In a corporation or large company, important decisions are made every day. To make sure that the decisions that affect the company’s value, like mergers or going private, are fair to all parties involved, qualified business analysts or advisors are commissioned to come up with a professional evaluation. Such a report is known as a fairness opinion. Keep reading to learn more about fairness opinions, their purpose and their uses.
Overview and Purpose
A fairness opinion is essentially a professional opinion that analysts or advisors formulate with the support of data collected during an evaluation which aims to determine whether a particular transaction is fair. Depending on the corporate decision being evaluated, the fairness opinion can examine price, legality, potential risks involved, terms, and potential conflicts. The professionals who prepare the report are usually hired from a third party. The fairness opinion is supposed to act as an objective analysis; it is simply a black-or-white finding to determine if the decision being evaluated is fair or not.
Mergers and Acquisitions
Fairness opinions are often employed for mergers and acquisitions. Mergers and acquisitions involve buying, selling, dividing, and combining different companies to the advantage of all parties. The purpose is to help companies become more dominant in their chosen sectors through collaboration.
While a merger is the legal consolidation of two companies into one, an acquisition occurs when a company acquires another as the new owner or as a subsidiary. In mergers and acquisitions, a fairness opinion is required to establish whether the arrangement is fair to each party involved. This is especially crucial for acquisitions, in which CEOs have to agree that joining together is in the best interest of their respective companies. Mergers and acquisitions often present situations where the stakes are high and all parties involved need to be assured that they can trust the deal they reach to be fair.
Fairness opinions are also helpful in buybacks. More accurately referred to as a stock buyback or share repurchase, a buyback occurs when a company re-acquires its own stock. This is especially crucial in the United States, where American firms have bought back more than $500 billion of their own stocks in the last 12 months alone. Usually a company can buy back its own stock by giving its shareholders cash in exchange for a reduction in the number of outstanding shares.
The U.S. Securities and Exchange Commission rule 10b-18 contains the requirements for stock repurchasing in the U.S. In some cases, a company might call for a fairness opinion when it wants to “split off” a section of its business as a separate company; this type of corporate action is referred to as a spin-off, or starburst. Fairness opinions can also be sought out as a result of privatization, a situation in which the company decides to disable equity securities and debt from being publicly traded on a stock exchange.
Tips to Keep in Mind
If your company is going to be making a large financial decision with another party in the future that could affect your shareholders, consider seeking out a fairness opinion from appraisal experts like the professionals at Appraisal Economics. When you do, it’s helpful to keep a few tips in mind. Even with the help of a fairness opinion, all parties involved should be aware of things that are not included in the report. For instance, analysts do not look into the best deal or price possible; they are merely concerned with whether the price on the table is fair. All parties involved in the deal are encouraged to ask questions for clarification.