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Finance: What is a Fairness Opinion? 0 Views

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What is a Fairness Opinion? Fairness opinions are used to help parties involved in any sort of changes in business ownership that involve selling. They are used with things like mergers and acquisitions; analysts look at the transaction as a whole and give their opinion regarding the selling price. The buyers and sellers are then able to use this information to ensure that everyone is receiving the best deal possible.

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Transcript

00:00
finance a la shmoop what is a fairness opinion? well shouldn't there be
00:07
something about love and war that goes here you know like not all's fair and [Woman throws page at a man]
00:12
maybe not all right two companies the one who boogs and we love gross each owned
00:17
40% of a small operating business that makes nostril trimmers shaped like the
00:24
16th century French apothecary the division yeah it's called [Nose trimmer vibrates]

00:28
Nostrildamus..........
00:32
A dozen other shareholders own the remaining 20% of the company privately
00:37
the one who boogs wants to buy out the 40% of Nostrildomus that we love gross
00:43
owns and the 20% owned by everyone else well they've co-owned this company for [Longsnout and sneezy walking together]
00:49
decades since great-grandpappy longsnout partnered with another great grandpappy
00:54
sneezy yeah no relation to the Disney family there
00:58
the division will do 100 million dollars in revenue this year and generate 15
01:02
million in cash profits alright so how does it get valued because there's got
01:06
to be a buyout here of the remaining percentage and it's not valued
01:10
separately at the moment why is it important for that value to be well fair?
01:15
while lots of potential for corruption here and unsquare dealings may be gross
01:20
would sell out cheap in return for bugs to back out of the Russian territories [Men with briefcases for heads appear]
01:25
where it does big business sort of a tit for tat business deal but then the 20%
01:30
minority owners of the division would be screwed because they didn't get full and [Minority owners protesting]
01:34
fair price for the division that was sold and well they don't benefit in the
01:38
way that gross would benefit by then being able to run the tables or nostrils
01:42
of Russia you know and the apostrophe stans that it controls right so
01:47
everyone's got to be treated fairly here so that's not easy and especially in
01:52
those stans you know like where Borat comes from so in order for everyone to [Borat wearing a mankini on a beach]
01:56
be treated fairly a wizened investment banker is usually called in to write a
02:03
legal fairness opinion and that opinion will likely be inspected by judges and
02:07
other bankers and lawyers should anything go awry so that banker has to
02:12
be very thorough and careful in the way that they calculate [Person punching numbers into calculator]
02:15
the values of each division and their rationale such that everyone gets paid
02:20
fairly and squarely all right well that fairness opinion is used to frame the
02:24
purchase price in the terms of whatever deal ends up going down or up a big part
02:31
of the bankers value-add is creative solutions to bridge valuation gaps where
02:35
one company thinks it's worth more than the other or at least more than what
02:39
it's getting in the deal and while bankers fairness opinions focus mostly
02:43
on just the cash value of the company well like you can imagine that owning or
02:49
controlling a hundred percent of the company would come with all kind of
02:52
benefits if nothing else just not having to report to tons and tons of
02:55
shareholders so what's that right to not report worth and everyone can argue [Man and woman arguing on the sidewalk]
03:00
about that in a banker who's done lots of these transactions can point to other
03:03
transactions that came with a 12% premium for the right to not have to
03:08
report to tons of tons of shareholders right so that's just one example
03:11
bankers often whisper through one side or the other deal dials that can be [Woman banker whispering to male banker]
03:16
turned where companies then feel more fairly treated and then happier to sign
03:21
on the dotted line because when they do well then the banker gets paid well
03:24
those whispers are things like extended term payments like they're buying for
03:29
cash could they pay over ten years and what if the the acquirer decided to pay
03:34
with equity like their own stock instead of all cash and then there's like 50
03:38
other little things like that the companies care about that bankers can
03:41
help them you know turn the dials and if they didn't care about any of those [Person turns dial]
03:44
things well then they'd be more likely to you know take a nosedive
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