What is Horse Bidding?
The term horse bidding (or) stalking horse bidding was devised based on an early method of hunting. In terms of business, when a company is distressed and on the verge of a crisis.
Advantages of Horse bidding:
The stalking horse bidder is frequently entitled to monetary compensation in the event that another party ultimately acquires the assets.
The stalking horse also will play a central role ⎯ along with the debtor, the debtor’s secured creditors and the committee of unsecured creditors of the debtor ⎯ in crafting the sale procedures proposed to the bankruptcy court.
The stalking horse also has the advantage of establishing itself as the front-runner for the assets. When the stalking horse is viewed as a party with substantial financial wherewithal and motivation to complete the deal, other parties may be dissuaded from investing time and energy in the process because they believe the stalking horse will ultimately win the deal.
Disadvantages of Horse bidding:
There are a few cons when being the initial bidder. Even though the stalking horse bidder wishes to attain the assets at the lowest price, the price must be within reason. Additionally, the negotiated bid between the company in debt and the bidder is not always guaranteed if not approved by the bankruptcy court or creditors committee.
Also, by setting the initial bid, there is the risk of the assets not being as valuable as the indicated floor price or the company’s assets deteriorating throughout the auction process. Without additional bidders, the stalking horse bidder may believe they overbid. Finally, success is not always promised. The stalking horse may be outbid at the auction or no other bidders may show.