the announce- ment dates of the proposed transactions. Opinion providers using this methodology have, as the universe for their data, companies that were acquired. ...
This study asks which valuation approaches and analyses are currently being used as the foundation for fairness opinions in stock-for-stock mergers involving US companies. An examination of the SEC's EDGAR database for the years 2009 through 2014 identified 146 proxy statements for stock-for-stock mergers containing 290 fairness opinions and descriptions of the approaches, methods, and analyses employed. We found that most opinions employed more than one approach, and that opinion providers (primarily investment bankers) determined the fairness of stock-for-stock mergers by considering relative analyses as well as customary valuation approaches. More than 90% of the fairness opinions utilized the two traditional ways to quantify going-concern value: the income and market approaches. In addition, more than 90% used one or more relative analyses. Relative analyses, which assess the relative fairness of the exchange ratios in a stock-for-stock merger, are applicable only when target shareholders continue to own an equity interest in the surviving company. Inputs used in the income approach and multiples used in the market approach were reviewed. Also, fees charged for public fairness opinions were examined.
This article discusses why harmonic means are statistically superior to arithmetic means in averaging data with price in the numerator.
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