What is an Indication of Interest (IOI)?
An indication of interest is a crucial expression among investors and acquirers, indicating a conditional, non-binding interest in purchasing a security awaiting approval by regulatory authorities or in acquiring a company. They express sincere interest but do not represent a legal obligation.
Key Takeaways
- Nonbinding Agreements: IOIs indicate nonbinding agreements either to acquire a company or buy a security once it is available.
- Relevant During IPOs: IOIs are especially relevant during the IPO registration process.
- Brokerage Role: Stockbrokers often facilitate IOIs, representing serious yet nonbinding inquiries.
- No Guaranteed Purchase: Expressing interest via an IOI does not assure the acquisition of securities once they reach the IPO stage.
How an Indication of Interest (IOI) Works
In the finance world, an IOI shows a conditional interest in buying a security as it undergoes the registration process with the intent of a future IPO. Although nonbinding, the IOI is a serious proposition that must be carefully handled, adhering to legal guidelines. The investor’s broker must provide a preliminary prospectus.
An IOI often includes:
- Security Details: The name and specific details of the security.
- Transaction Purpose: Indicates whether the buying or selling intent.
- Volume and Price: The number of shares, sizes, and prices.
Institutional brokers and firms communicate electronically and can project IOIs to the marketplace, although there are no guarantees of purchase even with high initial interest.
IOIs in Mergers and Acquisitions (M&A)
In M&A scenarios, IOIs initialize the conversation around a full acquisition. These nonbinding documents communicate genuine interest and often encompass more detailed assessments compared to twin financial/trading IOI counterparts.
Typical elements of an M&A IOI include:
- Estimated Price Range: Can be a dollar value or represented as a multiple of EBITDA.
- Management Retention: Plans for executive management’s roles post-acquisition.
- Due Diligence: An outline of due diligence aspects and timelines.
- Transaction Structure: Type of acquisition (asset vs equity, cash vs stock).
- Close Timing: Expected timeframe for closing the transaction.
Indication of Interest (IOI) vs. Letter of Intent (LOI)
While both IOIs and LOIs are nonbinding, they serve different purposes. The IOI is the initial communication of interest, broad and less formal, preceding the LOI. An LOI is more detailed and binds parties to negotiate exclusively. However, both do not serve as final agreements, allowing parties to break off negotiations at any time.
Example of an IOI
In May 2008, Marc Chardon, CEO of Blackbaud, expressed interest in acquiring Kintera through a structured IOI to Richard LaBarbera, Kintera’s CEO. The offer proposed an acquisition price of $1.12 per share, a time-restricted exclusive deal, and detailed negotiations and retention plans for Kintera’s top management.
Key details included:
- Purchase price of $1.12 per share
- All-cash proposal
- Conditions for closures and management retention plans
What Is an Actionable Indication of Interest?
An actionable IOI contains detailed, specific information about the purchase that includes comparable or higher prices than the National Best Bid and Offer (NBBO) and entails actionable volume details.
Who Can Cancel an Indication of Interest?
The initiating party can cancel the IOI or allow it to expire if left unconfirmed well beyond the confirmation period.
What Is a Natural Indication of Interest?
A natural IOI comes from the customer directly, not the firm actively seeking interests. It represents customer-driven interest applauded by organizations like FINRA.
The Bottom Line
Though informal and non-obligatory, indications of interest significantly impact organizational and investor strategies, stipulating conditional commitments towards significant financial, trade, or acquisition decisions. They are initial but decisive steps in robust investment and acquisition pathways.
Related Terms: Underwriting, Preliminary Prospectus, Letter of Intent, Due Diligence, Broker-Dealer.
References
- Business Transition Strategies. “Why an IOI can help get a better LOI”.
- Rose Biz. “Top 12 Most Common M&A Acronyms you Need to Know”.
- U.S. Securities and Exchange Commission. “EX-99.(D)(10) 16 dex99d10.htm INDICATION OF INTEREST LETTER”.
- Markets Media. “Banks: SEC Raising Bar on Trade-Order Transparency”.
- SoFi. “Can I change or cancel my indication of interest?”
- FINRA. “Regulatory Notice: Indications of Interest”, Page 2.
