THERE ARE 2 WAYS IN WHICH A COMPANY CAN TYPICALLY ACHIEVE GROWTH: ORGANICALLY AND INORGANICALLY.
Inorganic growth generally comes from mergers and acquisitions (M&As) of other companies or business units which leads to a significant bump in both top-line and bottom-line growth, making inorganic means a faster route to growth than solely relying on organic means. However, because of the operational complexities and financial considerations that must be made, inorganic growth comes at a cost and isn’t a fool-proof way of achieving enhanced performance.
The specifics of the transaction (e.g., transaction price, synergies, agreement terms, etc.) can mean the difference between a wildly successful acquisition or a failed attempt. Whether the M&A activity is an all-cash deal, stock-for-stock, or some combination of the two, management, executives, board members, and shareholders will want reassurance that the transaction specifics are fair and reasonable. A fairness opinion prepared by an independent financial advisor assesses the fairness of the financial transaction and provides an opinion to the parties involved. This assists with the decision-making process and helps to reduce the risks (including but not limited to litigation) associated with M&A activity.
An increasing number of private companies are realizing the benefits of a fairness opinion in M&A activity. Company directors and officers have a fiduciary responsibility to equity holders to demonstrate due diligence, a crucial and daunting task in the formation of the fairness opinion which requires an independent financial advisor who understand a multitude of factors surrounding the transaction. Deal and company specifics, recent comparable transactions, comparable publicly traded companies, financial performance and projections, and synergies are some of the items that are diligently analyzed and reviewed by the independent advisor. FINRA 5150 gives additional guidance on the disclosures and procedures of fairness opinions; saving the company, shareholders, and advisor from legal headaches.
Although fairness opinions are frequently associated with public transactions, more and more private companies are appreciating the benefits of fairness opinions in M&A transactions. Fairness opinions help demonstrate that company directors have done all they can to benefit the company and shareholders as much as possible. In a world with ever-increasing levels of transparency and visibility, it is more important than ever to illustrate to shareholders that enough due diligence has been performed, and a fairness opinion is an effective means of doing so.