In the context of investment and mergers and acquisitions (M&A), a stalking-horse bid refers to an initial bid. Or it is a potential buyer for the assets or business of a distressed company. The company is undergoing a bankruptcy or restructuring process. The purpose of a stalking-horse bid is to set a baseline or floor price for the assets and to attract other potential bidders to participate in a competitive auction process.
Here are key characteristics and considerations related to stalking-horse bids:
Distressed Company: A stalking-horse bid typically occurs when a company is in financial distress, such as bankruptcy, insolvency, or restructuring. The distressed company, with the assistance of advisors or bankruptcy courts, seeks a potential buyer to acquire its assets or business.
Baseline Bid: The stalking-horse bidder, selected by the distressed company, submits an initial bid or offer that serves as a starting point for the auction process. The bid is often in the structure as an asset purchase agreement, outlining the terms, and conditions of the proposed transaction.
Competitive Auction: After the stalking-horse bid is in announcement, other interested parties can involve to participate in a competitive auction process. These bidders have the opportunity to submit higher or more favorable bids, aiming to surpass the stalking-horse bid and win the acquisition.
Benefits for Distressed Company: It provides several advantages to the distressed company. It establishes a minimum acceptable price, reducing uncertainty and attracting other potential bidders. It also accelerates the sale process, as the stalking-horse bidder’s due diligence and negotiations have already taken place.
Benefits for Stalking-Horse Bidder: It can gain a competitive advantage by being involved early in the process. They have the opportunity to conduct thorough due diligence, negotiate favorable terms. It could potentially secure a “break-up fee” or other incentives if they are outbid by another buyer.
The use of stalking-horse bids aims to maximize the value of the distressed company’s assets and encourage competitive bidding. It is ultimately benefiting the creditors and stakeholders involved. It provides a structured framework for the sale process and helps expedite the transaction in a challenging financial situation.
