Regular readers may recall that I believe the use of “fairness opinions” (assurances by allegedly neutral third parties, in return for a fee, that the terms of a proposed M&A transaction are reasonable, when in fact they’re often an egregious ripoff of buyers, sellers, or both) is one of the most outrageous forms of corruption on Wall Street. They are a fig leaf concocted by the courts to give managements a free pass to plunder shareholders. You may not remember--but I sure do--that Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) were each paid $25 million to deem BofA’s acquisition FleetBoston as “fair” back in 2003 when in fact the deal substantially diluted BofA shareholders.
In any event, I mention all this because the uselessness of fairness opinions was highlighted briefly at the scheduling conference for the Sallie Mae (NYSE:SLM) -J.C. Flowers lawsuit Monday in Delaware Chancery Court in Wilmington. Flowers lawyer Marc Wolinsky, of Wachtell, Lipton, Rosen & Katz (who presumably knows a thing or two about these issues) argued that the deal was hamstrung because, among other things, Sallie had refused to provide updated financial projections for use by potential debt buyers. Judge Leo Strine wanted to know why the buyers couldn’t just make do with a you-know-what. The ensuing conversation is revealing:
THE COURT: Aren't [the potential debt buyers] just going to rely, like when they give fairness opinions – they just rely, without any independent verification, upon the information given to them?
MR. WOLINSKY: The guys who put their money on the -- into the bonds, I'm told they don't quite do that.
THE COURT: But the bank is saying this. Right?
MR. WOLINSKY: The -- JPMorgan and Bank of America are saying, "To sell these bonds, we need more financial information."
THE COURT: That's what I'm saying. It's a different standard than when they give a fairness opinion.
MR. WOLINSKY: Absolutely.
THE COURT: I wanted to be clear.
MR. WOLINSKY: This is real money changing hands.
THE COURT: A fairness opinion is just a fairness opinion.
MR. WOLINSKY: A fairness opinion, you know -- it's the Lucy sitting in the box: "Fairness Opinions, 5 cents."
“Fairness opinions, 5 cents.” That pretty much says it all, don’t you think?
Tom Brown is head of BankStocks.com.