What Does Stalking Horse Bidder Mean?
A stalking horse bidder is an entity that a distressed company chooses to make the first bid when selling one or more of its assets in an auction type process. This strategy, called a stalking horse bid, acts as a way to test the market. In this process, the company makes a list of possible bidders and chooses the highest. This stalking horse bidder is offered many incentives, such as breakup fees, to make the auction more enticing. As a result, the bidder will be willing to offer a higher price for the assets of the company. Since the price of the highest bidder becomes the starting price of the auction, the chance for the company to make more money is greatly increased.
Divestopedia Explains Stalking Horse Bidder
The stalking horse bidder acts as a trump card for a distressed company during an auction. Since the highest bidder gets to make the first bid, the company has a chance to get higher offers for its assets while avoiding any low ones. Even in cases where there are no other higher bidders, the distressed company still gets the best value from the stalking horse bidder. Therefore, this is a winning strategy for companies that need to sell their assets in an auction.
From a stalking horse bidder's perspective, he/she receives the highest value because of the many incentives offered by the auctioned company. Since these incentives more than make up for any possible losses for the bidder, he/she is willing to offer the highest bid. However, if another bidder places a higher bid, then it is up to the stalking horse bidder to increase their price depending on how important the assets are to each bidder. The rest of the process follows a normal auction with the highest bidder winning the distressed company's assets.