May 01, 2017

The Journal sat down with Jeff Phillips, a Managing Director in Stout’s Valuation Advisory group and head of the firm’s Transaction Opinions practice, to get the inside scoop into the world of transaction opinions, the role of a fairness opinion in a transaction, and the importance of hiring an independent and capable financial advisor.

What does the Transaction Opinions group do?

Our main role is to provide our clients with independent financial advice, and ultimately an opinion, regarding a potential transaction that they are being asked to consider. While the formal opinion is a two- to four-page letter indicating whether the transaction is fair from a financial point of view, the process to arrive at the conclusion is quite substantial and often complex. Generally, our analysis consists of not only a valuation (including full due diligence on the underlying business), but also a review of the transaction’s financial structure, the type and timing of the deal, and the financial and tax consequences of the transaction. In short, we help members of a company’s board of directors determine if certain elements (e.g. consideration paid or received) of a transaction are fair from a financial perspective.

What is the purpose of a fairness opinion in a transaction?

Although fairness opinions are only one input used by board members and other stakeholders when analyzing a transaction, they are considered an essential part of the process. Their purpose is twofold: 1) to provide an objective standard against which the financial aspects of a transaction can be measured, and 2) to insulate board members from a subsequent “breach of fiduciary duty” claim.

Why is it critical to hire an independent, qualified, and experienced financial advisor to conduct a fairness opinion?

Fairness opinions are routinely used in mergers and acquisitions and similar financial transactions, serving as a form of defense and legal protection for the boards of directors on both sides of these transactions. That said, fairness opinions are not without controversy.

Often, fairness opinions are:

  • Conducted by the same party that is advising one of the companies in the transaction and for a fee that is contingent on the successful completion of the deal, which represents a clear conflict of interest
  • Subjective and inconsistent; developed using a wide variety of methods and assumptions that can lead to equally varying values or a range of values so broad that it’s essentially meaningless
  • Considered a check-the-box activity with little attention paid to how the opinion was formed

How can you ensure that you are receiving an independent and thorough opinion?

A transaction opinion advisor should:

  • Have a long and proven track record of providing defensible opinions
  • Have relevant industry experience
  • Be able to produce comprehensive documentation in terms of how the opinion was formed
  • Not have any conflicts of interest with the investment bank advising on the deal or other parties to the transaction
  • Have an established and consistent internal review and approval process for issuing opinions
  • Not have fees that are contingent on deal success

Stout's Experience

As one of the largest valuation practices in the country, Stout leverages its considerable investment banking and valuation experience to assist clients in making sound decisions with respect to a transaction and navigating through the “noise” to provide timely, sophisticated, and reliable advice.

Our analytical approach incorporates:

  • Comprehensive empirical research
  • Real-world deal knowledge
  • Deep valuation experience
  • Guidance from recent court decisions and findings