WALL STREET JOURNAL.
Blog: Money Investing
SolarCity Snafu Casts More Doubt on Fairness Opinions
5, 2016 7:59 p.m. ET
It is once again time to consider the usefulness of
investment-bank fairness opinions. The latest reminder of their
dubious value, at least in some deals: Lazard’s fairness analysis for
’s special committee relating to the company’s
Tesla Motors. A securities filing
Wednesday disclosed a $400 million arithmetic error in Lazard’s
analysis that, when corrected, turned out to have no impact on the
opinion. But I would argue that the no harm-no foul result is just
more evidence of how little information fairness opinions convey.
Lazard’s roughly $10 million fee for its work on the deal, $2 million
was specifically allocated and paid in connection with the fairness
opinion. Plus the committee may pay Lazard as much as $2 million more
in its “sole and absolute discretion.” Unless a competing bid comes in
at this late stage (and Lazard has already contacted several potential
bidders who so far haven’t bit), none of this compensation would seem
to be for acting as a “finder” for the deal; Lazard wasn’t hired until
after Tesla announced its takeover proposal.
Fairness opinions became all but mandatory after a 1985 Delaware
Supreme Court opinion slammed a board for not doing enough homework on
a deal it approved. Ever since, directors selling a company have
insisted on what might be called a “getting their ticket punched”
exercise by getting an investment bank to wave its magic wand of
fairness over a deal.
true value and usefulness of fairness opinions have often been
questioned over the years and indeed, in the case of SolarCity, the
opinion doesn’t seem to come with much useful information.
example, in reaching its determination of fairness, Lazard looked at
four different discounted cash-flow valuations. When the special
committee was making its decision (before the valuations were
corrected for the error), in all of them, the high end of Lazard’s
estimate was more than double the low end. In one of them, the top of
the range was 400% of the bottom. In another, the low end was about a
quarter of the unaffected price. Since investment banks generally take
the position that a value at any point in its fairness range is as
likely to be accurate as another, the usefulness of these ranges is
Besides, it isn’t clear how the fairness analysis could have made much
of a difference. A page-one story in Thursday’s Wall Street Journal
reports that SolarCity was facing a cash squeeze, and 15 institutional
investors passed on either acquiring SolarCity or injecting equity.
That raises the question of what alternatives there were. The
seriousness of the problem is highlighted by the fact that management
prepared two different sets of projections in connection with the
deal: A “Liquidity Management Case,” which was given only to Lazard
and the special committee, and a “SolarCity Unrestricted Liquidity
Case,” which was also shared with Tesla. The first produced a
discounted cash-flow valuation range of $5.04-$20.64 a share in one
analysis. Given the market value of the deal was $25.13 a share at the
time that it was voted on by the board, it doesn’t sound like too much
sophisticated analysis was necessary to find the path forward.
Then there was that “computational error,” which double-counted some
of SolarCity’s projected debt in the spreadsheets Lazard used to
prepare its fairness opinion. Lazard discovered the error three weeks
after the special committee had approved the deal. It resulted in a
$400 million overstatement of SolarCity’s debt. Lazard was still able
to reaffirm its opinion after the error was discovered, undoubtedly
helped by those huge valuation ranges. But $400 million represents
more than 20% of SolarCity’s current market capitalization.
This isn’t the first time a significant error has been
incorporated into a fairness evaluation.
Goldman Sachs Group
was involved in one two years ago in connection with
Tibco Software Inc. that resulted in litigation and a roughly $30
million settlement payment by the bank.
isn’t that investment banks don’t provide valuable advice. It’s just
that using them to provide the patina of fairness has produced a
steady stream of fees in exchange for something that often doesn’t add
Barusch is a retired M&A lawyer who writes about deal making for The
Wall Street Journal.