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What Is a Stalking Horse Bid?
Let me explain what a stalking horse bid really is. It's that first bid on the assets of a company that's gone bankrupt. The company picks one bidder from a group to make this initial offer on what's left of their assets. This bid establishes the minimum price, so no one else can come in with a lower offer.
The name comes from hunters who would hide behind a horse—real or fake—to get close to their prey without being seen.
Key Takeaways
- A stalking horse bid is the starting offer on a bankrupt company's assets.
- The bankrupt company selects it, and it becomes the floor price for any purchase.
- Then, other bidders can jump in, but they have to offer more to win.
- The stalking horse gets perks like reimbursements for expenses and breakup fees.
How a Stalking Horse Bid Works
Here's how it plays out. This method helps a struggling company avoid getting stuck with rock-bottom offers when selling off their last assets. Once the stalking horse makes their bid, others can submit higher ones.
By setting that low bar, the company aims to squeeze out more value from their assets. Since bankruptcy is public, you get more details on the deal and the buyer than in a private sale.
One key point: the stalking horse bidder can usually negotiate exactly which assets and liabilities they want to take on.
Advantages of a Stalking Horse Bid
As the first bidder, the stalking horse gets some solid incentives from the bankrupt company. Think expense reimbursements, breakup fees, and even exclusivity for a while.
They can also shape the deal terms, pick specific assets and liabilities, decide on contracts to keep, and set up bidding rules that make it tougher for competitors.
Disadvantages of a Stalking Horse Bid
Being the stalking horse isn't all upside—you have to put in serious work to get those benefits. As the opener, you need to do thorough due diligence to figure out your offer and the true value of the assets. That takes time and money, and there's still a chance you'll overpay.
Plus, your bid is out in the open, so someone else could just top it slightly and benefit from all your research. Negotiating the deal adds even more costs on top.
Stalking Horse Bid Examples
Take Bed Bath & Beyond and Overstock.com. In April 2023, Bed Bath & Beyond filed for Chapter 11 after failing to turn things around. They had until June to pick a stalking horse for their assets.
Overstock.com got chosen and bid $21.5 million for things like intellectual property, data, apps, and contracts. Others eyed smaller pieces, like the domain or the Wamsutta brand.
The assets went to auction, and Overstock's bid held up—they bought the brand and relaunched it. Other parts went elsewhere, like leases to Burlington Stores and Buy Buy Baby IP to Dream on Me.
Another case: Dendreon and Valeant Pharmaceuticals in 2015. Valeant started with a $296 million bid for Dendreon's assets, but competition drove it to $400 million in a week.
The court approved Valeant as the stalking horse, with breakup fees if they lost. More bids came in, and the judge okayed the sale to Valeant for $495 million, including extra assets.
Is a Stalking Horse Bid Legally Binding?
Yes, it is. Since it needs bankruptcy court approval, it's legally binding.
What Is a Topping Fee?
A topping fee is a percentage of the gap between the winning bid and the stalking horse's offer, paid to the stalking horse. It's not like a flat breakup fee.
What Is a Stalking Horse Candidate in Bankruptcy Proceedings?
In bankruptcy, it's a buyer the company picks and gets court approval for. They set the initial bid that others can't undercut, which might discourage some from bidding if it's too high.
The Bottom Line
A bankrupt company selects a stalking horse to make the first bid on its assets, which the court approves. Then, others can bid higher to win them.
The role comes with controls over the process and safety nets like fees if you lose, but expect higher upfront costs from due diligence and negotiations that others might exploit.
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