Stapled Finance

"Stapled finance" is a loan commitment arranged by a seller in an M&A setting. Whoever wins the bidding contest has the option (not the obligation) to accept this loan commitment. We show that stapled finance increases bidding competition by subsidizing weak bidders, who raise their bi...

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Bibliographic Details
Published in:The Journal of finance (New York) 2010-06, Vol.65 (3), p.927-953
Main Authors: POVEL, PAUL, SINGH, RAJDEEP
Format: Article
Language:English
Subjects:
Acquisitions
Acquisitions & mergers
Auctions
Bank loans
Bidders
Bidding
Bids
Corporate finance
Economic benefits
Economic competition
Finance
Financial research
Financing methods
Investment banking
Lenders
Loans
Mergers
Modeling
Studies
Valuation
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Summary:"Stapled finance" is a loan commitment arranged by a seller in an M&A setting. Whoever wins the bidding contest has the option (not the obligation) to accept this loan commitment. We show that stapled finance increases bidding competition by subsidizing weak bidders, who raise their bids and thereby the price that strong bidders (who are more likely to win) must pay. The lender expects not to break even and must be compensated for offering the loan. This reduces but does not eliminate the seller's benefit. It also implies that stapled finance loans will show poorer performance than other buyout loans.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2010.01557.x