Fairness Opinion 101: Abhijeet Shekdar

Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

Q: What does a fairness opinion do? Why should a third party be better qualified to find on whether this acquisition is fair or not? What do you mean when you say its fair-is it strategically a fit, should it be done or should it not be done-is that what the fairness opinion does?

A: This is an opinion, which is given to the board of directors by a financial advisor finding that the transaction that they are contemplating is fair from a financial point of view to the shareholders. A fairness opinion doesn't recommend that this is the best transaction to do or this is the best price one could get but it's looking at that limited view of what that contemplated transaction is and telling the board whether it's fair to the shareholders.

Q: How you determine that aren't those areas, which are traditionally grey areas froth with uncertainty-you are doing a transaction for the shareholders of your company, is that a better transaction that we had out there, are you paying the right price in terms of valuation? Why should a fairness opinion have to sit in and deliver judgment on all of that?

A: Think about it this way. Let's say there is an asset for sale here and there are five competing offers now some may have higher cash component and some may have an equity component and some may have a varied structure. The board sitting there is scratching their heads trying to figure out which is the best offer. So you come in there and you look at it and objectively look at what the various offers are, look at economic and the financial metric around the offers and look at the asset value, the market value the earning potential the dividend, the future prospects of the company based on these offers to see which one is the best offer for the shareholders.

Q: Isn't that what the transaction advisers are meant to do anyway?

A: Yes, but that is more on the investment banking side, what you are talking about is more on the M&A side and M&A side necessarily doesn't look at it objectively. It is going to be looking at it in terms of what is the success fee that I am suppose to make on this transaction. So maybe the highest code gets the bid just because it is the highest code and I will probably make more money as a banker on that. So if you look at Duff, Duff & Phelps has been one of the largest independent providers of fairness opinions in the US. 

The whole independence kicks in because we are not incentivised to say whether the transaction contemplated is fair or is not fair. We get compensated irrespective of whether the transaction happens or not, so it is in our interest to be as objective as we can and be the best advisors to the board and to the shareholders. 

Even in the US there are rules which require us to disclose what fee we are going to make in the opinion, if there are any potential conflicts of interest and US is moving towards a structure where it is more and more not a contingent fee-based opinion, it is a fixed fee-based opinion and therefore the objectivity.

Q: You see this as a growing trend across the world and therefore it needs to be adopted in India as well, right?

A: Yes, absolutely.