FTI Consulting: M&A fairness opinions gaining terrain

Executives that find themselves in the midst of a merger/acquisition process are increasingly choosing independent advisors above related investment bankers. From a long term economic perspective, a sensible approach, reveals a recent survey from FTI Consulting.

As part of the due diligence process in complex mergers, acquisitions, disposals and other transactions, independent fairness and solvency opinions play a key role as they provide a legally defined basis for setting the price on a transaction. With an increasing regulatory load on transactions, and as a way to protect themselves from litigation, boards are increasingly turning to this instrument, even if fairness and solvency opinions are not a legal requirement in a transaction.

In an online survey by FTI Consulting, over 150 transaction lawyers, private equity and hedge fund managers and corporate executives were questioned about the use of independent advice in mergers and solvency deals. The majority of survey respondents indicated that in theory is it is better to have fairness and solvency opinions provided by independent experts, compared to opinions provided by related investment bankers.

FTI reports that seven times as many of the respondents trusted fairness opinions from independent providers in terms of effectiveness in defending boards from litigation over the opinions provided by investment banks. While the deal makers trust independent voices in theory, in practice, since 2008, 71% of fairness opinions they observed were provided by parties “running the deals they opine on.” Of the respondents however, 62% believe that stepping to an independent fairness opinion is on the rise since 2008.

Early stage commitment
Besides questioning the value of independent opinion, the manner in which independent third parties are engaged was also considered by the FTI survey. One of the findings was that 73% of respondents agreed that providing independent oversight in the form of fairness opinions early in the merger deal trajectory, before forecasts and deal terms were finalised, allowed for a more effective process. For solvency, 90% of respondents indicated that early oversight from an independent body led to a better outcome.

“In today’s highly regulated and litigious transactional environment, boards should ensure that they are taking the appropriate actions to mitigate legal risks and uphold their fiduciary duty to shareholders,” says Roy Salter, Senior Managing Director in FTI Consulting’s Corporate Finance practice. “This study overwhelmingly shows that fairness and solvency opinions prepared by independent providers, with strong industry experience that are hired at an early stage in a transaction, is the best approach for defending a transaction’s fairness, regardless of the size or industry.”