Valuation Methods in Fairness Opinions: An Empirical Study of Cash Transactions

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American Society of Appraisers Business Valuation Review™
Summer/Fall 2012 Volume 31, Issue 2 pp. 55-74
Gilbert E. Matthews, MBA, CFA


This study examined empirically the valuation methods that are currently being used in fairness opinions in cash acquisitions and the way in which they are applied. A search of the SEC's EDGAR database for two twelve-month periods identified 315 cash acquisitions with 352 fairness opinions containing descriptions of their methods and analyses. The findings showed the discounted cash flow, comparable company, and comparable transaction methods in predominant use, with most opinions employing more than one method and almost half drawing on the much-disparaged “premiums paid” approach. In addition, a comparison of the fairness opinion approaches used in related party transactions with those used in arm's-length transactions found one disparity.The study then scrutinized specific variables in the income approach, focusing on discount rates and terminal values. This commentary discusses the broad spreads of the discounted cash flow inputs that were found and the consequences thereof. For analyses using the market method, the study examines the multiples applied, finding, among other things, that price/earnings ratios were used more frequently in comparable company than in comparable transaction analyses. Additionally, the study examines the way in which enterprise value was defined for use in the market method; it is clear that investment banking practice is to deduct cash in calculating enterprise value when enterprise value is the numerator in a multiple.Throughout the study, two other lines of inquiry were investigated: whether valuators applied different approaches when valuing financial institutions and whether there were material differences in practice among the various investment banks rendering opinions.
Valuation Methods in Fairness Opinions: An Empirical Study of Cash Transactions
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