The market has only a few jobs:
Be fair.
Be fully disclosative.
Be low on friction (like trading costs, commissions, etc.)
If a market does all of the above, it wins. If it doesn't, it fails.
So...what's a failure in modern era? Well, the mortgage crisis of 2008/9 was one failure. That mortgage/housing market wasn't fairly disclosative of risk, and a ton of people were given loans who shouldn't have gotten them. They were then evicted and misery followed. So whose fault was that market failure? Should the banks have "known better" and not loaned 500 grand to a gardener married to a substitute school teacher with three kids and no savings, even if they technically qualified? (And yes, the definition of "qualified" clearly had to change.)
Had the bank denied that enormous loan to people who couldn't afford it, wouldn't there then be an outcry from journalists wanting to get clicks to the blog about how unfair evil corporate America is, in not letting the little guy buy into the American Dream? There'd then be a picture of the bank CEO's corporate jet, and politicians would milk the story for votes.
So...yeah, markets fail in different ways. One thing we know for certain: whatever the market rules are today, they'll be different next year.
Related or Semi-related Video
Finance: What is a Fairness Opinion?0 Views
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
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