Letters of Intent and Business Combinations

Ordinarily after a SPAC's IPO, there's a lengthy period during which hear precious little from SPAC management. SPAC investors are used to being totally in the dark, other than quarterly reports, until a SPAC's team inks a definitive merger agreement.

But this quarter, five have put out announcements disclosing either a signed LOI or advanced negotiations with a target company. Why would a SPAC put out information about a target without having signed a definitive agreement?

Leaving aside the conversation about strategic M&A leakage, there's a clear motive here. Each of these SPACs has (or had) an upcoming extension meeting. Extension costs have been rising lately, with common shareholders demanding an extra penny or two per share for each month in connection with most extensions. So it's perfectly reasonable for a SPAC to try to communicate that it has an exciting deal coming down the before asking for extra time.

We went through the past three years and found 12 instances where a SPAC disclosed an LOI or negotiations with a potential acquisition target in advance of a charter extension.

Pre-announcing an LOI has been successful by almost any measure. If you look at a SPAC's warrant price on the day before and after its LOI announcement, you'll find a median increase of 41%, demonstrating the market has received LOI news very enthusiastically.

Source: Letters of Intent and Business Combinations

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