The Fairness Opinion: What It Says and What It Does Not

A fairness opinion states that consideration is or is not fair, from a financial point of view, to a named party, as at a stated date, on stated assumptions and subject to stated limits. A fairness opinion is a view on one number at one moment. The document does not say the purchase is a good idea, does not verify the diligence work, and binds nobody.

A scene familiar from many households makes the point. A couple is buying a flat. Before they sign, they get a written certificate from a valuer saying the price they have agreed sits inside the range the valuer considers supportable for that flat, on the day it was written, on the assumption that the measurements and the title papers they were handed are accurate. The couple sign. Two years later a cousin says, but the valuer said it was a good buy. The valuer said nothing of the kind. The valuer said one number was inside one range on one day, on papers the valuer did not check.

A fairness opinionA short written view from a financial adviser saying whether the money changing hands in a transaction is fair, from a financial point of view, to a stated party, as at a stated day. in a corporate purchase is that certificate, written for a board instead of a couple, running to more printed sides, carrying the same four fixings and the same narrowness. Almost every misreading of one comes from the reader quietly dropping one of the four fixings and treating what is left as a verdict on the transaction. An opinion is a statement about a number, and a transaction is a decision, and the two things are not the same size.

Harivansh Packaging Limited, an invented listed maker of rigid and flexible packaging, is buying the whole of Sundarban Polymers Private Limited, an unlisted maker of flexible packaging films. The agreed enterprise value is Rs 1,320 crore, or 10.0 times the target's earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs 132 crore. Sundarban Polymers carries net debt of Rs 180 crore, so the equity value, being what the sellers actually receive, is Rs 1,140 crore. Devyani Kulkarni is the chief financial officer of Harivansh Packaging Limited and Ashwin Rege leads its transaction team.

The purchase contains more than one number, at more than one moment. An opinion reaches exactly one combination of the two and says so in its own text.

What is a fairness opinion actually fixed to?

Four things, at once, and they travel together. An opinion is addressed to somebody specific. An opinion is given as at a specific day. The opinion attaches to a specific figure. And it is limited by assumptions it states on its own face. Remove any one of the four and what is left is not a fairness opinion, it is a sentence with a comforting word in it.

Insisting on all four sounds pedantic until a fixing goes missing in the retelling. Drop the addressee and the opinion appears to be addressed to whoever is holding it. A reader with no entitlement to it is then invited to act on it. Drop the day and the opinion appears to cover the whole life of the transaction, including things that had not happened when it was written. Drop the figure and the opinion appears to bless the purchase rather than one amount inside it. Drop the stated limitsThe assumptions an opinion writes into its own text: what it took as accurate without checking, what work it did not do, and what it was not asked to consider. and the opinion appears to have verified everything it was handed rather than assumed it.

Notice that no one has to lie for any of this to happen. The opinion carries all four fixings on its face, in its opening paragraphs, before the conclusion. The loss happens in the retelling, in a meeting note that says the consideration has been opined fair, or in a line of a board pack that quotes the conclusion and omits the four sentences above it.

The practical use of that picture is a reading order. Most people read an opinion the way they read a school report, finding the grade and stopping there. The four fixings all sit above the conclusion, and reading them first changes what the conclusion means when the reader reaches it. Ashwin Rege makes his team read an opinion from the top and read the conclusion last, precisely so that by the time they reach it they already know how narrow it is.

The four fixings applied to this purchase produce a table small enough to hold in the head. Every entry in it is a figure or a fact drawn from the agreed terms of the purchase.

Who is the opinion addressed to, and who may read it without relying on it?

An opinion is given to a board, or to a committee of a board. A board is a narrow group of named people with a specific duty, and the opinion is one of the things they take into account before discharging it. The addresseeThe named party an opinion is written for and delivered to, usually a board or a committee of one, stated in the opening line of the document. is not a formality on the envelope, it is a statement of who the writer accepted a duty towards.

The everyday version is a doctor's note. A neighbour's cardiologist writes a note about the neighbour's medication, and a reader who comes across it can read it. The note might even concern a drug that reader takes. The reader is not the patient, the doctor never examined the reader, and nothing in the note was written with the reader in mind. Reading it is not the same as being a person it was written for, and acting on it as though one were is the reader's risk and nobody else's.

The distinction between reading a document and relying on it has a name in the document itself. Opinions ordinarily carry a paragraph saying who may rely on them and, more pointedly, who may not, and that paragraph is usually a good deal more emphatic than the conclusion is. RelianceThe entitlement to act on a document and to look to its writer if it turns out to be wrong. It is given to named parties and is not created by reading a copy. is a thing that is granted, in writing, to named people. Reliance is not a thing that attaches to whoever ends up with a copy.

Why does that matter to a reader who is not on the board? Because a great deal of what circulates about a transaction is quoted from an opinion by people standing outside its addressee list. A journalist, an analyst, a holder in the buyer, an employee of the target: all of them may see the conclusion and none of them was written for. The correct reading is not to ignore it. The correct reading is to treat it as real evidence about what one adviser thought about one number on one day, and not as a warranty running in the reader's favour.

There is a second consequence, and it is easy to miss. Because the opinion is addressed to the board, the board is also the body that gets to ask the writer questions. The value of an opinion to its addressee is partly the document and partly the meeting in which the board can ask what the analysis was sensitive to, where the consideration sat inside the supportable range, and what the limits actually cover. A reader outside the room gets the document without the meeting, and the document is the thinner half.

What day does the opinion speak as at, and why is that the hardest fixing?

An opinion speaks as at one day. An opinion is not a running commentary and is not renewed by the passage of time. Everything that happens after that day sits outside it, whether or not anybody thought about it. Of the four fixings, the date is the hardest to hold on to, and a transaction spends the next several months quietly walking away from it.

The house valuation is worth returning to. A valuer values on a day. If the road outside is dug up the following week, the valuation is not wrong and it is not updated either. The valuation said what it said about the day it said it about. A transaction is built to change shape between signing and completion, so a transaction is worse than a house in this respect. The agreement itself provides for the price to move. The price movement is written into the document the opinion was given on, and the amounts of it are still unknown on the day the opinion is given.

On this purchase the timeline runs like this. The analysis is done, and the opinion is given as at the signing date, attaching to the consideration as defined in the agreement. Then the completion accounts are drawn up. Working capital at completion is Rs 108 crore against a normalised peg of Rs 96 crore, so the price adjusts up by Rs 12 crore. Net debt at completion is Rs 195 crore against the Rs 180 crore assumed, so the price adjusts down by Rs 15 crore. Then completion happens and Rs 1,137 crore actually moves. Then, in the first year after completion, the earn-out is tested against an EBITDA of Rs 145 crore.

Every one of those events is to the right of the as-at dateThe single day an opinion speaks about. Its conclusion is a statement about conditions and figures as they stood on that day and on no other. and therefore outside the opinion. Not disclaimed, not qualified: outside. None of it had happened, so there is nothing to disclaim.

The picture is a sequence, not a schedule. The picture carries no period, no interval and no timetable. The record for this invented purchase carries none either, and how long a transaction takes is a matter for that record rather than for memory.

Which of this purchase's several figures does the opinion attach to?

An opinion attaches to the consideration as definedThe specific amount, described in the agreement's own words, that an opinion says is or is not fair. A purchase can contain several amounts and an opinion names the one it took. in the agreement at the time it is given, and it says which one in its own text. The question a reader should ask the moment they see a fairness conclusion is which figure, and the answer is written down and is almost always the line that gets skipped.

Look at how many figures this one purchase contains. The price exists at three moments and on two totals, and that makes six amounts before anybody has divided anything by anything.

Each row of that table reconciles, and it is worth walking once. At signing, equity value of Rs 1,140 crore plus the assumed net debt of Rs 180 crore is the enterprise value of Rs 1,320 crore. At completion, the adjusted equity value of Rs 1,137 crore plus the actual net debt of Rs 195 crore is Rs 1,332 crore. The maximum is the completion figure of Rs 1,137 crore plus the Rs 60 crore earn-out, or Rs 1,197 crore, and adding the same Rs 195 crore gives Rs 1,392 crore. The maximum is built on the completion figure and not on the signing figure, and stating that basis is part of quoting the number honestly.

Now put a multiple on it, and the six amounts become six multiples. Two candidate EBITDA figures exist as well, the Rs 132 crore Sundarban Polymers Private Limited actually earned and the Rs 145 crore the earn-out payment is conditioned on, a figure 9.8 per cent above it. Three enterprise values against two EBITDA figures is six defensible enterprise value multiples for one purchase, and every one of them is arithmetically true.

Six honest answers are why Devyani Kulkarni will not let a paper into a board pack that says the transaction was done at ten times without saying ten times what, measured on which enterprise value. Both halves of a multiple are choices, and a purchase with a conditional payment in it has more than one honest answer for each half. A multiple quoted without naming its numerator and its denominator has not told the reader anything that can be checked.

An opinion attaches to one figure. Two different figures can both be offered to the same analysis.

What does fair from a financial point of view actually mean?

The phrase means something considerably narrower than the ordinary English word suggests, and the narrowness is the whole content. Fair from a financial point of viewThe phrase an opinion uses for its conclusion. It means the amount sits inside the range the writer's analysis supports, and it makes no statement about anything other than money. means the consideration falls inside a range the analysis supports. Fairness is a statement about a set, not about a point, and once that is seen it cannot be unseen.

Two words in the phrase are doing quiet work. Financial narrows it to money: not the strategy, not the cultural fit, not the effect on the people at either business, not whether the buyer needed this at all. And point of view narrows it further, to the view of the writer, arrived at by the writer's chosen analysis under the writer's stated assumptions.

Now the range itself. The inputs are estimates and reasonable people put different values on them, so any serious analysis of what a business is worth produces a band rather than a figure. The writer forms a supportable rangeThe band of values an analysis can defend, arising because the inputs are estimates rather than facts, so the output is a band and not a single figure. and then asks one question: is the consideration inside it? Inside or outside is a yes or no question with a yes or no answer, and it produces the same answer for a figure sitting just inside the bottom of the band and a figure sitting just inside the top.

Sit with what follows. Two purchases at meaningfully different prices, both properly opined fair. The difference between them, in rupees, is real money that either stays with the buyer or goes to the sellers. Fairness does not distinguish between the top of a range and the bottom of it. The single most valuable decision available to a board is therefore one that a fairness opinion is structurally incapable of making for it.

Which raises the obvious question about this purchase: where inside the range did Rs 1,320 crore sit? The conclusion of an opinion cannot answer that. Position inside the range is the kind of thing a board asks about in the room, and the answer is a large part of why the meeting matters more than the document.

What does a fairness opinion not say?

An opinion's exclusions are usually relegated to a footnote and belong at the centre. The list of what an opinion does not say is longer than the list of what it does, and treating that list as a qualification rather than as the content is the root of nearly every over-reading.

An opinion does not say the transaction is the best course available. Nobody asked the writer to compare buying Sundarban Polymers Private Limited against buying something else, against building the same capacity, or against doing nothing and keeping the money.

An opinion does not say a better price could not have been obtained. Whether a better price was available is a question about negotiation, about who else was interested and about what the sellers would have taken, and an opinion about a range does not reach it.

An opinion does not verify the diligence findings. The financial, legal, tax and commercial diligence was done by other people, and the opinion ordinarily records that it took what it was given as accurate and complete without independent verification. The sentence recording that limit is not throat-clearing but a plain description of what was and was not done.

An opinion does not audit anything. An audit is a different exercise with a different standard, performed by different people, and an opinion says so.

An opinion does not value the likelihood of a conditional payment. The Rs 60 crore earn-out becomes payable if Sundarban Polymers reaches Rs 145 crore of EBITDA in the first year after completion, a figure 9.8 per cent above the Rs 132 crore it earned. Whether that happens is a fact about the future and no opinion states one.

And an opinion does not speak to anything after its date. Set beside the other five, the date limit is finally visible as one item among many rather than as the whole caveat.

Read the right column once more and notice that it is not a legal hedge bolted on by cautious people. The right column is the description of a job with a defined edge. The writer was asked a narrow question and answered it, and listed the questions that were not asked so that nobody would think they had been.

What is the difference between fair and right?

Fair and right are not the same word. Fair is a statement about where a number sits against an analysis, and right is a statement about a decision, and only the first of the two is what an opinion offers.

The household picture serves one last time. A shopkeeper quotes a price for a refrigerator. A friend who knows the trade says the price is within the normal band for that model in that market this month. The friend is right and has said something useful. The friend has not said whether a refrigerator is needed at all, whether this is the model for that kitchen, whether the money would be better spent on the roof, or whether waiting three months would serve better. Fair price, open decision.

A board sits in exactly that seat. The opinion tells it the consideration is inside a supportable band. Whether to buy this business, at this point, funded this way, in preference to everything else the same money could have done, is a judgement that requires knowing the buyer's own plans, its capacity, its appetite for borrowing and its view of the industry. None of that is in the opinion, and the decision is one the board makes and cannot hand to anybody.

The narrowness is not a criticism of opinions, and the reason is worth stating. The merit of a purchase depends on what the money would otherwise have done and on what the combined business goes on to achieve, and no figure published on any day settles either. A document that tried to say whether a transaction was right would be pretending to knowledge nobody has. An opinion is useful precisely because it answers a question that can be answered and refuses the one that cannot.

Where do the requirements for an opinion actually live?

Everything above describes what an opinion is and how to read one. Whether an opinion has to be obtained at all, who is permitted to give one, and what it must address are different questions entirely, and they are set by regulation and by company law rather than by practice. A reader who needs the current position reads it at the source.

The regulator and the ministry name where to look, and the current position on each of these questions is theirs to state.

What would an opinion on this purchase reach, and what would it miss?

Put the whole thing together on the invented transaction. An opinion here would be addressed to the board of Harivansh Packaging Limited, given as at the signing date, and attached to the consideration defined in the agreement, being an enterprise value of Rs 1,320 crore for Sundarban Polymers Private Limited, an equity value of Rs 1,140 crore before completion adjustments, and an earn-out of up to Rs 60 crore. The opinion would state that the consideration is fair, from a financial point of view, to Harivansh Packaging, subject to stated assumptions and limits.

Now walk the items an opinion does not reach, each with its figure.

People expect an opinion to have caught the dilution, so the dilution row deserves a sentence. Harivansh Packaging Limited earned profit after tax of Rs 225 crore on 18.00 crore shares, or Rs 12.50/- per share. Add the target's profit after tax of about Rs 61 crore, a rounded figure, then subtract Rs 67.5 crore of after-tax interest on the Rs 1,000 crore of new borrowing at the contracted 9.0 per cent and an effective tax rate of 25.0 per cent. The subtraction leaves Rs 218.5 crore on an unchanged 18.00 crore shares, or Rs 12.14/-, a dilution of 2.9 per cent measured on the Rs 12.50/- base. The rounding is load bearing. On the target's exact profit after tax of Rs 61.35 crore the arithmetic gives Rs 218.85 crore, Rs 12.16/- and 2.7 per cent, and the transaction is dilutive on either figure, with only the headline percentage moving. None of this is a fairness question, and an opinion given at signing does not touch it.

The most instructive part of that arithmetic is the pairing, and both halves must be struck on the same base to reconcile. The target's earnings yield on the Rs 1,140 crore paid is 5.35 per cent. The after-tax cost of the funding, struck on that same Rs 1,140 crore, is Rs 67.5 crore over Rs 1,140 crore, or 5.92 per cent. The spread is minus 0.57 points. On Rs 1,140 crore the spread is minus Rs 6.50 crore, and over 18.00 crore shares it is Rs 0.36/-, and Rs 12.50/- less Rs 0.36/- is Rs 12.14/- exactly. The multiple comparison and the funding cost are two different questions, and neither one is the answer to the other. A purchase can look inexpensive at 10.0 times EBITDA against a buyer trading at 12.58 times, on illustrative market data, and still dilute.

Now count what the opinion did reach. One of the six enterprise value multiples this purchase supports. One of the three moments at which the price exists. One of the two totals, being enterprise value or equity value, and it names which. An opinion on this purchase speaks to a single cell of a grid with a dozen honest entries in it, and it says which cell in its own text.

The difference between fair and right lands harder on the arithmetic than in the abstract. An opinion could properly have been given at Rs 1,320 crore. Both figures can sit inside a supportable range, so an opinion could properly have been given at a meaningfully lower figure. Choosing between the two was the decision the board of Harivansh Packaging Limited was in the room to make, and it was never the opinion's to make. The arithmetic is checkable and the merit is not, and no figure settles which of the two choices was correct.

How do a director, an analyst and a lender each read one?

Three readers, three different first questions, and only one of them is entitled to rely on the document at all. Seeing the three side by side is the fastest way to understand what an opinion is actually for.

A director reads it as one input into a decision they still have to make. Their first question is not the conclusion, it is what the analysis was most sensitive to, and their second is where inside the supportable range the consideration sat. Both of those are asked in the room, of the writer, and neither is answerable from the conclusion. The director who reads only the conclusion has converted an input into a substitute, and that conversion is the failure that costs the most.

An analyst covering Harivansh Packaging Limited reads it as evidence about the process rather than about the price. Whether an opinion was obtained, from whom, addressed to whom, and attached to which figure, tells the analyst something about how the transaction was run. The opinion does not give the analyst a valuation. The range behind the conclusion is not in the conclusion, and the analyst is not an addressee.

A lender being asked to fund the Rs 1,000 crore of new borrowing reads it, if at all, as one comfort among several, and a weak one. A lender's real questions are about cash, coverage and security, and an opinion speaks to none of them. A lender who wanted to know whether the combined business services its borrowings would find nothing in an opinion, so Ashwin Rege's team would not put one at the front of a lender pack.

The household version holds all three together. When a household buys a flat, the valuer's certificate is for the household, the neighbours read it as gossip about the going rate on the street, and the bank lending against the flat looks at it briefly and then goes back to asking about the household's income. Same document, three different weights, and only one of the three parties it was written for.

One last figure, and it is the smallest number in this guide. The completion adjustments moved the equity value from Rs 1,140 crore to Rs 1,137 crore, a net of minus Rs 3 crore. Minus Rs 3 crore is a rounding error against a purchase of this size, and the smallness is exactly why both legs are computed rather than either being skipped: a buyer who had checked working capital and not net debt would have been wrong by Rs 12 crore, and one who had checked net debt and not working capital would have been wrong by Rs 15 crore. The smallness of the net is a result of both checks being done, never a reason to do only one. And none of that movement existed on the day the opinion spoke as at, so no part of it is inside the opinion.