Stapled Finance

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. Copyright (c) 2010 the American Finance Association.

Boom and Gloom

“…(For details on the derivation, see the Internet Appendix. 13 ) As shown in Figure 1, the expected value of entry is increasing in K, and the probability of informed entry is decreasing in K. The assumption K = 1 (introduced below) seems reasonable: with higher values of K, the average realized value of 11 This model of noisy signals has been used in Povel and Singh (2010) to analyze stapled finance and in Povel and Sertsios (2014) to analyze toehold acquisitions prior to mergers. 12 The uninformed entrants' average realized value of entry increases if their signals are more informative, but it is below the average value realized by informed entrants as long as ϕ < 1.…”

Your Former Employees Matter: Private Equity Firms and Their Financial Advisors

“…For example, investment bank Petrie Parkman & Co. state (SEC File 333-137297): "In particular, the ability to provide debt financing has become an important advantage for some of our larger competitors, and because we do not provide such financing, we may be unable to compete as effectively for clients in a significant part of the investment banking market." 10 As described by Povel and Singh (2009) it is not only in buy-side deals where the ability of providing debt financing might play a role. In sell-side deals, the financial advisor acting for the selling PE firm often provides "stapled financing" which essentially is a statement that sums up the debt capacity of the business being sold and outlines the amount buyers can borrow and how much they will have to provide in equity.…”

Asymmetric Information about Collateral Values

“…For example, examining this market can contribute to our understanding of the market power that relationship lenders or physically proximate lenders might acquire by learning about hard-toobserve characteristics of particular borrowers or their collateral (Petersen and Rajan (2002), Berger and Udell (1995), Degryse and van Cayseele (2000), Degryse and Ongena (2005), Agarwal and Hauswald (2010)). Another setting with a similar information structure involves the practice of sell-side advisers offering "stapled financing" packages to buyers in M&A transactions (Povel and Singh (2010)). Since the bank providing the stapled financing advises on the sale of the asset, it could have superior information relative to other banks about the quality of the loan collateral.…”