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Fairness Opinions in M&A Deals

In the recent Sallie Mae buyout litigation hearing held before Delaware Vice Chancellor Leo Strone, buyout group counsel Mark Wolinsky opined on the merits of fairness opinions thusly: “A fairness opinion, you know — it’s the Lucy sitting in the box: ‘Fairness Opinions, 5 cents.’” A new paper by economists Makhija and Narayanan provides empirical support for that proposition:

Fairness opinions provided by investment banks advising on mergers and acquisitions have been criticized for being conflicted in aiding bankers further their goal of completing the deal as opposed to aiding boards (and shareholders) by providing an honest appraisal of deal value. We find empirical support for this criticism. We find that shareholders on both sides of the deal, aware of the conflict of interest facing advisors, rationally discount deals where advisors provide fairness opinions. The reputation of the advisor serves to mitigate this discount, while the contingent nature of advisory fees appears to have no impact. Furthermore, consistent with the criticism of fairness opinions, we find evidence suggesting that fairness opinions are sought by boards for the legal cover they provide against shareholders unhappy with the deal’s terms. Thus, altogether our findings suggest that investment bankers and boards may be complicit in using fairness opinions to further their own interests at an expense to shareholders.

Fairness opinions are just an insurance policy board members buy using the shareholders’ money. To the extent the Delaware case law effectively mandates fairness opinions, or even provides incentives for their use, that case law has the effect of wasting shareholder money.