Deal Lingo: Advisor to the Board = Fairness Opinion?

Nope, not necessarily

Well advising the special committee of the board can often (but necessarily always) include delivering a fairness opinion.

Fairness opinions are just a cover your ass mechanism. The BoD likes to cover their ass just like the rest of us, so this is often where the two come together.

thanks, what are the differences (from an analyst perspective) between advising the spec. committee and advising the company? is it considered not as good as advising the co., or similar (obviously depends but in general)?

Marcus sort of hit it. If you're advising the company on an M&A transaction, there's a lot to the process. Build the model, perform diligence, write books (as necessary), etc. etc. A fairness opinion is 100% technical. You know what kind of outcome you want, so that helps select comps, and you run the gamut of valuation analyses: comparable companies, precedent transactions, premiums paid, DCF and, occasionally, LBO. Being that it is on file with the SEC and subject to scrutiny, this exercise is typically exceptionally, exceptionally tedious — has to be proper justification for pretty much everything that is done. Can really be an analysts' worst nightmare.

thanks marcus and jim...so special committee advisory is essentially a fairness opinion?

Usually Special Committee advisory work involves situations where the buyer is a related party or majority shareholder (e.g. the Chairman or CEO of the Company). Because most often than not the Company is a listed entity, there is a real danger of lawsuits by minority shareholders if there is perceived to be a "sweet heart" deal or improper process.

There is a recent spade of take-private transactions (read: J-Crew, Playboy, etc.) where this is the case. A Special Committee is formed to represent the minority shareholders and is supposed to make up of independent directors. Often times an investment bank is hired to do one or two things: 1) help the Special Committee negotiate for a higher price with the Buyer Group, 2) solicit alternative, higher offers (Go-Shop). At the end of all the hoopla, if the advisor have exhausted all available means to increase the price and the SC agrees to the deal, then the same bank may issue fairness opinion.

Sometimes the two tasks are done by separate banks. A fairness opinion provider is someone who provides a letter (and sometimes, report) stating why the deal is "fair". But a SC advisor is involved in active negotiations and the goal is to obtain the highest price possible - so you see the difference.

ChairmanMao is spot on. The grand majority of Special Committees are raised due to conflicts of interest within the Board of Directions in regard to a specific transaction (management buyouts are the most salient example). I do want to add though that sometimes SC's are raised when there doesn't appear to be any conflict of interest, but because of a subtler conflict between the Board and Management.

For example, sometimes you see a deal that Management supports, but the Board raises an SC to "explore strategic alternatives." Or the other way around - an offer that Management rejects right away, but that the Board would like to see evaluated, almost always citing their legal obligation to maximize shareholder value. A lot of times it really is a debate about value - other times it's probably political.

For analysts, Special Committee advisory work resembles any other live deal, while fairness opinions are largely an academic exercise. SC advisory work is certainly not "beneath" advising management - it's fundamentally the same work, just for a different boss. If you'd like, you can even think of it as advising Management's boss.