In Deal Opinions, Independence Takes a Back Seat

NYT.com, Dealbook, December 7, 2007
According to a recent study by Thomson Financial, only 12 percent of deals in which there was a fairness opinion involved an “independent” firm, as opposed to an investment bank that was getting other fees as part of the transaction. It’s a notable statistic, especially when juxtaposed with this one: Nearly three-fourths of the portfolio managers and analysts surveyed by Thomson said they favored using an independent firm for fairness opinions.
Fairness opinions have long been the subject of hand-wringing on Wall Street.
Companies involved in mergers often order up these opinions, but the harsh truth is that they are widely seen as a way to ward off future lawsuits — and not earnest requests for financial analysis.
In general, the firm that draws up the fairness opinion is an investment bank that already has skin in the game. This may be because the bank will get a big advisory fee (much bigger than the fee for the fairness opinion) if the merger is completed. Or it may be because it is also offering financing to the buyer, known as staple financing.
It may come as no surprise that these banks generally find that the proposed deal is, indeed, fair.
Marc Wolinsky, a partner at Wachtell Lipton Rosen & Katz, offered this unusually frank assessment in October: “A fairness opinion, you know — it’s the Lucy sitting in the box: ‘Fairness Opinions, 5 cents.’” (We would note that, for deals valued at more than $5 billion, the median fee for a fairness opinion these days is more like $1.8 million, according to Thomson.)
It is easy to frame the problem, but solutions aren’t so easy to find. Jeff Block, who wrote Thomson’s recent report on fairness opinions, points out that while independence may sound nice, even independent firms depend on referrals and repeat business.
If an independent firm has a reputation for not telling the board what it wants to hear, that firm may quickly find that its phone stops ringing.
Consider this cynical comment from an unnamed buyside equity analyst who took part in Thomson’s survey. Asked if companies should hire an independent third party to render an additional fairness opinion, the analyst said: “It would not introduce additional integrity into an already flawed process. It would only add to the number of pigs feeding at the trough.”
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