Maryland Business

By: Liz Farmer

With all the buzz this week about Magna Entertainment Corp.’s stalking horse bid (being delayed, then pulled altogether), we in the newsroom started wondering where in the heck the term “stalking horse” came from.

In this case with Magna, the term is used to characterize a bid that basically serves at the benchmark bid — it’s one that the company in bankruptcy feels is as a good price for its assets. The stalking horse bid was to be the measuring stick competing bidders should use to form their own offers.

But we wondered why “stalking horse”? Why not something more literal like “starting bid”? So I did a little Internet sleuthing.

According to word-detective.com, the term comes from horses used in hunting. “‘Stalking horses’ were trained to allow a hunter to dismount and then use the horse as a blind to conceal his presence as he ’stalked’ the game (which apparently did not notice that it was being approached by a six-legged horse),” the author writes. “The term was expanded fairly quickly to cover any sort of portable blind.”

The explanation makes sense for the use of “stalking horse” in the context of being a decoy, such as a stalking horse candidate entered into an election to conceal the candidacy of another or to divide the opposition, as thefreedictionary.com defines the term.

But how did the term get linked with auction proceedings? That connection is provided by Ken Naglewski in his 2006 article in Financier Worldwide:

“It appears that the tactical leverage…dissuades other qualified bidders who might have bid more from even entering the fray,” he said. “There have been cases where other potential bidders choose not to participate rather than spend more time and effort trying to overcome the bidding advantages offered to the stalking horse.”

Although the stalking horse bid has been an increasingly common process in bankruptcy auctions over the last few years, Naglewski says a stalking horse bid is not required. He also says it’s typical for the stalking horse bid to wind up as the winning bidder, which also backs up that “chilling effect” theory.

So now that we know the history, do you think it matters that Magna is going ahead without a stalking horse bid? Without a leading bid, is anyone at a disadvantage?