Stapled Finance

Paul Povel B · Rajdeep Singh

32 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Private Equity and Venture Capital Auction Theory and Applications

Abstract

ABSTRACT “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.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1996Agency costs of free cash flow, corporate finance, and takeovers 1981Optimal Auction Design 1988Managerial control of voting rights 2004Market Valuation and Merger Waves 2002Do Conglomerate Firms Allocate Resources Inefficiently Across Industries? Theory and Evidence 1988Corporate control contests and capital structure 2007How Are Firms Sold?

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