Strategic Valuations in M&A Fairness Opinions

with Gabriel Pereira Pundrich, Rodrigo Verdi and Ben Yost

Abstract

We examine strategic behavior in fairness opinion (FO) valuations obtained as part of M&A transactions. To do so, we employ a large, hand-collected sample of FOs and focus on the two most common valuation techniques: peer firm comparables and DCF analysis. Using a regulatory shock to merger litigation risk, we find that target-sought FOs exhibit lower valuations when litigation risk is high. The effect is concentrated in deals featuring greater potential agency conflicts between target management and outside shareholders. Furthermore, downward-biased valuations reduce the likelihood of appraisal lawsuits, but are 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.