When a company declares bankruptcy, it is typically necessary to auction off the company’s assets to the highest bidder. During this process, various interested buyers will place bids that become part of an auction process. An auction can be structured as a single sealed bid process, a rapid bid process, or a multiple round bid process. The auction may include an initial bid, known as a stalking horse bid.

A stalking horse bid is a crucial initial bid in the auction process, which sets the market value as the floor for other interested buyers. It is important for setting the bid low enough that other buyers have an opportunity to participate and not be underbidding. To incentivize the stalking horse bidder from abandoning the plan, the bidder is afforded various incentives, such as expense reimbursements, breakup fees, and a period of exclusivity in the auctioning process.

A nonprofit organization like an industrial development agency may use a stalking horse bid as a way of keeping the business alive and continuing it in a city. This helps protect against an outside bidder who takes the assets without any interest in keeping the company running locally.

The potential bidder who makes the stalking horse bid may be asserting the value of the company’s assets while another bidder, who makes a higher bid, is paying a higher price than the original bid. The stalking horse bidder can expect to be paid back more than the original bid. The stalking horse bid process helps secure a base and minimum assignment value to the assets of a bankrupt company.

The manipulation of the stalking horse bid process has also been known to occur. In certain cases, the stalking horse bidder has been accused of overestimating the price of assets. This has led to price inflation, making it costly and more challenging for the winning bidder to make a return on the assets. The motivation for the stalking horse bidder is the benefit of a breakup fee, the potential to get an exclusive bid, and other financial rewards.

Overall, a stalking horse bid is a unique type of initial bid that sets the floor for other interested buyers in the auction process. This can be done with noble intentions, such as when a nonprofit makes a bid to keep a business in the community, or it can be done with the motivation of making a return, such as when the company is auctioned off to the highest bidder. Care should, however, be taken to make sure that manipulation of the bid does not occur, such as with an unrealistically high stalking horse bid that prices out potential buyers.