Truth and Bias in M&A Target Fairness Valuations: Appraising the Appraisals

Abstract

In U.S. M&A transactions, target directors are effectively required to seek and consider a “fairness opinion” and supporting valuations before accepting a takeover offer. Despite their legal status, critics have argued that these valuations are biased, and that even unbiased valuations would not be useful to public companies, which can use their pre-deal stock price as an appraisal of their value. I develop and implement tests for the usefulness and the bias of fairness opinion valuations, and find tight evidence for both. They impound information about fundamental mispricing in targets, and prospective deal synergies, which could make them useful to directors in exercising their duties. They also exhibit predictable bias: providers toggle their discount-rate assumptions ex post to rationalize negotiated deal prices. However, this bias has been constrained by judicial scrutiny in recent years. These findings suggest that third-party appraisal could have a useful role in M&A governance, and suggest avenues for reform.