Mergers
What is a merger? A merger can be best understood through its legal definition. It is when one company is combined with and disappears into another company. The disappearing company ceases to exist. The process is similar to when one lane of traffic merges into another. At the end of the merge only one lane remains. In a merger, an acquiring company purchases 100% of the shares of the target company (acquired company) with either its own shares of stock, cash, or notes. The acquirer retains its existence while the target company ceases to exist. But it could be the other way around, and the target company retains its identity and the acquirer ceases to exist. This happens most often when the target has a more well-known brand name. Occasionally, there is a merger of equals where the identity of both companies ceases to exist and a completely new company is formed.
When two companies decide to merge, if the companies are publicly held, the shareholders from both companies will get to vote on the merger. In order to convince the shareholders of the financial fairness of the merger, and to demonstrate their fiduciary duty to the shareholders, the board of directors will typically request a fairness opinion on the merger. A fairness opinion is an opinion on the financial fairness of the offer to the shareholders.
A fairness opinion usually involves extensive valuation analysis, evaluating whether the purchase price is fair and whether the deal will result in an increase in the earnings per share for the remaining company. A fairness opinion usually requires approval by an in-house fairness opinion committee, after which it is presented to the board of directors. The fairness opinion may be prepared by the investment bank advising on the sale or by an independent third-party. The fairness opinion is presented in the form of a letter with an elaborate, supporting memorandum.
The SEC requires any publicly traded company to disclose any fairness opin