Revealing look at fairness opinions

BVWireIssue #179-4
August 23, 2017

During a recent webinar, BVR presented a preview of its new Fairness Opinion Research Service (FORS). This service—scheduled to launch this October—gives you full access to hundreds of actual fairness opinions from around the world. What’s more, you can filter a search by any data point or field.

Shining a light: The webinar audience received a handout of a sample document from the new service, an actual “valuation analysis” for a firm proposing to do a reverse stock split. The document contains disclaimers stating that the valuation experts relied on management’s forecasts and projections and assumed they were accurate, taking no responsibility for independent verification. In other words, they accepted management’s projections without question.

This brings up the question of how can a valuation analysis be done without scrutinizing management’s projections and how can a fairness opinion be rendered if no one questions the projections. One answer is that fairness opinions are not genuine valuations and do not fall under standards such as USPAP. They are designed to take certain specific assumptions agreed on with management to come up with an acceptable range of a deal price. They are also designed to provide evidence that boards have sought professional financial and legal advice about a proposed transaction. However, there are critics of the process.

Another document we saw from FORS is an engagement letter from an investment bank for a fairness opinion that includes a contingency fee that’s paid if the transaction is successful. This represents a potential conflict of interest and, to some, a clear conflict. During the BVR webinar, speakers said boards should compensate the financial advisor with a noncontingent opinion fee.

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