TL;DR
A stalking horse is a strategic maneuver in business and finance where a party is used to test the market or gauge interest in an asset, often in the context of bankruptcy or distressed sales.
Concept
A stalking horse is a term used in business and finance to describe a strategic maneuver where a party (the “stalking horse”) is used to set a baseline price for an asset or to test the market for potential buyers. This tactic is often employed in situations involving bankruptcy, distressed sales, or mergers and acquisitions. Key aspects of stalking horses include:
Initial Bidder: In a bankruptcy proceeding, a stalking horse bidder is the first entity to make a bid on the assets of a distressed company. This bid establishes a minimum price that other potential buyers must meet or exceed.
Market Testing: The stalking horse approach helps gauge interest in the asset and can attract additional bidders. By setting a baseline, it encourages competitive bidding, which can ultimately increase the sale price.
Negotiation Leverage: The stalking horse bidder often negotiates favorable terms, including the right to match any competing offers. This provides them with a strategic advantage in the bidding process.
Protection for Sellers: For sellers, using a stalking horse can provide a degree of assurance that they will receive a fair price for their assets. It also helps to streamline the sale process by clarifying the value of the assets.
Legal and Regulatory Considerations: The use of stalking horses is subject to legal and regulatory scrutiny, particularly in bankruptcy cases. Courts may need to approve the stalking horse bid and the terms associated with it.
Risks and Rewards: While stalking horses can facilitate a successful sale, they also carry risks. If the stalking horse bid does not attract additional interest, the seller may end up with a lower sale price than anticipated.
Overall, the stalking horse strategy is a valuable tool in the context of asset sales, particularly in distressed situations, as it helps to create a competitive bidding environment and establish a fair market price.
