My post on the Tesla/SCTY offer about the ineptitude and laziness that Lazard and Evercore brought to the valuation process didn’t win me any friends in the bank M&A world. And in addition, some pushback was attracted by it, not so much from bankers, but from journalists and lawyers, taking me to the job for not understanding the framework for these valuations. As Matt Levine notes in his Bloomberg column, where he cites my post, “a fairness opinion is not just a real valuation, not a pure effort to estimate the value of an organization from first principles and 3rd party research” (Trust me. No one is setting the bar that high.
What is a fairness opinion? I am not just a lawyer, and I don’t play intend to play one here, but it could very well be to revert back again to the legal description of the term best. In a great article on the topic, Steven Davidoff defines a fairness opinion as an “opinion provided by an outsider a transaction meets a threshold degree of fairness from a financial perspective”. Implicit in this definition will be the assumptions that the outsider is qualified to complete this common sense and that there is some realistic standard for fairness. Note that while fairness views have become part and parcel of all corporate and business control transactions, they are not required either by legislation or rules.
As with so much of business law, especially relating to acquisitions, the basis for fairness views and their surge in utilization can be tracked back to Delaware Court judgments. Fairness Opinions: Current Practice? What about this technique is reasonable, if bankers are permitted to concoct discount rates, and how could it be an opinion, if the amounts are given by management? And who exactly is protected if the end result is a variety of values so large that any price that is paid can be justified?
And finally, if the contention is that the bankers were using professional judgment just, in what way could it be professional to argue that Tesla can be the overall global economy (as Evercore is doing in its valuation)? Towards the extent that what the thing is in the Tesla/Solar City deal is more the guideline than the exception, I would argue that fairness opinions are doing more harm than good. By looking at off a legally required container, they have grown to be a way when a plank of directors buy immunization against legal effects.
By providing the illusion of oversight and an independent assessment, these are making shareholders sanguine that their privileges are being protected too. It really is true that there are cases, where courts have been willing to challenge the “fairness” of fairness opinions, but they have been reserved and infrequent for situations where there is an egregious discord appealing.
- Who will in actuality own the house and how will your passions be secured
- You will be amazed at who your biggest supporters are
- Banks borrow from the Fed at a minimal rate; lend to the general public at a higher rate
- $250,000 for wedded taxpayers submitting jointly
17.62, effectively throwing out the fairness opinion backing the deal. Fish or Cut Bait? Given that the fairness opinion, as employed now, is more travesty than security and a pricey one at that, the first option is to remove it from the acquisition valuation process. That will place the onus back on judges to choose whether shareholder interests are being protected in transactions. Given how difficult it is to improve founded legal practice, I don’t think that this may happen.
The second is to keep the fairness opinion and give it teeth. This will demand two ingredients work, judges that are willing to put fairness opinions to the test and punishment for those who consistently violate those fairness concepts. Many judges have allowed bankers to browbeat them into accepting the undesirable in valuation, using the argument that what they are doing is standard practice and somehow professional valuation.