All's fair in love, war and, it turns out, the pricing of M&A deals. You can look up that last point in any one of the thousands of fairness opinions buried in public company proxy statements. In each transaction the adviser rendering the opinion was paid to confirm that a price -- one that buyer and seller had already agreed upon -- was fair. And sure enough, in each case the adviser did so. Not that it was hard. According to critics, there's almost always a way to make that case.

But that's just part of the buzz in the odd world of fairness opinions -- those opaque deal documents that occupy a small corner of the valuation arena but still manage to fuel a big public argument every so often. You may remember the Massachusetts secretary of state using the fairness opinion to try to block Procter & Gamble Co.'s $57 billion bid for Boston-based Gillette Co. back in 2005. More recently, some Bear Stearns Cos. shareholders were irate when the firm's advisers at Lazard opined that J.P. Morgan Chase & Co.'s $2 per share offer for Bear was fair and eight days later said the same about $10 per share.

Fairness opinions are intended to confirm -- usually for sellers, occasionally for buyers -- that the price in a transaction falls within a reasonable range. And especially since a 1985 Delaware Supreme Court ruling made them the de facto vehicle for boards to show they have fulfilled their fiduciary duty, they have been showing up routinely in transactions of all shapes and sizes. Public company boards see them as legal protection from dissatisfied shareholders. Smaller private companies with little deal experience often want the added analysis, especially when considering a sale.

For corporate dealmakers, fairness opinions are usually just part of the landscape, with little direct impact on their own valuation work. "It's not one of the key things that tells you what the value is," says Jan Monster, senior director of corporate development for specialty engineered products manufacturer Teleflex Inc.

The most common complaints about fairness opinions involve the conflicts of interest that arise when the opinion is rendered by an investment bank that is also advising the company on the deal. There's a growing number of advisers offering independent fairness opinions, but even in those cases, the lure of future business is a potential conflict in itself. Other more fundamental concerns include the subjectivity of the data that underpins the opinions, the lack of standards for how they are prepared and, of course, the fact that they are typically rendered after buyer and seller have agreed on a price. The chances of a financial adviser, particularly one that hopes to work with the client again, refusing to render a fairness opinion at that late date are slim.

"To think that boards say, 'We got a fairness opinion. Let's do the deal.' That just doesn't happen," says Steven Davidoff, an assistant professor of law at Wayne State University Law School and a former Shearman & Sterling LLP attorney. "At this point everyone is just going through the motions."

If fairness opinions are so flawed, why are they used at all? True, compared with the overall price of a deal, the cost is usually minimal -- anywhere from $200,000 to a few million dollars. But if the idea is to serve the interest of shareholders, why expend resources on a fairness opinion that will almost always be positive and that doesn't really guide the board in its decision making?

The answer is simple. "Boards have to do something to satisfy their duty of care," says Davidoff. And fairness opinions, flawed or not, are for now the only vehicle that allows them to do that.

For Goldman, Sachs & Co., Deutsche Bank AG, Lazard and other investment banks, rendering a fairness opinion is an add-on to their broader advisory work. These relationships raise some obvious red flags, with the reddest ones hoisted when the advising bank will receive a success fee should the deal close or when the bank is providing funding to a potential buyer. While the banks above declined interview requests, no one believes that a bank that has advised on a deal is going to suddenly conclude the price isn't fair. "If Goldman Sachs is advising me on the deal and they're providing the fairness opinion," says Teleflex's Monster, "it's truly a technicality."

Even a financial adviser not otherwise involved in the deal may have an interest at stake. "You can say I was advised by Goldman Sachs and I went to Merrill Lynch for the opinion," Monster continues, "but Merrill would still want to maintain a good relationship with Teleflex because it may want to advise us on the next deal. It's a small club, and we all understand how the game works."

The Financial Industry Regulatory Authority's Rule 2290, adopted by the Securities and Exchange Commission in November, was designed to address potential conflicts. It requires financial advisers rendering fairness opinions to disclose success fees the firm would receive should the deal close. It also requires disclosure of any previous relationships with the client and expectations for future business. Still, the disclosures, which may or may not include the amount of any fees, end up being not much more than boilerplate language in the proxy.

Rule 2290 did, however, make corporations more sensitive to the need to avoid the appearance of conflicts, says Patricia Luscombe, who leads the fairness opinion and valuation practice of Lincoln International, one of a growing number of boutique investment banks and law firms offering independent fairness opinions. What does Luscombe say to criticism that fairness opinions don't add value to the deal process? She is quick to differentiate the work of her firm from that of the investment bank advising a company on a deal.

"Our sole job is to analyze the transaction," says Luscombe, whose clients are typically small public companies and privately held firms. "That's the only hat we wear. So the depth of analysis that we bring, I believe, is a lot greater than the primary investment bank, which may have been steeped in the deal for so long that it's all second nature to them. Our senior management is involved, and we bring our own M&A expertise, and a fresh set of eyes to what's going on in the industry that the client may not have heard from their existing investment bank."

In rendering the opinion, Luscombe may work with the corporate development executives who determined the valuation. "Sometimes they think we're there to rubber-stamp the situation. They don't realize that when we talk through projections with them, we'll listen to their point of view, then come back to our office and, with our industry expertise, run our own analysis to understand the range of values for the transaction."

It's important to note that by the time Lincoln International is brought in, negotiations are nearly complete. Plenty of time and resources have likely been spent reaching the deal terms, and the boards of both parties are expecting the fairness opinion will be rendered. What happens if Luscombe determines that a price is not fair?

"At first blush, if the terms don't pass the smell test, we might turn the job down," she says. But that doesn't often happen. "I think boards and legal advisers in this post-Sarbanes-Oxley world have grown more sophisticated in getting transactions on the table that do pass the smell test and allow boards to exercise business judgment."

The potential conflicts of interest that arise in fairness opinions don't concern attorney Davidoff because they're well known. He's more bothered by the subjectivity of the process. "The numbers can be manipulated so that the bank can always come to fairness if it wants to," says Davidoff.

As one veteran corporate dealmaker who wished to remain anonymous put it, "I've seen fairness opinions come back with a range wide enough to straddle any number."

It doesn't help that the assumptions the bank uses to determine fairness are not disclosed to the public, thereby denying the public the opportunity to judge the, well, fairness of the fairness opinion. Of course, no company wants to "play out its negotiating hand in public," says Davidoff, so any disclosure of financials would have to be balanced against the need for confidentiality.

A concern that could be more easily remedied is the lack of standards for how fairness is determined. As it stands now, there are no guidelines, for instance, for evaluating other offers, comparing all-cash offers with partial or no-cash offers or setting limits on the range of what's considered fair.

"It's an art, not a science," says Davidoff. "Different firms can be using different methods to do valuation. Again, this may be fine with full disclosure, but we're not getting full disclosure."

But for all the objections, it's also the case that fairness opinions -- if done well and used thoughtfully -- can actually inform corporate boards. "That obviously provides value," says Davidoff, particularly if the summary helps the board in further negotiations. Lincoln International's Luscombe thinks board education is a clear benefit. "I think of it as putting together lots of different puzzle pieces of what a company's worth, its growth prospects, its business condition and ultimately how all that bears on what the business is worth today."

Over time, most corporate dealmakers would agree, boards with a better understanding of the valuation puzzle can only be good for corporate dealmaking. - Suzanne Stevens

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