Definition
A stalking-horse bid is an initial bid on the assets of a bankrupt company, chosen by the bankrupt company itself, before the auction process. This starting bid sets the lowest price that the company will accept for its assets. The strategy is used to avoid low bids on the company’s assets during bankruptcy procedures.
Phonetic
The phonetic pronunciation of “Stalking-Horse Bid” is: Staw-king-Hors Bid
Key Takeaways
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- Protective Mechanism: A Stalking-Horse Bid is a common tool used in bankruptcies, designed to test the market and avoid low bids on a debtor’s assets. This initial bid sets the floor for bidding in a bankruptcy auction, which helps protect the assets of the bankrupt company from ‘low-ball’ bids.
- Bidder Advantages: The stalking-horse bidder, despite the risks, also has several advantages. They have the opportunity to negotiate the terms of the sale with the bankrupt entity beforehand. They also might get a ‘break-up fee’ or expense reimbursement if another bidder outbids them in the auction.
- Positive Outcome: Though the stalking-horse bid process can seem unfair to other potential bidders, it can benefit all parties involved. The bankrupt company gets a reasonable minimum bid for its assets, the stalking-horse bidder can potentially acquire assets at a favorable price, and other bidders get a clear sense of the minimum bid they need to place.
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Importance
A Stalking-Horse Bid is especially crucial in the realm of business and finance as it serves as an initial bid on a bankrupt company’s assets from an interested buyer selected by the bankrupt company. This strategy helps prevent undervalued sales of the bankruptcy assets, instigate bidding, and maximize the assets’ overall worth. The stalking-horse bidder will set the low-end bidding bar, preventing low-ball offers. Also, for putting themselves in this position, the stalking horse bidder often receives certain benefits like bankruptcy court protection, a breakup fee if outbid, and expense reimbursements, reducing their risk in the transaction. Thus, the Stalking-Horse Bid serves a significant role in maximizing the realizable value of a bankrupt firm’s assets, reducing the risk for bidders, and ensuring a fair sale process.
Explanation
A Stalking-Horse Bid plays a crucial role in bankruptcy processes, specifically in sales of distressed assets. Its primary purpose is to test the market and avoid low bids on the assets of a bankrupt company. This method allows a bankrupt company to avoid a situation where its assets might be undersold or undervalued by setting a minimum bid price limit that other interested bidders will have to surpass. Essentially, the stalking-horse bidder sets a floor price beneath which auction prices cannot fall.Stalking-Horse Bid also offers a certain degree of control over the sales process for the bankrupt company. The initial bidder, the stalking-horse, negotiates the terms of the purchase agreement with the bankrupt company beforehand. This agreement often contains specific provisions that protect the stalking-horse’s interests, such as break-up fees or expense reimbursements if they are outbid. The agreed terms must then be adhered to by any subsequent bidders, ensuring a fair and advantageous process for all parties involved.
Examples
1. Borders Group Inc., a well-known book and entertainment products retailer, filed for bankruptcy in 2011. They received an initial bid, known as the “Stalking-Horse Bid,” from Direct Brands, a direct-to-consumer distribution company. The bid was worth $215 million and also included an assumption of $220 million of the company’s liabilities. 2. In 2020, stalking-horse bidding came into play in the airline industry when Avianca Holdings, Latin America’s second largest airline, filed for bankruptcy. The company had a stalking-horse bid from a company named Kingsland Holdings Limited, with an initial bid of $72 million. 3. The Stalking-Horse Bid is also used in real estate. For instance, in 2009, real estate tycoon Donald Trump made a stalking-horse bid for two buildings that Ed McMahon, the late TV personality, was forced to sell. Trump’s bid was intended to help prevent the properties from being foreclosed. After the deal, Trump allowed McMahon’s widow to continue living in the house.
Frequently Asked Questions(FAQ)
What is a Stalking-Horse Bid?
A Stalking-Horse Bid is a preliminary bid on the assets of a bankrupt company. The bankrupt company will choose an interested buyer to make the first bid on its assets, setting a low-end bidding bar so that other interested bidders cannot underbid the purchase price.
Why is the term Stalking-Horse used?
The term originates from hunting, where a hunter would use a horse, or a figure of a horse, as a way to hide and have a better chance of catching the prey. In similar fashion, the stalking-horse bidder is initially used as a way of advancing the interests of the selling party, by preventing lower bids.
What advantages does a Stalking-Horse Bidder have?
The Stalking-Horse Bidder has several advantages including the capability to conduct due diligence on the bankrupt company, the ability to negotiate terms of the purchase agreement, and the potential to receive a break-up fee should another bidder win the assets.
What are the disadvantages of Stalking-Horse Bid?
The primary disadvantage for a stalking-horse bidder is the cost and time devoted to the due diligence process without certainty of acquiring the assets. By being the first bidder, the stalking-horse bidder may also potentially overpay if no other competitive bids emerge.
Who determines the value of the initial Stalking-Horse Bid?
The bankrupt company often collaborates with the stalking-horse bidder to determine the initial bid. This value is important, as it sets the floor for potential future bidding rounds.
Can a Stalking-Horse Bid be topped by another company?
Yes, a stalking-horse bid sets the lower limit for the sale and other bidders can present higher bids. If no other bids are presented or if the stalking-horse bid is the highest, then the initial bidder may acquire the assets.
How is a Stalking-Horse Bid used in a bankruptcy auction?
The bid serves as a starting point in the auction process, providing a minimum bid amount. The stalking-horse bidder sets the floor pricing and terms that are acceptable to the seller, and protects the seller from low-ball or opportunistic bids.
Related Finance Terms
- Bankruptcy Sale: A type of sale in which the assets of a company undergoing bankruptcy are sold off to satisfy creditors.
- Bid Protections: Protective measures included in a stalking-horse agreement that can include expense reimbursements or breakup fees if the bidder is not successful.
- Breakup Fee: A fee paid to the stalking-horse bidder if another party outbids them and wins the assets being sold.
- Auction: A public sale in which goods or property are sold to the highest bidder.
- Asset Purchase Agreement (APA): The legal document that finalizes the terms and conditions related to the purchase and sale of a company’s assets.
