Preparing the Fairness Opinion

If the company decides to seek a fairness opinion, the investment banking firm working on the transaction generally does the work and renders the opinion. Particularly on the sell side, the bank will already have performed many of the due diligence and valuation tasks required to issue the opinion. However, conflict of interest concerns may prompt a company to retain an independent investment banking or valuation firm to generate the opinion.

The first step for the bankers is to prepare a draft of the fairness opinion. The fairness opinion is an opinion on the fairness of the transaction to shareholders. The fairness opinion itself is generally in the form of a letter, accompanied by a detailed supporting memorandum.

A fairness opinion is not equivalent to a valuation, but clearly valuation is a critical element of the overall fairness, or unfairness, of a proposed transaction. An investment banker working on a fairness opinion will use some of the financial analysis methods described in Chapter 2 to support the ultimate opinion. In addition to performing a valuation and analyzing other financial aspects of the deal, members of the team working on the fairness opinion will typically look at the deal structure, due diligence issues, potential risks and challenges, and general industry trends.

The memorandum describes the proposed transaction; explains the underlying financial and valuation analysi