Are Third-Party Fundamental Valuations Relevant in Public-Company Takeovers?

39 Pages Posted: 8 Oct 2020 Last revised: 6 Dec 2022

See all articles by Matthew Shaffer

Matthew Shaffer

University of Southern California; University of Southern California - Marshall School of Business

Date Written: December 5, 2022

Abstract

In U.S. M&A, target directors are required to consider third-party financial valuations, summarized in a "fairness opinion," before accepting a takeover offer. Critics argue (1) that these valuations are not relevant for public companies, which can assess the desirability of the deal based on the market premium and (2) that the investment bank providers cater to management by "rationalizing" the deal price rather than providing an independent valuation check. I find that fairness valuations can provide valid information about the target's value, incremental to its pre-deal stock price. They can impound expected transaction synergies, unravel rumor-driven stock price runups, and may signal ex ante fundamental mispricing. I also find evidence of the alleged catering, which I distinguish from "legitimate' valuation disagreements. This suggests that third-party fundamental valuation could play a useful role in the governance of public company takeovers, but there are flaws in its current implementation.

Keywords: Fairness Opinions; Valuation; Corporate Governance; M&A

JEL Classification: G30, G34

Suggested Citation

Shaffer, Matthew, Are Third-Party Fundamental Valuations Relevant in Public-Company Takeovers? (December 5, 2022). USC Marshall School of Business Research Paper, Available at SSRN: https://ssrn.com/abstract=3663518 or http://dx.doi.org/10.2139/ssrn.3663518

Matthew Shaffer (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

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