Toeholds and Takeovers

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

Finance from University Library of Munich, Germany

Abstract: 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: D44 G30 G34 (search for similar items in EconPapers)
Pages: 36 pages
Date: 1996-08-14
Note: Type of Document - Postscript; prepared on UNIX Sparc LaTeX; to print on HP/PostScript; pages: 36 ; figures: included
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Toeholds and Takeovers (1999)
Working Paper: Toeholds and Takeovers (1999)
Working Paper: Toeholds and Takeovers (1996)
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