Fairness Opinion
AdvancedA fairness opinion is a letter, usually from an investment bank or independent valuation firm, stating whether the price or terms in a proposed transaction, such as a merger or acquisition, are fair from a financial point of view to a company's shareholders.
Boards of directors approving major transactions have a duty to act in shareholders' interests. A fairness opinion provides independent financial support for their decision and can help protect directors against later legal challenges.
To prepare the opinion, the adviser analyses the transaction using methods such as discounted cash flow, comparable company and precedent transaction analysis, often summarising the results in a football field chart. It then states whether the consideration falls within a range it considers fair.
For example, before a target company's board recommends accepting a takeover offer of 45 per share, it may obtain a fairness opinion confirming that the price is fair to shareholders.
Fairness opinions have been criticised because the adviser providing them may also earn a large fee if the deal completes, creating a potential conflict of interest. Many companies therefore use an independent adviser with no stake in the outcome. A fairness opinion does not say the price is the best possible, only that it falls within a fair range.
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