Fairness Opinions Come to the Fore

M&A shops that provide fairness opinions have seen an upsurge in these assignments in recent months, according to practitioners. While the Enron scandal has increased the urgency with which boards have sought out the financial backstopping that a fairness opinion provides, at least one shop, Houlihan Lokey Howard & Zukin, says it was seeing an upswing in the business even before Enron exploded last fall. “A lot of boards had been requesting the type of insurance policy that a fairness opinion offers, even before Enron focused everyone’s attention on the accuracy of financial reporting,” says Jack Berka, head of Houlihan’s financial opinions and advisory services group. Basically, a fairness opinion is the professional opinion of an investment bank, provided for a fee, regarding the fairness of a price offered in a merger or other significant structural event in the life of a company. Because it addresses the price of a specific deal, the fairness opinion can be used as evidence that the board has acted in good faith in paying a certain price and that there hasn’t been any self-dealing involved in the transaction. With 85 assignments completed last year, Houlihan Lokey ranked No. 1 in the U.S. in providing fairness opinions, when ranked by number of announced and completed deals. Goldman, Sachs topped the fairness opinions list ranked by the value of announced and completed deals in 2001, with $77.7 billion in transactions (22 deals). Houlihan’s total value of deals for which it gave fairness opinions was $11.8 billion. (see page 31 of the February 2002 issue of Mergers & Acquisitions). But the basic fairness opinion has evolved, according to George Holder, a vice president at Fleet M&A Advisors, from the being the work product of one or two bank officers to a collaborative effort by a team of as many as 10 professionals. Represented in this corps of advisers will be investment bankers, accountants, lawyers, and, increasingly, specialists from the specific industry or sector in which the buyer and seller operate. Holder also says that it’s his sense that where the fairness opinion was a formality in earlier years, boards are paying more attention to the reports now. Berka notes that the vast majority of the fairness opinions his firm worked on last year were transaction-related, although some were tied to the kick-off of a new round of capital raising. One advantage of using an independent financial adviser such as Houlihan, he adds, was that it was less likely to be conflicted than the bulge-bracket investment banks. Berka also says that the new accounting rule changes, which did away with the pooling-of-interest accounting treatment, and required companies to write off impaired goodwill in one fell swoop, have created a new use for fairness opinions. “More and more, companies don’t want to rely on their own estimates of when goodwill has been impaired, so they can use a fairness opinion as a basis to justify leaving goodwill on the books or writing it off,” he states.