The plain definition from investopedia.com:
An initial bid on a bankrupt company's assets from an interested buyer chosen by the bankrupt company. From a pool of bidders, the bankrupt company chooses the stalking horse to make the first bid. This method allows the distressed company to avoid low bids on its assets. Once the stalking horse has made its bid, other potential buyers may submit competing bids for the bankrupt company's assets. In essence, the stalking horse sets the bar so that other bidders can't low-ball the purchase price.
That answered my question to the 'what' part. However, how did horses get into the mix in the first place? From Wikipedia:
The term stalking horse originally derived from the practice of hunting, particularly of wildfowl. Hunters noticed that many birds would flee immediately on the approach of humans, but would tolerate the close presence of animals such as horses and cattle. Hunters would therefore slowly approach their quarry by walking alongside their horses, keeping their upper bodies out of sight until the flock was within firing range. Animals trained for this purpose were called stalking horses. Sometimes mobile hides are used for a similar purpose.
The term isn't relegated to financial dealings; it also applies to politics which is where I originally heard this term used. Ed Finn does a great job of explaining the politics side of the term stalking horse in his article "What Exactly Is a "Stalking Horse" in Slate's Explainer section.
Now you know.
- Read more about this investing term from Investopedia: http://www.investopedia.com/terms/s/stalkinghorsebid.asp#ixzz2Ja4iz0ui
- Read more info on the term stalking horse from Wikipedia: http://en.wikipedia.org/wiki/Stalking_horse