The Strategic Choice of Peers in M&A Valuations

Abstract

We examine the strategic choice of peer comparables in fairness opinions (FOs) used in M&A valuations. Using a hand-collected sample of peer comparable analyses and a regulatory shock to merger litigation risk, we show that target-sought FOs employ lower-valued peers when litigation risk is higher. The effect is concentrated in deals featuring greater conflicts of interest between target management and outside shareholders and when the target CEO is incentivized to successfully complete the deal. Furthermore, the selection of downward-biased peers reduces the likelihood of appraisal lawsuits, but is also associated with lower premiums. In contrast to prior work suggesting that target-sought FOs are used to negotiate a higher takeover price, our findings imply that FO valuations are driven, at least in part, by the desire to mitigate litigation risk and facilitate successful deal completion.

Keywords: Mergers; Fairness opinions; Peer groups; Benchmarking

JEL Classification: G24, G30, G34