What is Fairness Opinion?
In the M&A context, a fairness opinion is a document provided by the seller’s investment banker to the seller’s board of directors attesting to the fairness of a transaction from a financial point of view. The purpose of the fairness opinion is to provide selling shareholders with an objective third-party analysis of the deal’s fairness.
Fairness Opinion: Definition in M&A
A fairness opinion is important because shareholder interests are not always perfectly aligned with the interests of management. Management, for example, may favor one bidder over another (something Salesforce claimed happened when LinkedIn rejected its offer), might be less motivated to conduct a broad auction, or could negotiate terms post-acquisition that favor themselves over shareholders.
The fairness opinion is designed to protect shareholders from the above situations while also protecting seller management teams and boards from shareholder lawsuits upon consummation of the deal.
Learn More → Investment Banking Primer
Fairness Opinion Example: Qatalyst Partners and LinkedIn
When Microsoft acquired Linkedin in June 2016, LinkedIn’s investment banker, Qatalyst Partners, submitted a fairness opinion to the LinkedIn board as a final step before the board approved the deal.
The representatives of Qatalyst Partners then rendered Qatalyst Partners’ oral opinion to the LinkedIn Board, subsequently confirmed by delivery of a written opinion dated June 11, 2016, that, as of June 11, 2016, and based upon and subject to the various assumptions, considerations, limitations and other matters set forth therein, the per share merger consideration to be received … was fair from a financial point of view.
The fairness opinion is included in Linkedin’s merger proxy. It basically states Qatalyst’s belief that the deal is fair.
The analysis that supports the fairness opinion is the same analysis that goes into an investment banking pitchbook:
In addition to housing the fairness opinion letter, the LinkedIn merger proxy (like virtually all merger proxies) includes a summary of Qatalyst’s valuation methodologies and assumptions as well as the projections (provided by LinkedIn management) Qatalyst used to make the valuation.
Qatalyst’s DCF, trading and transaction comps analyses yielded values for LinkedIn ranging from $110.46 to $257.96. The actual purchase price was $196.00. We summarize their valuation conclusions below (quoted text comes from the official LinkedIn merger proxy):
|Valuation methodology||Inputs, assumptions and conclusions|
1 Cynics will argue that Qatalyst’s dilution factor and modified EBITDA “innovations” are an effort to show a lower valuation, thereby making the purchase price offered by Microsoft seem more than fair to LinkedIn’s shareholders. We agree that Qatalyst, like all fairness opinion providers, is incentivized to have the fairness opinion show that the deal is fair (see our discussion on this below). However, notwithstanding the out-of-whack incentives inherent in fairness opinions, both the dilution factor and modified EBITDA methodology are defensible if used consistently. Neither we nor the cynics, however, have access to Qatalyst’s full analysis, which would be required to sort out whether the methodology is actually being used consistently.
Qatalyst Modification of EBITDA (“Adjusted EBITDA”)