What is Stalking-Horse Bid?

870 reads · Last updated: December 5, 2024

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’t underbid the purchase price.The term “stalking horse” originates from a hunter trying to be concealed behind either a real or fake horse.

Definition

A stalking horse bid refers to an agreement in bankruptcy proceedings where a bankrupt company and an initial bidder (the 'stalking horse') set a minimum bid price to ensure that the assets are sold for at least that amount. This initial bid is known as the 'stalking horse bid'.

Origin

The concept of a stalking horse bid originated from the evolution of bankruptcy law, designed to protect the value of a bankrupt company's assets by setting a benchmark price. The earliest cases of stalking horse bids can be traced back to the late 20th century, when reforms in bankruptcy law popularized this mechanism.

Categories and Features

Stalking horse bids are mainly divided into two categories: conditional and unconditional stalking horse bids. Conditional stalking horse bids require the bidder to meet specific conditions to be valid, while unconditional stalking horse bids do not attach any conditions. The main feature of a stalking horse bid is its set minimum bid price, which provides a reference point for other potential bidders, ensuring that the assets are not undervalued.

Case Studies

A typical case is the 2011 bankruptcy auction of Borders Group, where Gordon Brothers Group acted as the stalking horse bidder, setting a benchmark price that ultimately attracted more bidders and increased the final sale price of the assets. Another example is the 2013 bankruptcy auction of Hostess Brands, where Apollo Global Management served as the stalking horse bidder, helping to ensure a fair valuation of the assets.

Common Issues

Common questions from investors include whether a stalking horse bid limits the participation of other bidders. In reality, a stalking horse bid may attract more bidders by setting a baseline price, as they know the assets have a reasonable starting price. Another misconception is whether the stalking horse bidder always wins the auction; in fact, they merely set the minimum price, and the final outcome depends on the bids from other participants.

Suggested for You

Profit Centers

A profit center is a branch or division of a company that directly adds or is expected to add to the entire organization's bottom line. It is treated as a separate, standalone business, responsible for generating its revenues and earnings. Its profits and losses are calculated separately from other areas of the business. Peter Drucker coined the term "profit center" in 1945.

Profits Interest

Profits interest refers to an equity right based on the future value of a partnership awarded to an individual for their service to the partnership. The award consists of receiving a percentage of profits from a partnership without having to contribute capital.In effect, it is a form of equity compensation and is used as a means of incentivizing workers when monetary compensation may be difficult due to limited funds, such as with a start-up limited liability company (LLC).

Accumulated Depreciation

Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life. Accumulated depreciation is a contra asset account, meaning its natural balance is a credit that reduces the overall asset value.

Loss Carryback

Loss Carryback refers to the practice where a business can apply a net operating loss (NOL) incurred in the current year to previous tax years' taxable income, thereby potentially obtaining a tax refund for taxes paid in those prior years. This mechanism provides businesses with immediate cash flow relief during tough economic times. The specific rules and allowable periods for loss carryback vary by country. For example, in the United States, businesses can carry back NOLs to the previous two tax years. It is important to distinguish loss carryback from loss carryforward, which involves applying the NOL to future taxable income to reduce future tax liabilities.

Loss Carryforward

Loss Carryforward, also known as loss carryover, is a tax provision that allows a company to apply a net operating loss (NOL) to future taxable income to reduce tax liability in future years. Depending on the tax regulations of different countries, losses can typically be carried forward for a period ranging from 5 to 20 years, with some jurisdictions allowing for indefinite carryforward. This mechanism helps businesses mitigate tax burdens during tough financial periods, aiding in their recovery and growth.

Net Sales

Net sales is the sum of a company's gross sales minus its returns, allowances, and discounts. Net sales calculations are not always transparent externally. They can often be factored into the reporting of top line revenues reported on the income statement.