In mergers & acquisitions, a stalking horse refers to the actions of an acquiring firm testing the water for a potentially hostile takeover of a target. The stalking horse approach enables the acquirer to more accurately assess the response of the target and the wider market as well as the potential risks involved. Once the real likelihood of success (DCP), can be calculated, the acquirer can decide whether or not to mount a full takeover bid, either hostile or friendly, or pursue an alternative strategy such as a toe hold approach.
The primary reason for this type of action is the understanding that the acquiring party, whether a public company, private equity firm or an individual, has a valuable reputation that could be damaged if the proposal was rebuffed. This is especially true for private equity firms where intimidation via a Leveraged Buyout (LBO) may not be as effective in the future if potential targets were to display higher levels of resistance. This tactic differs from a casual pass where the identity and / or the intentions of the acquirer might be revealed.
Stalking horse originates from hunters who attempted to conceal themselves behind either a real or fake horse so they can get closer to their prey before launching an attack. The term is frequently used in politics (especially in the United Kingdom) as a way of maintaining anonymity when furthering one’s own agenda such as a leadership challenge. It may not always be known by the “horse” that they are being used for this purpose.
