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Writer's pictureDavid Sterrett

Understanding Stalking Horse Bids

In the world of mergers and acquisitions, the term "stalking horse bid" often surfaces, particularly in the context of bankruptcy proceedings. While it might sound like something out of a medieval tale, a stalking horse bid is a modern financial maneuver that can play a crucial role in the sale of distressed assets. 


What is a Stalking Horse Bid?


A stalking horse bid is an initial bid on the assets of a bankrupt company, made by a prospective buyer chosen by the debtor. This bid sets the floor price for the auction of the company's assets, ensuring that the assets are not sold for less than their value. The stalking horse bid is intended to attract other bidders to the auction, encouraging competitive bidding and maximizing the sale price.


How Does a Stalking Horse Bid Work?


  1. Selection of the Stalking Horse Bidder: The bankrupt company identifies and negotiates with a potential buyer to make an initial bid. This buyer is known as the "stalking horse."

  2. Bid Protection: To incentivize the stalking horse to make a bid, the bankrupt company often offers certain protections. These can include breakup fees (compensation if the bid is not successful), expense reimbursements, and overbid protections (requirements that subsequent bids must exceed the stalking horse bid by a certain amount).

  3. Auction Process: Once the stalking horse bid is in place, other interested parties can submit competing bids. The auction process aims to secure the highest possible price for the assets.

  4. Approval and Sale: After the auction, the bankruptcy court must approve the final sale, ensuring that it is in the best interest of the creditors.


Advantages of Stalking Horse Bids


  1. Establishes a Floor Price: The primary advantage of a stalking horse bid is that it sets a minimum acceptable price for the assets. This prevents lowball offers and ensures that the assets are not sold for less than their worth.

  2. Attracts Additional Bidders: By establishing an initial bid, a stalking horse bid can attract other potential buyers to the auction, creating a competitive environment that can drive up the final sale price.

  3. Provides Credibility: The involvement of a stalking horse bidder can lend credibility to the sale process, reassuring creditors and other stakeholders that there is serious interest in the assets.

  4. Bid Protections: The stalking horse bidder often receives certain protections, such as breakup fees and expense reimbursements, which can mitigate the risks associated with making the initial bid.


Disadvantages of Stalking Horse Bids


  1. Potentially Higher Costs: The debtor company may incur additional costs due to the protections offered to the stalking horse bidder, such as breakup fees and expense reimbursements.

  2. Complexity and Time-Consuming: Negotiating and setting up a stalking horse bid can be a complex and time-consuming process, which might delay the overall sale.

  3. Risk of Discouraging Bidders: If the terms set for subsequent bids are too stringent (e.g., a high overbid increment), it might discourage other potential buyers from participating in the auction.

  4. Potential for Lower Final Price: If no other bidders come forward, the assets may be sold for the stalking horse bid amount, which might be lower than what could have been achieved through a different sale process.


Stalking horse bids are a valuable tool in the sale of distressed assets, providing a structured and competitive environment that aims to maximize value. While they offer significant advantages, including setting a floor price and attracting additional bidders, they also come with potential downsides such as higher costs and complexity. Understanding the dynamics of stalking horse bids can help stakeholders navigate the often tumultuous waters of bankruptcy asset sales, ensuring that the process is as beneficial as possible for all parties involved.


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