Toeholds and Takeovers

Jeremy Bulow, Ming Huang and Paul Klemperer ()
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Jeremy Bulow: Graduate School of Business, Stanford University, USA
Ming Huang: Graduate School of Business, University of Chicago, USA

Finance from EconWPA

Abstract: (forthcoming Journal of Political Economy). Part ownership of a takeover target can help a bidder win a takeover auction, often at a low price. A bidder with a "toehold" bids aggressively in a standard ascending auction because its offers are both bids for the remaining shares and asks for its own holdings. While the direct effect of a toehold on a bidder's strategy may be small, the indirect effect is large in a common value auction. When a firm bids more aggressively, its competitors face an increased winner's curse and must bid more conservatively. This allows the toeholder to bid more aggressively still, and so on. One implication is that a controlling minority shareholder may be immune to outside offers. The board of a target may increase the expected sale price by allowing a second bidder to buy a toehold on favorable terms, or by running a sealed bid auction.

Keywords: Toeholds; Takeovers; Auctions; Mergers; Corporate Acquisitions; Footholds; Winner's Curse; Common Value Auctions (search for similar items in EconPapers)
JEL-codes: G34 D44 G30 (search for similar items in EconPapers)
Date: 1999-03-16
Note: Type of Document - Tex/pdf; prepared on PC; to print on HP/PostScript/; pages: 34 ; figures: included in document. We never published this piece and now we would like to reduce our mailing and xerox cost by posting it.
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Related works:
Working Paper: Toeholds and Takeovers (1996)
Working Paper: Toeholds and Takeovers (1996)
Journal Article: Toeholds and Takeovers (1999)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:9903005

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