Are Third-Party Fundamental Valuations Relevant in Public-Company Takeovers?

In U.S. M&A, target directors are effectively required to consider third-party financial analyses and valuations, summarized in a “fairness opinion,” before accepting a takeover offer. Critics argue that these valuations are not relevant for public companies, which can assess the desirability of the deal in terms of the market premium. I identify conditions under which a target's pre-deal market price will not provide directors with the information required to assess a takeover offer, and test for whether fairness valuations provide incrementally relevant information. I find that they can impound expected transaction synergies and unravel abnormal runups in the target's stock price prior to the public announcement date, and they may signal ex ante fundamental mispricing. I also find that the providers bias their valuations to cater to their clients. This suggests that third-party fundamental valuation has a plausible role as a supplement to market signals in public-company M&A, though the current process has flaws in its design