Stapled Finance

Authors

  • PAUL POVEL,

  • RAJDEEP SINGH

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    • Paul Povel is at the Bauer College of Business, University of Houston. Rajdeep Singh is at the Carlson School of Management, University of Minnesota. We would like to thank an anonymous referee for very helpful comments. We are also indebted to Philip Bond; Mike Fishman; Tingjun Liu; Richmond Mathews; Tom Noe; Jacob Sagi; Gustav Sigurdsson; S. “Vish” Viswanathan; seminar participants at Arizona State University, Claremont McKenna College, University of Arizona, University of Houston, University of Iowa, University of Minnesota, University of Pennsylvania (Wharton), and University of Virginia; and participants at the 4th Annual Conference on Corporate Finance (Washington University at St. Louis), China International Conference in Finance, National University of Singapore International Conference in Finance, and the 2009 Meetings of the American Finance Association for helpful comments.


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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