So-called fairness opinions are not as much fair as they are a method to shift responsibility from a corporate board to that of an “independent” investment bank. The latest example of a fair value shell game was pointed out by The Wall Street Journal. It involved Lazard’s value analysis of SolarCity. The company was acquired by Tesla Motors, an organization with related ownership interests that has been called into question. In this case, the investment bank made a $400 million arithmetic error – but this oddly didn’t impact the company valuation. Welcome to the new world of accounting where increasingly 2 + 2 = 6.
Tesla could be in a cash crunch and in need of a positive fairness opinions
There have been increasingly pointed questions about the value analysis and cash position at Tesla Motors. A Fortune article by Shawn Tully, for instance, notes the company’s “cash crunch might worse than you think,” a September 2 headline warned.
In this case, Tully notes that Tesla is counting cash flow that the firm collected up front, but due to variable rebate programs, may not entirely keep. The valuation is important because Tesla, recently involved in a Facebook satellite crash that also crashed Tesla’s stock price, needs to raise additional cash.
“The news is raising concerns that Tesla already is facing a cash crunch, so it’s crucial to assess whether Tesla really can count on collecting all the money that its pro-forma reporting claims,” Tully writes.
With an acute need to have its valuation as high as possible before going to investors hat in hand comes the fairness analysis issue.
How can a $400 million valuation error not result in a recalculation of SolarCity value?
Lazard, the investment bank that earned $10 million in fees on the restructuring deal, were given $2 million just to issue a fairness opinion about Tesla’s acquisition of SolarCity. Barusch notes SolarCity may pay Lazard up to a $2 million bonus that is based on the “sole and absolute discretion” of the company. Lazard does not earn this bonus based on finding a buyer – Musk-controlled Tesla was already in a deal to purchase Musk-controlled SolarCity when they hired Lazard. What could the additional $2 million bonus be paid based on?
Such is the potential conflict of interest swamp of “fairness opinions,” where mostly became mandatory resulting for a 1985 Delaware Supreme Court opinion that held the board of directors responsibility for not properly examining a bad corporate deal.
In what might be a moniker of the times, instead of addressing the core of the problem – corporate boards do their homework and understand the deals they are approving – they turned to fairness opinions so they are absolved of liability.
Barusch has questioned the fairness of the “fairness” deals in the past, noting their lack of true value. “In the case of SolarCity, the opinion doesn’t seem to come with much useful information,” he wrote.
Welcome to accounting standards, stardate 2016.