What Is Staple Financing?
Staple financing is a method of financing the purchase of a corporation. Staple financing involves an auction in which several companies submit takeover bids. Unlike standard auctions, the company that wins the auction receives the right, but not the obligation, to buy the target corporation. With staple financing, the bank that is advising the corporation that is selling its shares also offers the loan to the buyer.
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Definition
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The bank sets the interest rate and loan terms before the auction, which apply to all bidders. This arrangement is known as staple financing because the bank simply staples these loan terms onto the offering documents that it gives to each auction bidder. Each bidder offers a different price, such as five times the company's earnings, but can't alter the other loan terms.
Conflict of Interest
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Staple financing can create a conflict of interest. The bank has a fiduciary duty to the seller because it is giving the seller advice about the companies that submit bids, but the bank also earns money from the fees that it charges each bidder and it earns money after a successful sale. The bank may tell the seller to accept a bid from an auction buyer so the bank can earn the interest income and other transaction fees, even if the selling firm could receive more money for its stock from a buyer that does not participate in the auction because it arranges financing from another lender.
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Fairness Opinion
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To ensure the bank is not cheating the seller, the seller may obtain a fairness opinion. With a fairness opinion, a third party, such as a consulting firm, examines the staple financing contract to determine whether the bank is taking advantage of the seller. According to Harvard Law School, the company that gives the fairness opinion must disclose whether it had any financial relationship with the seller, the bank, or any of the auction bidders within the last two years because of National Association of Securities Dealers regulations.
Sale Price
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Staple financing can increase the price the seller receives for its stock. Because the auction bidders don't have to complete the sale, they can make large bids compared to the company's current earnings with little risk. If bad news comes out about the company, the auction winner can simply cancel the bid. The auction bidder also knows the bank that is handling the auction is willing to finance the entire transaction, so the bidder will not have to search for other lenders.
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