Stapled Finance

Abstract

Stapled Finance is a loan commitment arranged by a seller in an M&A setting. The key feature is that whoever wins the bidding contest has the option (not the obligation) to accept the loan commitment. Stapled finance has become common: in 2004, it was offered in 39% of US deals that involved private equity funds. We show that stapled finance benefits sellers if there are financial buyers in the pool of bidders, because it makes them bid more aggressively. However, 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 buyout loans that originated as stapled finance will show poorer performance than other buyout loans.

Keywords: Stapled Finance, Mergers & Acquisitions, Takeovers, Debt, Auctions

JEL Classification: G24, G32, G34