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Sunday, March 20, 2005

Are Fairness Opinions Fair?

This article in the New York Times is the second mention of "fairness opinions" in the press in the last two weeks (the first was about a week or so back in the Wall Street Journal). So, it's robably worth a mention. It starts out:

So maybe all is not fair in love and investment banking.

For the last several months, regulators have been on Wall Street's back about "fairness opinions," those conflict-ridden fig leaves that banks provide to clients to justify a proposed merger or acquisition. The National Association of Securities Dealers has just finished gathering comments from the public on how to change the practice and is expected to set new rules for fairness opinions soon, possibly in concert with the Securities and Exchange Commission.
The piece does a pretty good job of laying out the agency problems involved: The same advisors that an acquirer (or target) uses on the pricing of a deal then writes a "fairness opinion" that the companies' directors use to protect themselves agains litiation; The bank that advises the target often also provides financing to the buyer (a practice known as "Staple financing"; There is typically little disclosure of the conflicts of interest or compensation invoilved.

Click here for the whole piece.

1 comment:

Daniel O'Connor said...

Fairness opinions should only be issued by independent third-party advisors... never by one of the advisors to a party to the transaction... certainly not the investment bank that set the transaction price. The fees paid for a fairness opinion should be a simple, one-time, flat fee not contingent upon the completion of the transaction.

I used to do this for a living and this was just common sense business ethics and a standard accepted by the nation's biggest valuation firms. Has the industry really deteriorated as much as the NYT reporter suggests?