Investment Banking Fairness Opinions: Profitable and Prestigious, or Glamorless Gruntwork?

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Investment Banking Fairness Opinion“Morgan Stanley is acting as financial advisor to the buyer and Credit Suisse is acting as financial advisor to the seller, with the fairness opinion provided by Houlihan Lokey.”

So we’ve been over this “financial advisor to the buyer and seller” stuff before, but what about that fairness opinion bit?

You always see sentences like the one above at the bottom of deal announcement press releases – so what is this mysterious “fairness opinion,” why does it matter, and what should you do when your VP calls you at 2 AM and asks you to help out with one?

What are Fairness Opinions and Why Do Banks “Provide” Them?

A “Fairness Opinion” is just a detailed valuation of a company that’s being sold (if you’re representing the seller) or a valuation of the company that your client is buying.

Right before a deal is announced, the bank that prepares the Opinion presents it to the Board of Directors and concludes whether or not the deal is “fair” based on the purchase price and deal structure.

As you might guess, banks never say a deal is “unfair” – the Opinion is just a rubber stamp to justify the deal to investors.

While they’re not technically required by law, Fairness Opinions almost always get issued for deals that involve the sale of public companies due to lawsuits: no matter how much a company sells for, someone is bound to sue them.

Even if the company is worth $100 million and it gets sold for $1 billion, some random shareholder with too much time on his hands will argue that it should have been sold for $10 billion and will start a class-action lawsuit.

The bank’s Fairness Opinion is filed along with all the other documents related to the transaction (the definitive agreement that includes the terms of the acquisition, for example), and serves as evidence when lawsuits start arriving.

Why Should You Care About This Legal Nonsense?

Bankers have no love for lawyers, but you need to know what Fairness Opinions are and how they work because:

  1. The deals you work on determine your exit opportunities, your ranking and bonus, and how much you learn.
  2. You will be asked to work on or help out with Fairness Opinions from time to time, so you need to know whether to say “yes” or to claim you have other urgent deadlines.
  3. Some banks and groups do more Fairness Opinion work than others – you need to understand this upfront because it affects which bank and group you select.

When Do Companies Request Fairness Opinions?

99% of the time they get issued when there’s a public company being sold – you do not do Fairness Opinions for equity or debt deals, so if you’re in an ECM, DCM, or Leveraged Finance group you won’t deal with them.

If you work with mostly private companies, you also won’t see Fairness Opinions because private companies have far fewer shareholders (well, except for Facebook and its clever skirting around the rules) and are often closely held by the founders or VC/PE investors.

Fairness Opinions might also be issued when:

  1. There’s a management buyout or take-private (a PE firm acquires the company via a leveraged buyout and turns it private).
  2. A public company divests one of its divisions.
  3. There’s a bankruptcy, liquidation, restructuring scenario (less common).
  4. There’s a hostile takeover – in this case it would be called an “inadequacy opinion” instead and would be used to defend the target by claiming that the offer is not fair.

In short: whenever there’s a high chance of getting sued, companies request these Opinions and use them to defend themselves in lawsuits.

Outside the US, Fairness Opinions are common in some countries (Western Europe) and not common in other places (emerging markets). Whether or not they’re required depends on the legal system in the country, but you almost always see them for public company transactions in developed markets.

How to Issue a Fairness Opinion, Part 1: Before the Deal Comes Together

M&A deals come together in different ways: sometimes the company itself wants to sell, other times investors are getting impatient and force them to sell (Zappos), and sometimes a buyer jumps in with an attractive offer and starts a bidding war (YouTube).

If it’s the last case, where a buyer swoops in with an offer to buy the company, no one thinks about the Fairness Opinion until that point.

But if it’s one of the other scenarios, then the seller may hire an investment bank to find a buyer. If they do this, in the initial contract they might also give the bank the right to issue a Fairness Opinion in addition to advising on the deal process.

You see that sometimes, but many times the “financial advisor” bank and the “Fairness Opinion” bank are different.

The same bank advising a company on its sale and also saying whether or not the deal they get is “fair” is hardly objective – so executives and regulators believe that having a different bank issue the Opinion is more “impartial.”

If a different bank is providing the Fairness Opinion, they are not notified until the deal is about to be announced – doing so any sooner than that would create unnecessary work because M&A deals often fall apart in the early stages.

How to Issue a Fairness Opinion, Part 2: Just Before the Deal is Announced

Now comes the fun part. A couple factors make the actual construction of the Fairness Opinion especially painful:

  1. You are under extreme time pressure – you get a few days, and sometimes up to a week or a bit longer. This happens because the process is last-minute and occurs only when everyone is 99% sure the deal is going through.
  2. You must be excruciatingly precise – this is where bankers’ reputation for “attention to detail” comes from. This valuation could be used as evidence in lawsuits, so if you’ve added back the incorrect amortization amount when calculating EBITDA, you might be thrown into a snake pit.

Normally when you value a company you don’t have to be super-precise: bankers ask for quick valuations all the time, and if you spent hours going through a company’s SEC filings (or equivalent government organization abroad) you would never get anything done.

So you pull a lot of information automatically using tools like Capital IQ and Factset and rely on their numbers.

But when you’re working on a Fairness Opinion you can’t do that – rather than just pulling the LTM (Last Twelve Months) EBITDA from Capital IQ, for example, you have to look at a company’s income statements and cash flow statements (for the correct non-cash charge numbers) to calculate it.

And then you would have to look through the Notes to the Financial Statements and the MD&A to find all the non-recurring charges and other accounting shenanigans that you need to remove.

Another analyst will also check your numbers, your associate will check them, and even the VP may get involved depending on the deal.

To make things even more fun, this entire process will be a last-minute effort that requires all-nighters over the few days you get to complete it.

Oh yeah, and then the deal announcement itself is often delayed – so you need to monitor the seller and all the other companies you’ve used in your analysis and update the numbers when someone announces earnings, issues debt or equity, or does anything else that affects its numbers.

When you finish the Opinion and everyone has checked it over 52 times, you then present it to the Fairness Opinion Committee at your bank and explain all the numbers to them – if they see something they don’t like, you get to re-do that part.

And then when you finally get their approval, the senior bankers working on the deal will present it to the Board of Directors of the company and sign off on the decision.

Sometimes they actually present it to the company’s Special Committee – if one was formed for the deal – but usually it’s to the Board.

Internationally the entire process may be a little less painful, but it depends on your group and the country you’re in – in London, for example, there’s no difference and you will still spend hours poring over filings and adjusting for capitalized leases, pensions, and other trickery.

Why Do Banks Provide This Service?

Simple: it’s easy money and easy prestige for banks, especially for the senior bankers that don’t have to suffer through ultra-precision.

Fees paid to banks in a sell-side M&A deal are a percentage of the sale price (the equity value of the deal, not the enterprise value), and that percentage scales down as the size of the deal increases.

For a $500 million deal, the bank might negotiate a 1% fee and therefore earn $5 million if the deal closes. For a $5 billion deal, it might be 0.2% or 0.3%, for $10-$15 million. For deals in the $50 billion range – very rare – the fee might be around $50 million (0.1%).

With a Fairness Opinion a bank earns a much lower fee – it might be in the hundreds of thousands for smaller deals up to the low millions for larger deals – but it earns that fee with far less time and effort.

Let’s say that a bank is advising a company on a $50 billion deal – something that large would take years to put together (unless we’re in the late 90’s and it’s happening all the time), and they might earn a $50 million fee on the actual advisory work if the deal closes.

The bank that issues the Fairness Opinion might earn a few million – let’s call it $5 million – but it earns that fee with 1/100th the amount of time and effort that the financial advisor put in.

The other, really important point is that the bank earns that fee even if the deal gets announced but does not close – it’s not like M&A advisory fees where they only get paid out when the deal closes.

So a bank could make tens of millions of dollars by issuing Fairness Opinions for deals that never close.

The thinking here is that paying banks upon completion of the Opinion rather than when the deal closes makes them “less biased,” but it had the unintended consequence of making FOs extremely lucrative for risk-averse bankers as well.

Got Prestige?

In addition, the bank receives league table credit for issuing a Fairness Opinion – so a bank that issues 50 Fairness Opinions but doesn’t advise on any deals would look as good as a bank that has advised on 50 real deals, at least according to a table that ranks banks by # of deals.

If you look at a table that ranks banks by fees earned instead, the Fairness Opinion-centric bank won’t look as good – but you can bet they won’t be showing that version of the table in their pitch books.

Often Fairness Opinions are given to banks as “favors” for work done in the past.

A company might go with a bulge bracket bank for the M&A advisory work for political reasons, but the CEO might know a senior banker at a boutique and might have worked with them in the past – in this scenario the company might give the Fairness Opinion assignment to that boutique as a favor for their past relationship.

The boutique will still feel as if its toes have been stepped on, but the pain won’t be quite as acute if they can make at least some money off the deal anyway.

What Banks and Groups are Known for Fairness Opinions?

No, I’m still never going to rank the banks, so please go away right now if you’re expecting that.

But some banks and groups – for better or worse – are known for Fairness Opinions.

Houlihan Lokey is consistently ranked #1 in Fairness Opinion market share, beating even the bulge bracket banks and elite boutiques.

At HLHZ, the Financial Advisory Services (FAS) group does all the Fairness Opinion work and the other groups don’t touch them. And yes, the FAS group provides other services like solvency opinions, purchase price allocations, and more technical accounting-esque work as well.

Other banks – from bulge bracket to elite boutique (Perella Weinberg is also well-known for FOs) to middle-market – also do Fairness Opinions but no one else dominates the space as HLHZ does.

Groups such as ECM, DCM, and Leveraged Finance do not work on Fairness Opinions because they’re not required for debt or equity deals – so you only have to worry about them if you’re in an M&A, Restructuring, or industry group.

Of those, industry groups are the most likely to work on Fairness Opinions, although you may get asked to help out even if you’re in another group.

Outside of investment banks, some Big 4 firms also do Fairness Opinion work and dedicated valuation boutiques also issue Opinions from time to time.

Take Me to the Examples

Finding actual Fairness Opinions is not the easiest thing in the world, so here are links to good examples. Some of these are quite old, but corporate valuation barely changes over time so they are equally valid today:

You’ll see the usual valuation analyses there: public company comparables, precedent transactions, premiums, DCF, future share price, and so on.

Even if you have no interest in Fairness Opinions, I strongly recommend looking at those examples because they show you exactly how banks value companies in the real world, common multiples, and other questions you’ll get in interviews.

Sometimes Fairness Opinions also include mergers models and LBO models – merger models are more common on deals where it’s more of a merger as opposed to a behemoth acquiring a much smaller company, while LBO models are more common for LBO deals.

You do not include a detailed 3-statement model for the seller, nor do you show all the supporting work that went into the numbers – only the output matters.

If you want to find more examples yourself, you can search for S-4 or DEF 14A (proxy) forms on the SEC EDGAR site; for countries outside the US you will have to go to the company’s website directly and hope they have it there, or go through whatever online database has securities filings in your country.

So, Should You Work On Fairness Opinions?

I am not a huge fan of Fairness Opinions because they represent the worst parts of bankinglast-minute all-nighters and combing through filings to make small tweaks to numbers that don’t make a difference in the final analysis.

It’s good to get exposed to a Fairness Opinion at least once, but similar to climbing Mt. Fuji or going ice swimming, you don’t want to get exposed repeatedly – especially at the expense of real deals.

Yes, it’s good to learn how to find all the hidden charges and shady tactics a company is using but 99% of the time they don’t make a difference in your final analysis – and on the buy-side you rarely go into such detail unless you’re about to close an investment and you’re in the final stages of due diligence.

So if your VP or staffer waltzes in and asks if you have any “bandwidth” to help out with a Fairness Opinion, cite an urgent deadline and say that you might be able to check some of it, but can’t do it all yourself because of [Important Client-Related Item] that’s due in 2 days.

And if you’re out of excuses, suck it up and do it – but make sure that you hand it off to the 1st years or interns next time around.

About the Author

is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys learning obscure Excel functions, editing resumes, obsessing over TV shows, and traveling so much that he's forced to add additional pages to his passport on a regular basis.

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29 Comments to “Investment Banking Fairness Opinions: Profitable and Prestigious, or Glamorless Gruntwork?”

Comments

  1. FairnessGuy says

    There is no such thing as an “unfairness opinion.” Rather such opinions proposing the rejection of an offer (such as the rebuke of a hostile takeover) are generally called “inadequacy opinions” as this provides a much lower threshold to demonstrate than the very relative concept of “fair”. This can be seen in the attempted TakeTwo transaction a few years back: http://www.nytimes.com/2008/03/30/business/worldbusiness/30iht-deal.4.11538616.html

    Additionally, fairness opinions are excellent work for analysts relatively new to valuation and provide an opportunity to really sharpen the most important skill a junior banker has: valuation. Additionally, the quality of work certainly beats managing a data room in sell side, or tracking a diligence list in buy side.

    • says

      Yeah, except for the fact that PE firms and hedge funds don’t care about Fairness Opinions you would almost be right. I agree you can learn something valuable from them and that valuation is important, but unless you have solid deal experience as well you don’t have a good shot at buy-side recruiting.

  2. Jenny says

    So I don’t get why everyone wants to move to PE/or the buy side? It’s different it’s that you’re doing DD on a lot of different companies up front to see what you want to invest, so essentially, it’s just investing in a company isn’t it Brian?

    So technically, wouldn’t wealth management (when you’re just picking stocks) and stuff be considered PE? What is different than PE than other picking stocks case, and what’s the real definition of PE (in simple terms)?

    • says

      The difference is that with asset management, it’s not your own money. You’re managing clients’ money and ultimately it’s up to them to approve your decisions. It’s also far smaller-scale (millions / tens of millions) as opposed to hundreds of millions or billions at work. So it’s not really comparable to PE.

      As for why everyone wants to do PE, money, better hours (sometimes), prestige, the usual.

  3. Disco says

    Brian,

    Great article.

    Had a request for you. I know you have written articles on breaking in from different regions around the world.

    I was wondering if you could shed some light on the quality/type of dealflow depending on the region.

    This is asking the type of deals conducted at BBs in NYC as opposed to Chicago or LA in terms of sector, clients, etc.

    Thanks in advance!

    • says

      Thanks for the suggestion. I’m not sure there is much to say because most regions can be described very simply, basically smaller deals (for the most part) and different industries (SF = tech/healthcare, LA = gaming/media/entertainment/some biotech, Houston = energy, Chicago = industrials) but I’ll see if there’s room to do something more in-depth.

      • Disco says

        Thanks for the reply.

        Yea that makes sense that there might not be much to discuss. But it may help potential bankers make an informed decision.

        Either way, thanks again for the clarification.

        Regards

  4. Ben says

    Brian,

    Excellent article.

    If I receive a technical question that I have absolutely no idea as to what the answer is, then is the most appropriate thing to say is “I’m not sure”? Also, what if I know a part of the question (ie: how does XYZ flow through the financial statements) but I don’t know the entire answer, should I try to tell them what I do know and guess and the part I don’t or should I say “I’m unsure from here”?

    Thank you.

    • says

      Either say you don’t know it if you really don’t know it at all, or say the part that you do know if you know part of it and then say you’re not sure what comes next.

  5. miran says

    GS IBD hands down.

    Either way you’ll be working like a factory worker for 0-3 years. Bear in mind if you stick with GS and you try leave before your analyst years are over and they find out you’ll be fired immediately (word from an MD I know personally). Its very much about them retaining staff.

  6. priya says

    Hi, just a quick question – I’m having a problem crafting my “walk me through your resume” story for summer internship interviews.

    In specific, I’ve somehow only had internships in small PE shops in college, and in the part where I say how ibanking will lead me to future success in my long term career, I can’t seem to find stories other than how ibanking will eventually lead to PE. Especially given my previous internships, I’m afraid this will sound like I’m going to jump off ship quickly once I get into investment banking, and saying that I’d like to be a CFO or an advisor doesn’t sound very convincing again based on my background.

    Any suggestions?

    • says

      Just say that you found PE to be too operationally-focused and you want to do more finance and deal-work / negotiations instead, so you fit in more with IB.

  7. Zack says

    Brian,

    For SA recruiting, I have interviews coming up with an elite boutique and a mm firm. What would be the best way to answer “what other banks are you interviewing with?” for each bank? I only have two interviews and all of the other banks have already selected candidates that they want to interview so I can’t really say “other mm banks (or elite boutiques)” cause I’m sure they will check to see if that is true.

    Any advice?
    Thank you.

  8. JJ says

    Hi there,

    Any advice on how to present your contribution as an 1st year to a fairness opinion (c.$4bn deal) on your CV? Quite intense valuation work but all the DD and exec has been already done by the main advisor. What’s your take on this?

    • says

      Just explain the more technical parts of what you did and indicate how it affected the behavior of the parties involved (if it did) – but sometimes you can’t do that or it didn’t matter as much so don’t worry about it if you can’t.

  9. Sarah says

    Brian,

    very nice article.

    I do have a question, how does a final interview for an analyst position in “fairness opinion” look like? Will there still be technical questions?
    I do have one upcoming and I’m very curious.

    Thank you so much.

  10. 21 fairness says

    I’m 21, an associate in an investment bank in Asia. I am task to two write two fairness opinions. I dont understand why they did delegated it to me……. I think i’m dying…..

      • 21 fairness says

        Hi nicole, are you in IB as well? Whats your email? Lets share experiences. I need a boost, the fairness opinion designated to me drains all of my motivational reserve.

        • M&I - Nicole says

          Haha I am no longer in IB so I can’t share your pain with you though I can empathize with you. Hang in there! :)

          • 21 Fairness says

            Thanks, I haven’t slept well for the last 6 weeks. I cant sleep because I feel so worried about the deal. I have a board presentation on the client on Thursday. Help me god!!

  11. Ivy says

    Brian,

    Thanks for the article, it’s great!
    I have a question, is it possible for a public acquirer to only use fairness opinion, or only use advisory for the acquisition? Or it has to use both and better to be from two independent financial advisors?

    Also, I downloaded some financial adviser related data for Chinese M&As from Thomson One Banker, and find that public acquirers are most likely to only use fairness opinion when acquiring subsidiary firms, followed by acquiring private firms, then public firms. Is this the case for U.S. M&A deals too? Is it because when public acquirers only require the fairness opinion service is when they have fixed targets, and more often these targets are subsidiary and private firms, so it causes the trend I observed?

    Looking forward to hear your answer, thanks!

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