Optimal takeover contests with toeholds

Gino Loyola ()

Economics Working Papers from Universidad Carlos III, Departamento de Economía

Abstract: This paper characterizes how a target firm should be sold when the possible buyers (bidders) have prior stakes in its ownership (toeholds). We find that the optimal mechanism needs to be implemented by a non-standard auction which imposes a bias against bidders with high toeholds. This discriminatory procedure is such that the target´s average sale price is increasing in both the size of the common toehold and the degree of asymmetry in these stakes. It is also shown that a simple mechanism of sequential negotiation replicates the main properties of the optimal procedure and yields a higher average selling price than the standard auctions commonly used in takeover battles.

Keywords: Optimal auctions; Takeovers; Toeholds; Asymmetric auctions (search for similar items in EconPapers)
JEL-codes: C72 D44 D82 G32 G34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta and nep-ifn
Date: 2008-02
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Persistent link: http://EconPapers.repec.org/RePEc:cte:werepe:we083217

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