1. Fairness Opinions, Financial Analyses,
Projections and the Role of Financial Advisors
Kevin Miller
Alston & Bird LLP
90 Park Avenue
New York, New York 10016
Tel: (212) 210-9520
Fax: (212) 922-3840
kevin.miller@alston.com

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Fairness Opinions
 What Are They?
 An opinion with respect to whether the consideration paid or received in a transaction is fair
from a financial point of view to the party or persons paying or receiving the consideration.
 Why Does a Board Want One?
 To help the board demonstrate that it gathered all reasonably available information in fulfilling
its fiduciary duty of care in approving the transaction.
 When Are They Required?
 They are not required under Delaware law or the Federal Securities Laws. Most companies
will obtain them in connection with transactions requiring shareholder approval and many
companies will obtain them in connection with transactions of a certain size or significance
(i.e., if sufficiently material to the company).
 When Do Boards Need Them Delivered?
 Generally at the meeting at which the board approves the transaction.
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Fairness Opinion Considerations
 Fairness opinions are not a substitute for the exercise of business judgment by a
board and senior management – the scope of a fairness opinion is limited to an
evaluation of the fairness of the consideration to be paid or received from a financial
point of view.
 The benefits of a fairness opinion are limited if rendered after the transaction is
authorized by the board.
 The key for boards is to gather all reasonably available information and to act in good
faith on an informed basis. A detailed financial presentation and discussion with the
board is often more valuable than a two- or three-page fairness opinion.
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Fairness Opinions
What They Say
 What Do Fairness Opinions Say:
 In connection with a divestiture, a Fairness Opinion addresses the fairness, from a financial
point of view, to the seller of the consideration to be received by the seller.
 In connection with an acquisition, a Fairness Opinion addresses the fairness, from a financial
point of view, to the buyer of the consideration to be paid by the buyer.
 Only in connection with transactions where the stockholders of a company receive
consideration will a Fairness Opinion address the fairness, from a financial point of view, to
the holders of common stock of the company of the consideration to be received by such
stockholders in the sale. Certain stockholders may be carved out.
 Fairness Opinions only address the fairness “from a financial point of view” of the
consideration being paid or received by a party actually paying or receiving consideration.
 Fairness Opinions speak of a specific date, and opinion providers generally disclaim any duty
or obligation to update or reaffirm their opinions. Note: In re Southern Peru Copper Corp.
S’holder Derivative Litig., C.A. No. 961-CS (Del. Ch. Oct. 14, 2011).
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Fairness Opinions
What they don’t say
 What Fairness Opinions Don’t Say:
 They do not address the relative merits of a particular transaction as compared to
alternative business strategies.
 They do not address the company’s underlying business decision to pursue a
transaction.
 They do not constitute a recommendation to stockholders on how to vote or act with
respect to a transaction.
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Fairness Opinions
What they don’t say (cont.)
 What Fairness Opinions Don’t Say (cont.):
 They do not typically address the allocation of the aggregate consideration to be
received among holders of different classes of capital stock. But see In re Tele-
Communications, Inc. S’holders Litig., No. CIV.A. 16470, 2005 WL 3642727, (Del. Ch.
Dec. 21, 2005).
 They do not typically address the fairness of consideration to be received by holders of
preferred stock whose rights are typically contractual or quasi-contractual.
 They do not typically address any other terms of the transaction or agreements entered
into in connection with the transaction or otherwise, like: lockups, termination fees,
severance agreements, no shop provisions, financing arrangements, etc.
 They do not address the price at which a buyer’s stock will trade after giving effect to the
transaction or the price at which buyer or seller stock can be purchased or sold at any
other time.
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Financial Analyses Underlying Fairness Opinions
 Valuation Analyses
 Selected Companies Analysis
 Selected Transactions Analysis
 Discounted Cash Flow Analysis
 Contribution (Stock Consideration)
 Other Analyses and Considerations
 Historical Stock Trading Analysis
 Premiums Paid Analysis
 LBO Analysis
 Merger Consequences – accretion/dilution
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Financial Analyses Underlying Fairness Opinions –
Selected Considerations
 Choice of Methodologies, Assumptions and Inputs
 Exercise of professional judgment taking into account relevant facts and circumstances
 Industry acceptance and academic support for methodologies and assumptions
 Precedent and consistency (are different teams of bankers approaching similar issues consistently)
 Discounted cash flow analyses
 What is the appropriate role of a financial advisor in preparation and vetting of projections, alternative cases and sensitivities?
 What benchmark should be used/considered for calculating the risk-free rate of return?
 Use of historical beta v. Barra beta
 Use of historical v. supply-side equity risk premia
 Use of company’s debt/equity ratio v debt/equity ratio of peers
 Use of specific company risk premia or other premia or discounts other than size premia in calculating discount rates
 Use of terminal value multiples v. perpetuity growth rates
 Use of terminal value multiples based on selected companies analysis v. selected transactions analysis
 Other inputs – what if commodity price projections used by the company differ from financial advisor and/or industry analyst estimates?
 Selected companies and selected transactions analyses
 Selection of companies/transactions – mathematical/fixed criteria v. exercise of professional judgment
 Do you include target in selected companies?
 Median v. selected multiple ranges based on professional judgment that may not be centered on median
 Application of control premia to valuation ranges indicated by selected companies analysis

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Financial Analyses Underlying Fairness Opinions –
Selected Considerations
 Choice of Methodologies, Assumptions and Inputs (cont’d)
 Treatment of cost savings and synergies
 Cash v. stock-for-stock transactions
 Buyside v. sellside
 Treatment of NOLs
 Cash v. stock-for-stock transactions
 Buyside v. sellside
 Other financial analyses
 Historical stock trading
 Premiums paid
 LBO
 Illustrative forward stock trading
 Accretion/Dilution
 Common questions
 Must financial analyses underlying fairness opinions follow case law regarding statutory appraisals?
 What if no reliable projections exist?
 What if management projections generate DCF valuation ranges significantly in excess of the proposed purchase price?
 What if not all of the analyses support a fairness conclusion?

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Projections Issues
 When and on what basis should projections be prepared?
 What is the role of the board and company counsel in supervising the preparation and approval of projections?
 Dealing with unrealistic projections or projections that change or are updated during a sale process.
 What should a buyer be told and when?
 What if a board/special committee or a financial advisor has reservations regarding a counterparty’s projections?
 Which are more relevant:
 counterparty management’s projections for counterparty; or
 client management’s projections for counterparty?
 Avoiding disputes regarding the projections on which financial advisors were authorized to rely.
 What to do if a counterparty won’t provide internal projections?
 Criteria for determining whether to press for obtain buyer projections?
 Under what circumstances can you consider relying on publicly available analyst estimates in lieu of internal
management projections?
 How should multiple projections cases be considered by the board/special committee and financial advisors?
 What if management cannot or will not identify a single set of projections representing its best estimates as to the
future financial performance of the company?
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