Fair Value

finance a la shmoop what is a fairness opinion? well shouldn't there be

something about love and war that goes here you know like not all's fair and [Woman throws page at a man]

maybe not all right two companies the one who boogs and we love gross each owned

40% of a small operating business that makes nostril trimmers shaped like the

16th century French apothecary the division yeah it's called [Nose trimmer vibrates]

Nostrildamus..........

A dozen other shareholders own the remaining 20% of the company privately

the one who boogs wants to buy out the 40% of Nostrildomus that we love gross

owns and the 20% owned by everyone else well they've co-owned this company for [Longsnout and sneezy walking together]

decades since great-grandpappy longsnout partnered with another great grandpappy

sneezy yeah no relation to the Disney family there

the division will do 100 million dollars in revenue this year and generate 15

million in cash profits alright so how does it get valued because there's got

to be a buyout here of the remaining percentage and it's not valued

separately at the moment why is it important for that value to be well fair?

while lots of potential for corruption here and unsquare dealings may be gross

would sell out cheap in return for bugs to back out of the Russian territories [Men with briefcases for heads appear]

where it does big business sort of a tit for tat business deal but then the 20%

minority owners of the division would be screwed because they didn't get full and [Minority owners protesting]

fair price for the division that was sold and well they don't benefit in the

way that gross would benefit by then being able to run the tables or nostrils

of Russia you know and the apostrophe stans that it controls right so

everyone's got to be treated fairly here so that's not easy and especially in

those stans you know like where Borat comes from so in order for everyone to [Borat wearing a mankini on a beach]

be treated fairly a wizened investment banker is usually called in to write a

legal fairness opinion and that opinion will likely be inspected by judges and

other bankers and lawyers should anything go awry so that banker has to

be very thorough and careful in the way that they calculate [Person punching numbers into calculator]

the values of each division and their rationale such that everyone gets paid

fairly and squarely all right well that fairness opinion is used to frame the

purchase price in the terms of whatever deal ends up going down or up a big part

of the bankers value-add is creative solutions to bridge valuation gaps where

one company thinks it's worth more than the other or at least more than what

it's getting in the deal and while bankers fairness opinions focus mostly

on just the cash value of the company well like you can imagine that owning or

controlling a hundred percent of the company would come with all kind of

benefits if nothing else just not having to report to tons and tons of

shareholders so what's that right to not report worth and everyone can argue [Man and woman arguing on the sidewalk]

about that in a banker who's done lots of these transactions can point to other

transactions that came with a 12% premium for the right to not have to

report to tons of tons of shareholders right so that's just one example

bankers often whisper through one side or the other deal dials that can be [Woman banker whispering to male banker]

turned where companies then feel more fairly treated and then happier to sign

on the dotted line because when they do well then the banker gets paid well

those whispers are things like extended term payments like they're buying for

cash could they pay over ten years and what if the the acquirer decided to pay

with equity like their own stock instead of all cash and then there's like 50

other little things like that the companies care about that bankers can

help them you know turn the dials and if they didn't care about any of those [Person turns dial]

things well then they'd be more likely to you know take a nosedive