Takeover Contests, Toeholds and Deterrence

David Ettinger

Scandinavian Journal of Economics, 2009, vol. 111, issue 1, pages 103-124

Abstract: We consider a setting in which two potential buyers, one with a prior toehold and one without, compete in a takeover modeled as an ascending auction with participating costs. The toeholder is more aggressive during the takeover process because she is also a seller of her own shares. The non-toeholder anticipates this extra-aggressiveness of the toeholder. Thus, he is deterred from participating unless he has a high valuation for the target company. This leads to large inefficiency losses. For many configurations, expected target returns are first increasing then decreasing in the size of the toehold. Copyright © The editors of the "Scandinavian Journal of Economics" 2009 .

Date: 2009

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