Fairness Opinions, Understanding a Transaction’s Full Value

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Why Companies Get a Fairness Opinion Before Entering a Financial Transaction

How important is a fairness opinion (FO) when a company is evaluating a merger, acquisition, spin-off, buyback, carve-out, or other corporate change of ownership? Part of the due diligence of a large financial transaction is to engage for a fee, an experienced expert to create a fairness opinion that, among other things, advises on the valuation of the proposed transaction. And possibly recommends adjusting some terms to align the transaction with what the expert sees as fair. 

Understanding Fairness Opinions

When companies are considering impactful transactions, they may be required to get an objective opinion on whether the terms of the deal are fair. If it isn’t required, it is still a good idea to help reduce risks inherent in large transactions.

A fairness opinion is a professional assessment of the fairness of a proposed transaction. An independent third-party advisor, such as an investment bank, usually provides it. The goal of a fairness opinion is to provide an impartial evaluation of whether the transaction is fair to all parties involved based on various financial and strategic factors. The analysis involves evaluations of the impact of synergies, overall asset value, current market worth, dilutive effects, structure, and other attributes that a non-experienced executive may easily overlook.

Who Provides Fairness Opinions

Investment banks are the most common providers of fairness opinions. Choosing an institution that has extensive industry-specific experience and knowledge in valuing a transaction or strategic opportunity could save the client many times the cost of the service.

For example, Noble Capital Markets, an investment banking firm with 39 years of experience serving clients in a variety of industries, provides as one of its opinion services, FOs to companies considering a transaction. Francisco Penafiel, Managing Director and part of Noble’s investment banking & valuation practice, explained why getting an opinion from a reputable investment bank can avoid expensive problems.  Mr. Penafiel said, “FO’s should be provided by independent third parties, but it’s highly recommended for companies to have the assistance of advisors with a sound reputation, credibility, and significant industry experience.”

Why should the advisor have an intimate understanding of the industry? Penafiel explained, “it’s also important for the advisors to have knowledge of the regulatory compliance factors that affect the process as well as to be fully independent to avoid any conflict of interests.” He believes most often, investment banking firms, with platforms that include many years of experience, are best suited to run analysis that is deep and thorough, and are necessary when rendering these opinions

“Noble has helped clients over the years with their valuations needs, we’re now witnessing an increased demand for FOs because of the benefits they bring to the companies involved in a transaction. It also goes a long way to demonstrate that management and boards fulfilled their fiduciary duties, reducing risks of litigation,” said Penafiel.

The SEC has shown that they approve of and, in some cases, could require an FO. Recent regulations applying to de-SPAC transactions make fairness opinions the standard as de-SPAC transactions have an inherent conflict of interest between a SPAC’s sponsor and the stockholders. The third-party FO provider allows for impartiality and transparency to benefit all parties, especially investors.

Steps in Creating an FO

To provide a fairness opinion, an investment bank will typically conduct a thorough analysis of the deal’s financial and strategic aspects. This analysis may involve evaluating the company’s financial statements, projecting future earnings, analyzing the transaction structure, and reviewing comparable transactions in the industry. The investment bank will also consider the prevailing market conditions, economic climate and the impact on interest rates and the effects of any regulatory or legal issues on the transaction.

After completing its analysis, the investment bank will issue a formal report summarizing its findings and conclusions. The report will typically contain a detailed explanation of the fairness opinion, including the methodology used, the assumptions made, and the supporting evidence. It will also provide a valuation of the company, which may be used as a reference point for negotiating the deal’s terms.

It’s worth noting that a fairness opinion is not a guarantee that the proposed transaction is fair. Rather, it’s a professional opinion based on the information available at the time of the analysis. The ultimate decision about whether to proceed with the transaction lies with the parties involved, who must consider various factors beyond the scope of the fairness opinion.

Take Away

 Obtaining a fairness opinion is a critical step for companies considering major transactions. It provides an objective evaluation of the transaction’s fairness, which can help the parties involved make informed decisions. Investment banks are well-positioned to provide fairness opinions, given their extensive experience and expertise in financial analysis and valuation. By engaging an investment bank to provide a fairness opinion, companies can gain a valuable perspective on the proposed transaction, which can help them negotiate more effectively and ultimately achieve a better outcome.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://noblecapitalmarkets.com/opinion-practice

https://core.ac.uk/download/pdf/160249385.pdf

https://www.investopedia.com/terms/f/fairness-opinion.asp

http://edgar.secdatabase.com/1680/121390023011399/fs42023ex23-4_heritage.htm

Stock Buybacks in 2023 are $175 Billion Strong and Part of the Stock Market Surge

Image Credit: Anders Kristensen (Pexels)

Company Stock Repurchases Have Reached Record Levels

Stock buybacks often boom when borrowing costs are down. However, interest rates are currently as high as they have been in a while, yet buybacks are still surging. The rampant pace also flies in the face of new corporate taxes on the practice.  US companies grabbing their own shares is one part of why the market has started the year very strong. The S&P 500 was up for a third week in a row to end January and kick off February. The pace shows no sign of slowing and may even pick up as earnings season and the related blackout periods are lifted. What’s involved in stock buybacks, and what has been the impact now, so early in 2023.

How is a Stock Buyback Executed?

Last week Meta Platforms (META) followed a few logistics companies, oil businesses, and even aerospace contractors by announcing an increase in management’s authorization to purchase its own shares. There are simple but important rules Meta and the others will have to abide by to conduct these purchases. The rules are to provide orderly markets, they fall under the Securities and Exchange Commission’s “Safe Harbor” for Issuer Repurchase, SEC 10b-18 protections.

The head trader at Noble Capital Markets, David Lean is a veteran equity trader whose desk has been involved in many stock repurchases. He explained the critical areas a broker has to follow. They are, Manner of Purchase, Timing, Price, and Volume.

“The company must purchase shares through a single broker or dealer during a single day,” Mr. Lean said, explaining that one day a company may choose a broker like Noble and provide instructions and criteria, it then is the only broker allowed to trade on behalf of the buyback plans that day. Another day a different single broker or dealer may be selected for the trading day.

As far as timing, the SEC has laid out the following guidelines: A company with an average trading volume less than $1 million per day or a public float value below $150 million is unable to trade within the last 30 minutes of trading. Companies with higher average-trading-volume and public float value can trade up until the last 10 minutes.

David Lean explained the trading price restrictions on behalf of the company, “The company must repurchase at a price that does not exceed the highest independent bid or the last transaction price quoted.” While a stock repurchase does put upward pressure on share prices, the act of repurchasing shares should not be allowed to bid up the price directly.

The rules on volume also help prevent the repurchase from being overly disruptive. “The company cannot purchase more than 25% of the average daily volume as measured over the previous four weeks,” according to Lean. He was also was quick to point out that there is an exclusion whereby “The company may make one ‘block’ purchase per week and not be subject to the 25% volume limitation, provided the ‘block’ purchase is the only Rule 10b-18 purchase made on that day.”

The SEC provides these “Safe Harbor” rules as a guide for all parties involved to understand the boundaries of acceptance in the eyes of the SEC.  

Buybacks 2023

During the first month of 2023, announced corporate buybacks more than tripled to $132 billion from a year ago. Then, February kicked off with META immediately adding another $40 billion to the annual tally. According to data compiled by Birinyi Associates, January broke, by 15%, the previous record for a January set in 2021.

There has been no slowdown. According to Bloomberg, Morgan Stanley’s desk that executes buybacks saw orders increase 5%. This feeds into the market strength that thus far has characterized 2023, along increased buying interest from retail accounts, and quant funds.

This increase in stock buybacks in 2023 coes at the same tome a new tax levy on repurchases comes into play by the Inflation Reduction Act of 2022. According to the IRS the new code imposes a 1% excise tax on the aggregate fair market value of stock repurchased by certain corporations during the taxable year. The 1% levy is not deductible. The new tax indicates that the government doesn’t encourage companies repurchasing their own stock. In fact in the case of Chevron (CVX), they had been criticized by the White House for using their cash in this way rather than to try to increase output.

Take Away

Each company has its own reason to repurchase its own stock. However, in each case it could represent confidence in the future. There are rules put in place by the SEC that help provide orderly trading in the names, but the announcements themselves tend to create upward spikes in the names.

A new tax on the practice that came into effect on January 1 is going to cost the companies buying their shares 1%. This has not prevented the record levels of stock buybacks in January.

Paul Hoffman

Managing Editor, Channelchek

Sources:

https://www.rttnews.com/corpinfo/stockbuybacks.aspx

https://finance.yahoo.com/news/7-big-stock-buybacks-meta-065244274.html

https://www.sec.gov/divisions/marketreg/r10b18faq0504.htm

https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-corporate-stock-repurchase-excise-tax-in-advance-of-forthcoming-regulations#:~:text=The%20new%20code%20section%20added,taxable%20year%2C%20subject%20to%20adjustments.