March 27th, 2012
Directors rely on fairness opinions for a variety of corporate transactions. In non-arms’ length or affiliated party transactions, these advisors become even more important. Choosing the right Financial Advisor is a critical step in formulating a recommendation to the shareholders.
A fairness opinion is a letter / report that states whether or not a transaction is fair, from a financial point of view, to the securityholders as a whole or the securityholders excluding a group making the offer. Financial fairness measures what the securityholder holds after the transaction against what they held before the transaction.
Fairness opinions have come under fire in recent years when Financial Advisors are also involved in structuring the transaction and therefore are incentivized to opine the deal is fair. Choosing a Financial Advisor that is completely independent can help remove the appearance that the analysis has been manipulated to achieve a pre-determined result.
Choosing a Financial Advisor that is experienced in the company’s industry is critical. An inexperienced Financial Advisor may not know what to look for – especially if timing is an issue – which can lead to inaccurate conclusions and potentially a loss of value. Boards should request a detailed memo outlining how the Financial Advisor arrived at its conclusions in order to ensure the guideline companies and transactions selected are correct, that discount rates match the risk in future results and that the right industry and general economic data is considered. The wrong multiple or discount rate can throw off the calculations and lead to the wrong conclusion. It is also important that Financial Advisors are aware of any policies governing a specific transaction, particularly as they relate to junior companies with illiquid stock.
In the resource sector, understanding of resources versus reserves, political risks of various mining jurisdictions, the costs to production and determining the right set of comparables is important when determining value which is the first step in fairness. The right Fairness Advisor gets you closer to the right value and the right deal. In the words of Warren Buffet – price is what you pay, value is what you get. This is true in both deals and in choosing your Financial Advisor.
Evans & Evans has over twenty years of experience in providing independent fairness opinions in a variety of industries, including the resource sector – for more details click here.