Questions about the utility of fairness opinions have periodically seized headlines for many years. As the leading fairness opinion advisor, we can readily speak to the value of the opinions we provide and the best practices we observe in rendering them. But when addressing broad industry criticisms – in particular that fairness analyses generally provide valuation ranges too wide to be useful and that they are too reliant on "mechanical" discounted cash flow (DCF) analyses – our arguments have lacked the force of empirical data beyond our own client work.
Until now. This report – the compilation, review and analysis of more than 3,000 fairness opinions – is the culmination of our efforts to address those criticisms with research. We believe it does that.
We also believe that the report itself can serve as a valuable tool for boards evaluating purchase offers.
Directors seeking fairness opinions have long been left to rely on their own intuition and experience in scrutinizing valuation estimates. Our report provides them with a set of benchmarks, drawn from federal filings, for comparison. They'll now know when a fairness opinion's estimate falls outside the average valuation range against the offer price for similar-sized deals. Our report should empower directors to ask more informed questions, which can only improve the process of deliberating a purchase offer.
We don't expect our study to put an end to the debate around fairness opinions. We do believe it can help elevate that debate by injecting data where there has only been conjecture, by replacing the anecdotal with the empirical and by better equipping boards to make informed decisions.
Fairness Opinions 2006-2016
Most fairness opinions use a robust set of methodologies to produce a useful range of valuations, according to Duff & Phelps' study of more than 3,000 publicly disclosed fairness opinions.
Those conclusions disprove periodic criticisms that fairness opinions generally provide little utility for boards analyzing potential transactions. Specifically, some critics have asserted that fairness analyses produce valuation ranges too wide to provide meaningful information and that, because most fairness opinions are based in part on DCF analysis, the opinions are too reliant on financial projections that have been produced by management and left unscrutinized by the fairness advisor.
We agree that narrower valuation ranges are, intuitively, more useful to boards than wider ranges. However, some deals are likely to produce wide ranges because the companies themselves are difficult to value. The real question is whether wide ranges are pervasive. And while we would also agree that relying solely on DCF analysis (that uses projections company management has fed to the fairness advisor) can be problematic, the follow-up should be to ask: is that really happening?
In an effort to answer those questions, assess the validity of periodic criticisms and determine the overall usefulness of fairness opinions, Duff & Phelps conducted a thorough analysis of more than 3,000 fairness opinions filed with the SEC during the ten-year period ending in 2016. Specifically we looked at forms 14D and DEFM14A, which companies are required to file when they are the target of a purchase offer or require a shareholder vote.
Download - In Defense of Fairness Opinions: An Empirical Review of Ten Years of Data
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