Stalking Horse Bid: Definition, How It Works, Example

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’t underbid the purchase price.

The term “stalking horse” originates from a hunter seeking concealment behind either a real or fake horse while stalking game.

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. As bankruptcy proceedings are public, they allow for the disclosure of more information about the deal and the buyer than would be available in a private deal.

Advantages of a Stalking Horse Bid

As the stalking horse bid is the opening offer for the assets or company, the bankrupt company typically awards several incentives to the stalking horse bidder. These include expense reimbursements, breakup fees, and exclusivity for a specified period.

The stalking horse bidder also may negotiate the terms of the purchase, choose which assets and liabilities it wishes to acquire, and decide which executory contracts it is willing to cure and have acquired. Moreover, the stalking horse bidder can negotiate bidding options that discourage competitors from bidding.

Disadvantages of a Stalking Horse Bid

The stalking horse bidder will exert great effort to gain the advantages of being the first bidder. As this is the opening bid, the stalking horse bidder must perform due diligence 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, allowing it to capitalize 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.

Stalking Horse Bid Examples

Bed Bath & Beyond/Overstock.com

In April 2023, Bed Bath & Beyond filed for Chapter 11 bankruptcy after several failed attempts to turn the business around and raise enough cash to cover expenses and stay afloat. The retailer then had until June to choose a stalking horse bid for some or all of its assets.

Eventually, Overstock.com, the online retailer known for its large furniture, was chosen to set the floor for future bids. Overstock.com bid $21.5 million for some of Bed Bath & Beyond’s assets, including its intellectual property, business data, rights to mobile apps, and certain contracts. Other businesses were interested in picking up fewer assets, such as just the retailer's domain name or certain assets associated with the Wamsutta brand.

After the stalking horse bid was selected, Bed Bath & Beyond’s available assets went to auction. In the end, Overstock.com’s bid proved to be enough. Overstock.com bought the brand out of business and relaunched its website as BedBathandBeyond.com.

Meanwhile, some of Bed Bath & Beyond’s remaining assets were sold to other entities. For example, Burlington Stores bought most of the company's leases. And Dream on Me purchased Buy Buy Baby's intellectual property assets.

Dendreon/Valeant Pharmaceuticals

It doesn't always end that way. Sometimes, the stalking horse bid attracts lots of interest and the price gets pushed up.

For example, in 2015 Valeant Pharmaceuticals International Inc. (now Bausch Health Companies Inc.) placed a stalking horse bid for certain assets of bankrupt Dendreon Corp. The initial offer was $296 million in cash on Jan. 29, 2015. However, due to other competitive bids, the price increased to $400 million one week later.

At a bankruptcy hearing on Feb. 20, 2015, 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.

The Bottom Line

A stalking horse is chosen by a bankrupt company to put in an initial bid on its assets. The bankruptcy court must approve the choice and the bid. The assets are then opened up to other bidders, who must make a higher bid to succeed in acquisition of said assets.

Being a stalking horse bidder has its perks, which include having control of many aspects of the bidding situation and fail-safe fees in the event that its bid doesn’t win. However, the downside is that the role comes with higher initial costs, incurred by extensive negotiations and conducting due diligence, upon which other bidders can then capitalize in making their bids.