The Fairness Opinion Process SPAC Sponsors Should Know — Michael Moscarelli

Michael Blankenship: 0:00

Hi, this is Mike Blankenship with SPAC Podcast. Today I'm joined by Michael Moscarelli. Michael, why don't you tell us a little about yourself?

Michael Moscarelli: 0:07

Yeah, yeah. Thanks. Uh, good to be on here. My name is Mike Moscarelli. I'm with, uh, Houlihan Capital. So we specialize in valuations and specifically fairness opinions, and we've carved out a, a bit of a niche for ourselves doing fairness opinions in the, the SPAC space.

Michael Blankenship: 0:25

Great. Well, let's dig in. So why do I need a fairness opinion for a SPAC transaction?

Michael Moscarelli: 0:30

Couple of, couple of different reasons, kind of broad-ranging there. I think the first, and probably the one that most folks will run into when they're going through this process, uh, is the entire fairness standard, uh, in potential litigation. You know, we've seen since the Multi-Plan case back in twenty twenty-two, big shift in the market. Um, there's generally an expectation that in the event of litigation there's gonna be some consideration for the entire fairness standard, which is a little bit more stringent. Um, needs... It requires management to demonstrate kind of a higher burden of proof that the transaction was fair. Um, and there's, there's two considerations there. There's fair pricing and there's fair dealing. Um, a fairness opinion helps to, to really demonstrate the fair pricing component of that i- in the event that you need this line of defense in litigation. And then I think as well, you know, having gotten a fairness opinion and demonstrated that you've done your diligence helps to also sort of evidence the fair dealing there as well. So because of Delaware law, again, a lot of SPACs now incorporated in Cayman, but you end up re-domesticating to Delaware post de-SPAC, um, there's a presumption of being subject to the entire fairness standard. So that's kind of the big one right up front. Um, it of course demonstrates appropriate diligence throughout the transaction. It gives you a third-party insight into sort of market thinking about the deal. And then honestly, we find with a lot of management teams we work with, it's just nice to get an outside check. Um, you know, you're very much in the weeds, you've done the diligence, you're involved with the company. It is nice to have an outside advisor take a look at the company, tear the deal apart, run all the numbers, um, and kind of give an, an added level of comfort before you make that, that final BCA uh, vote there. Um, and, and just give you a level of certainty. So I think that's sort of the two major, major reasons there.

Michael Blankenship: 2:20

Yeah. And so I need an opinion, um, who do I go to and, and, and what am I looking for when I'm choosing a provider?

Michael Moscarelli: 2:27

Yeah. Cou- couple of items there for sure. Um, the first I would say is, you know, industry experience. You're likely looking at a target that is in a relatively niche space or might have specific components to the business that require background. So that first and foremost, um, when you've got some names in front of you, you wanna really make sure that they understand the company, um, the operating state of it and the business- And, and can give a reasonable valuation assessment just at, at base level for the actual target company. Um, the other thing is experience with the SPAC structure and fairness opinions for SPACs specifically. Um, they're not the same as fairness opinions for many other transaction types. Uh, the SPAC vehicle is... has, has a lot of ins and outs to it that need to be considered in the opinion, and also it, it changes, right? The, a SPAC being done in, in 2026 is very different than a SPAC being done in 2022. So you wanna make sure it's a firm that's following the market, understands the vehicle, has done a lot of these. The beauty of that is that they're almost always disclosed, right? The name of the firm in, uh, in filings. So you can go to your heart's content and search through EDGAR and, and search for firms who are active in this space. And then honestly, the, the easiest way, right, is to use your resources, use your advisors. Um, you know, you have a deal team put together. They know the firms that are active in the space. They know who to call. Have them throw you a couple names. Um, they can really be an excellent resource in sourcing a firm for a fairness opinion.

Michael Blankenship: 3:58

You know, one question I get a lot, uh, from my clients is, "What will this cost me and, and how should that fee be structured?"

Michael Moscarelli: 4:06

Yeah, absolutely. Uh, we g- we get that one as well. Um, that's, that's one of the first questions, uh, in the process here. Um, fees can be wide-ranging and, and again, sometimes you'll see them disclosed, uh, in, in filings, sometimes you won't. Uh, we say, you know, it's, it's typically starts at six figures, and it can go as high as seven. We've seen some, um, if there's particular risk or it's a very, very large transaction. So the, the, the range varies. It's based on risk. It's based on size. It's based on the firm you engage. They may have more or less overhead. Um, so there, there's a lot that can go into it. But really the, the thing to be aware of when you're, you're figuring out the fee component is just to ensure that there's no contingency, right? A, a contingent fee for a fairness opinion that's contingent on the outcome of the opinion, um, kind of defeats the, the purpose, uh, to some degree. So you just wanna make sure that as you're, you know, regardless of what the number is, that you're appropriately structuring, um, any sort of milestone fee structure so that you don't have this, this inherent contingency. You wanna make sure you can avoid that as much as possible.

Michael Blankenship: 5:16

Yeah. And, and oftentimes, you know, people get busy, uh, the advisors get busy on a deal, so how can they really make that opinion process smooth for, for, for everyone?

Michael Moscarelli: 5:26

Right. Um, well, the outset, you know, you wanna understand your deliverables. You wanna understand the respective timelines for those deliverables. You know, I'm paying this fairness opinion advisor, what am I getting? When does it arrive? When do I need it by? So laying all that out at the outset is going to save you a lot of time and a lot of headache. Um, again, you'll have engaged an advisor with experience in this space who's done a lot of these transactions. Um, so you can kind of throw that to them of, you know, what is the reasonable timing here? How much time do you need? Talk to your advisors on your team, how much time do you need internally to make sure this process goes, uh, comes together all at the right time, and, and communicate that upfront. Now, obviously it's, it- it's M&A, right? Deal timelines are al- ever-shifting. Can be a variety of reasons why that might shift, and communicating that as soon as you know to your provider is, um, gonna keep everybody's, uh, nights and weekends a little, little freer than they might otherwise be. Um, the other thing to do is prepare information in advance. Your, you know, you'll have a data room together for the transaction. Um, there's a couple of additional items that you might need to think about, things like trust statements, um, an understanding of any, uh, non-redemption agreements, any PIPE, uh, agreements that are in process, and then of course BCA, any transaction documents that are, that are starting. You wanna have all that, uh, available right up front. Um, the less back and forth you spend with your, uh, with your opinion team, the, the smoother the process can go. So as, as much information as you can have pre-compiled and can just sort of send across, um, that will help a lot. Uh, and then specifically, again, there's SPAC-specific requests, right, for a fairness opinion. It's a bit of a different animal from a typical opinion. Um, your provider should send an info request. It's easiest just to ask for that if they haven't sent it, and then you'll know what to work through, right? You can check things off the list, have your information ready, and that's gonna save you, uh, a lot of time. But really it's anything, a- as with any transaction, it's communication, right? Update as soon as you know something that could affect the timeline of the opinion, communicate that to your team, um, and that will help keep everything running smoothly.

Michael Blankenship: 7:39

Yeah. And so Michael, what's the difference, or if there is any difference, between a SPAC fairness opinion and any other kind of opinion given in a transaction?

Michael Moscarelli: 7:49

For sure. The, the biggest differentiator, and I think this is kind of, uh, can be hard for, for teams to wrap their head around sometimes- Uh, is that there's a lot more focus on the allocation component. Um, you know, we've seen this, the market of, of opinion providers come to meet this requirement. You know, regulators are very focused on, you know, how is the dilution affecting public shareholders, right? How is that, uh, at the other side of the transaction, pro forma for the deal, what does it look like down on a per share level as though I were, you know, a public shareholder? So the biggest difference really is that you're not just comparing enterprise value to enterprise value, and I think in the early days of some SPAC fairness opinions, that was a reasonable enough approach, and I think it's become best practice to consider, you know, down to the per share value as compared to my redemption price per share, uh, is the transaction fair? And that's really where we're seeing the regulatory attention, um, and where an opinion differs. There's a lot of assumptions. Obviously, there's a lot of structure on how you get to that allocation. You need to consider warrants. You need to consider any potential, uh, capital raise in the transaction, PIPEs, equity lines of credit, all that sort of thing, um, debt and cash pro forma for the transaction. There's a little bit more focus there that I think, uh, on a typical fairness opinion may not be necessary to give an opinion of fairness. So that's really where you're gonna see the biggest difference. Um, and then I think the second one, and this kind of comes into, to choosing an advisor, uh, there needs to be a level of comfort with valuing sort of earlier stage, more growth stage companies. Um, the, the kinds of companies that are gonna typically utilize a SPAC vehicle may be different from what you would see in, like, a typical IPO situation. So you really want, uh, a firm and a provider that's comfortable working with VC, PE-backed companies in that kind of stage, um, comfortable dealing with, uh, different levels of, of information and available forward information. Um, and, and that's really a, a key differentiator as well. So th- those are kind of the two biggest focuses as far as how an opinion might vary in the SPAC space from a traditional opinion.

Michael Blankenship: 10:05

Yeah. That-- This has been very helpful, uh, Michael, to really to understand the kind of fairness opinions and, and the need within the SPAC space, uh, given, you know, these transactions early on valuation, um, as opposed to an IPO, and so good to hear. So I appreciate you coming on today. Uh, this is Mike with the SPAC Podcast.