Setting the Pace: The Essence of a Stalking Horse Bid
A stalking horse bid represents the initial bid on the assets of a bankrupt company. When companies file for bankruptcy, they often struggle to save what remains of their business. In a structured effort to do so, they select a bidder, known as the “stalking horse,” from a pool of interested parties. This stalking horse bidder sets the minimum purchase price for the auctioned assets, establishing a baseline below which other bidders cannot undercut.
The concept draws its name from an age-old hunting tactic where hunters use a physical or fake horse as concealment when advancing towards their prey undetected.
Key Takeaways
- Initiation: A stalking horse bid is the first bid on the assets of a bankrupt firm, typically setting the lowest acceptable price.
- Protective Measure: It aims to safeguard the company from receiving undervalued bids for its residual assets.
- Attracts Offfers: Once set, other interested buyers must propose higher bids to win the assets.
- Incentives for the Bidder: Stalking horse bidders often receive incentives such as expense reimbursements and lucrative breakup fees.
How the Stalking Horse Bid Works: Boosting Prospects in Distress
Utilizing the stalking horse bidding process allows financially troubled companies to invoke a sense of security in attracting better offers during an asset sale. After the initial stalking horse bid, competing bidders must come forward with more lucrative offers.
This method not only ensures better potential returns but also makes valuable details of the deal public, facilitating greater transparency that public proceedings inherently provide. Typically, a stalking horse can negotiate specific terms about which assets and liabilities they aim to secure.
Advantages of a Stalking Horse Bid: The Bidder’s Benefit
Bidders, or stalking horses, often glean several perks in gaining the role of an initial bidder. These benefits include:
- Expense Reimbursements and Breakup Fees: Covering initial costs and ensuring financial fallback.
- Strategic Control: Ability to choose valued assets and liabilities, managing desirable acquisitions.
- Bidding Discouragement: Structuring bidding terms to reduce competitors’ interest.
Disadvantages of a Stalking Horse Bid: The Pitfalls to Consider
Taking the initial leap as a stalking horse bidder entails substantial efforts to stay ahead:
- Due Diligence Costs: Performing thorough evaluations to determine fair bid offers.
- Resource Investment: Committing substantial time and financial resources into bid-preparation.
- Competitive Risks: Other parties can easily place incremental offers to clinch assets after the initial bidder has worked intensively on due diligence and negotiations, increasing overhead costs.
Stalking Horse Bid Examples: Real-World Applications
Bed Bath & Beyond and Overstock.com
In April 2023, Bed Bath & Beyond filed for Chapter 11 bankruptcy following unrealized attempts at business recuperation. Requiring an efficient sale, they chose Overstock.com as their stalking horse bidder. Overstock’s bid, valuing at $21.5 million, involved intellectual property, business data, app rights, and a few contracts. Ultimately, Overstock succeeded, reinforcing its brand under BedBathandBeyond.com, while other assets went to different entities.
Dendreon and Valeant Pharmaceuticals
Not all stalking horse bids culminate straightforwardly. Valeant Pharmaceuticals demonstrated in 2015 with their stalking horse bid of $296 million for Dendreon Corp.’s assets. Heightened interest from other bidders pushed the competitive price to $400 million within a week. Eventually, due to persistence and s tactical fee arrangements, Valeant secured the assets for $495 million.
Legal Aspects: Ensuring a Binding Agreement
Stalking horse bids must receive approval from the bankruptcy court, solidifying their legally binding status. These bids act as formidable concrete steps within the auction process overseen by regulatory stipulations.
Additional Concepts Related to Stalking Horse Bids
Topping Fee:
A topping fee differs from a breakup fee. It’s a set percentage of the price difference between the winning and initial bid, ensuring some returns if the initial bid isn’t successful.
Stalking Horse Candidate:
In politics, a stalking horse candidate serves as a decoy or disruptor. Similarly, in bankruptcies, it represents the entity designated to make the primary bid setting benchmarks for others to compete with.
##The Bottom Line: Strategic Plunge with a Purpose
A stalking horse bid involves a strategic partnership initiated by a bankrupt company to establish the open market value of diminishing assets. Despite perks regarding bidding influence and asserted fees, this role demands due diligence and extensive preparations applicants’ must undertake seriously as competitors can capitalize over their groundwork.
Related Terms: breakup fees, due diligence, bankruptcy, initial bid, financial distress.
References
- Nasdaq. “Stalking Horse Bid”.
- Collins English Dictionary. “Definition of ‘Stalking Horse’”.
- Thomson Reuters Practical Law. “Stalking Horse”.
- United States Courts. “Bankruptcy Courts and Cases—Journalist’s Guide: Accessing Bankruptcy Records”.
- SC&H Group. “Bankruptcy Sales and the Stalking Horse: Is It a Fit?”
- CourtListener.com. “Case 23-13359-VFP”.
- CNBC. “Overstock.com Wins Auction for Bed Bath & Beyond’s Intellectual Property, Digital Assets”.
- CNBC. “These Retailers Will Take Over Bed Bath & Beyond’s ‘Top-Notch’ Store Leases”.
- Reuters. “Bed Bath & Beyond Ends Auction for Buy Buy Baby Stores”.
- PR Newswire. “Valeant Enters Into Amended Agreement to Remain Lead Bidder in Acquisition of Dendreon and Its Leading Immunotherapy Treatment, PROVENGE® (sipuleucel-T)”.
- The Wall Street Journal. “Valeant Approved to Buy Dendreon Assets for $495 Million”.
- American Bankruptcy Institute, New York University (NYU) School of Law, and NYU Pollack Center for Law & Business, via Wachtell, Lipton, Rosen & Katz. “39th Annual Lawrence P. King and Charles Seligson Workshop on Bankruptcy & Business Reorganization”, Page 11 of PDF.
