M&A Valuation, Fairness Opinion

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M&A Value is different from the Fair Market Value or Formal Value. M&A Value's characteristics are:

•Real transaction/ dynamic       

•Buyer and seller have different knowledge and negotiating skills       

•Parties imprudent or compelled to act       

•Non-cash consideration       

•Ultimately beauty in eye of beholder (specific to investor - investment value)

Types of M&A Valuations are:

•Preliminary Valuation: initial frame of reference for client and intermediary, can also be used for strategic planning and reengineering       

•Buyers Synergistic Value: private & subjective       

•Dynamic Valuation: actual deals       

•Formal Valuation: only reference

The Sales Side Preparing the Business for Sale (Exit Planning):

•Three years planning        

•Financial reporting clean up, get GAAP accounting, preferably an audit       

•Shoring up management and operations       

•Gather and follow market place and industry research and intelligence       

•Remove and liquidate non-operating assets       

•Advance tax planning, especially entity selection   

•Raise the profile of the business

Types of Synergies to the Buy Side:

•Operational    - Revenue Enhancement - Expanded sales channels, joint market opportunities, etc.   - Expense Reduction - Duplicative technology, facilities, and purchasing gains      

•Financial - Better Access to Capital or lower cost of Capital      

•Access to new markets       

•Growth in market share       

•Access to new products       

•Access to talent       

•Enhanced reputation       

•Reduction in operating expenses       

•Access to distribution channels       

•Access to new technologies       

•Reduction in number of competitors       

•Access to new brands

A “Fairness Opinion” is a detailed valuation of a company that’s being sold or a valuation of the company that the client is buying.

Right before a deal is announced, the valuer 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.

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 valuer’s Fairness Opinion is filed along with all the other documents related to the transaction and serves as evidence when lawsuits start arriving.

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.

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.

A solvency opinion is a brief letter typically from a financial advisor to a company’s Board of Directors, stating that, after giving effect to a specific proposed transaction, the company will be solvent, according to the following test:

When is a Solvency Opinion Needed?

Public/private company LBOs              

Corporate spin-offs          

Leveraged recapitalizations          

Dividend recapitalizations

Historically, purchaser (in case of LBO) or company (in case of dividend/recapitalization) obtains an opinion upon request of secured lender.  A solvency analysis encompasses valuation and cash flow tests to determine whether the aforementioned solvency tests are met.

Balance Sheet Test

Perform a valuation to estimate fair saleable value for the subject company. Deduct the stated value of the subject company's liabilities, including all contingent liabilities identified to us by the company.

Analyze the “equity cushion” or the amount by which the assets exceed the liabilities, to determine whether the company would be left with a reasonable amount of capital for the operations of the business in which it is engaged. Determine if the transaction has impaired the capital of the company.

Capital Adequacy Test

As part of the analyses developed for the balance sheet test, we analyze the “equity cushion” or the amount by which the assets exceed the liabilities following the proposed transaction, to determine whether the company would be left with a reasonable amount of capital for the operation of the businesses in which it is engaged. We Also determine whether the indicated “equity cushion” exceeds the aggregate par value of the company’s issued capital stock. This is known as the “Delaware Surplus Test.”