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Successful stalking horse bids address the often-conflicting aims of the seller and its constituencies while taking into account the bidder's financial and operational needs
Economic and forecasting and market intelligence firm Global Insight recently announced that U.S. corporate bankruptcies are expected to increase by 17% this year, due to cooling of the housing market, high energy prices, and other factors. Corporate debt defaults are expected to rise substantially by year-end, opening the door to opportunities in distressed investing. However, distressed M&A transactions require significant knowledge of bankruptcy procedures.
In non-distressed deals, a big part of the strategic wrangling between buyers and sellers centers on hammering out the purchase price, whereas the key focus on sales under Section 363 of the Bankruptcy Code is often the bidding process.
Under Section 363, assets can be sold free and clear of liens and encumbrances. As "free-and-clear" asset sales continue to gain favor as the default method for valuing and liquidating businesses in Chapter 11 bankruptcy, the technical processes for qualifying competing bidders and conducting auctions have become largely homogeneous - at least on paper. While Section 363 of the Bankruptcy Code does not directly address any of the finer points of pre-sale protocols, the bid procedure orders that outline these steps have become almost identical in every case, regardless, to some extent, of jurisdiction or case size.
Under these standardized procedures, bidders are qualified to bid at auction based on financial wherewithal and submission of a form bid that, by some modicum of apples-to-apples comparison, meets a floor requirement established by the "stalking horse" bidder - an interested buyer, chosen by the distressed, that essentially sets the bar so that other potential acquirers can't low-ball the purchase price.
To qualify to bid against the stalking horse, suitors must offer a figure that is at least the sum of the stalking horse's bid plus a court-approved breakup fee, which is ultimately paid to the stalking horse if it is outbid. If competing bids are qualified, an auction is held, a winner is announced, and the debtor moves the bankruptcy court to approve the sale to the winner at a hearing a couple of days later.
But what these pro forma bid procedure orders rarely address is the...