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

45 Pages Posted: 8 Oct 2020 Last revised: 22 Feb 2021

See all articles by Matthew Shaffer

Matthew Shaffer

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

Date Written: February 21, 2020

Abstract

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

Shaffer, Matthew, Are Third-Party Fundamental Valuations Relevant in Public-Company Takeovers? (February 21, 2020). 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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