Strategic Toeholds in Takeovers

Hervé Alexandre (), Christian At () and Catherine Refait-Alexandre
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Hervé Alexandre: DRM, CNRS, [UMR 7088], Université Paris-Dauphine, PSL, Place du Maréchal de Lattre de Tassigny 75775 PARIS Cedex 16;
Christian At: Université de Franche-Comté, CRESE, F-25000 Besançon, France

No 2023-10, Working Papers from CRESE

Abstract: Theoretical literature predicts that raiders should hold part of the shares - a so-called toehold - before a takeover operation. Whereas theoretical results predict that the toehold should be maximal, empirical results reveals heterogeneity in the observed levels of toeholds. Our study explains this gap. We develop a tender offer model with atomistic target shareholders and asymmetric information. We find that it is optimal to acquire a toehold prior to the announcement of the takeover and we determine the optimal level of the toehold. Some particular environments may reduce the optimal level of toeholds: strong dilution mechanisms, soft financial constraints for the bidder, low financial frictions, a high legal protection for investors and not all-cash payment methods. We provide empirical evidence that support our predictions.

Keywords: Toeholds; Takeover; Asymmetric Information; LBO; Financial Constraints; Investor. (search for similar items in EconPapers)
JEL-codes: D82 O12 Q15 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2023-12
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Working Paper: Strategic Toeholds in Takeovers (2023)
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