Are Third-Party Fundamental Valuations Relevant in Public-Company Takeovers?
45 Pages Posted: 8 Oct 2020 Last revised: 22 Feb 2021
Date Written: February 21, 2020
In U.S. M&A, target directors are effectively required to consider third-party financial valuations, summarized in a “fairness opinion,” before accepting a takeover offer. Critics argue that these valuations are not relevant for public companies, which can assess the desirability of the deal in terms of the market premium. I identify conditions under which a target’s pre-deal market price will not provide directors with sufficient information to assess a takeover offer, and test for whether fairness valuations provide incrementally relevant information. I find they can impound expected transaction synergies and unravel abnormal runups in the target’s stock price prior to the announcement, and may signal ex ante fundamental mispricing. I also find that providers bias their valuations to cater to their clients. This suggests that third-party fundamental valuation has a plausible role in the governance of public-company takeovers, and has flaws in its current implementation.
Keywords: Fairness Opinions; Valuation; Corporate Governance; M&A
JEL Classification: G30, G34
Suggested Citation: Suggested Citation