Stalking-Horse Bid

What Is a Stalking-Horse Bid?

A stalking-horse bid is an initial bid on the assets of a bankrupt company. The bankrupt company will choose an entity from a pool of bidders who will make the first bid on the firm's remaining assets. The stalking horse sets the low-end bidding bar so that other bidders can not underbid the purchase price. The term "stalking horse" originates from a hunter trying to conceal himself behind either a real or fake horse.

Key Takeaways

  • A stalking-horse bid is an initial bid on the assets of a bankrupt company, setting the low-end bidding bar so that other bidders can’t underbid the purchase price. 
  • Other buyers can submit competing offers following the stalking-horse bid. 
  • A stalking-horse bidder is afforded various incentives, such as expense reimbursements and breakup fees.

How a Stalking-Horse Bid Works

The stalking-horse bid method allows a distressed company to avoid receiving low bids as it sells its final assets. Once the stalking-horse bidder has made its offer, other potential buyers may submit competing bids for the company's assets.

By setting the low end of the bidding range, the bankrupt company hopes to realize a higher profit on its assets. Bankruptcy proceedings are public. The public nature allows for the disclosure of more information about the deal and the buyer than what would be available in a private deal.

Stalking-horse bidders can generally negotiate which particular assets and liabilities it hopes to acquire.

Advantages and Disadvantages of a Stalking-Horse Bid

Since the stalking-horse is the opening offer for the assets or company, the bankrupt company typically awards the stalking-horse bidder with several incentives. Incentives include expense reimbursements, breakup fees, and exclusivity for a specified period. 

The stalking-horse bidder receives benefits for its efforts. It may negotiate the terms of the purchase and can choose which assets and liabilities it wishes to acquire. Most importantly, the stalking-horse bidder can negotiate bidding options that discourage competitors from bidding.

The stalking-horse bidder will exert great effort to gain the advantages of being the first bidder. Since this is the opening bid, the stalking-horse bidder must perform due diligence (DD) when determining its offer price and the fair value of the remaining assets. The stalking-horse bidder must invest time and resources to do this research. The risk remains, however, that even with due diligence, the price bid may be more than the value of the assets. 

Additionally, there is risk associated with the stalking-horse's bid being public. Another party can merely prepare and submit a slightly higher offer. In this way, the second company capitalizes on the stalking-horse's due diligence. Also, the stalking-horse bidder may spend a good bit of time in negotiating the terms of the deal, which will further raise overhead costs.

Example of a Stalking Horse

Valeant Pharmaceuticals International Inc. (NYSE: VRX) placed a stalking-horse bid for certain assets of bankrupt Dendreon. The initial offer was $296 million in cash on January 29, 2015. However, due to other competitive bids, the price increased to $400 million one week later.

At a bankruptcy hearing, the court formally approved Valeant's role as a stalking-horse bidder. The company was entitled to receive a breakup fee and expense reimbursement if its bid was unsuccessful. The court also set a deadline for additional bids. Ultimately, the bankruptcy judge approved the sale to Valeant for $495 million, with a new deal including other assets.