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Toehold acquisitions as option games

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  • Lacerda, José
  • Pereira, Paulo J.
  • Rodrigues, Artur

Abstract

This paper studies how a pre-bid minority ownership (toehold) in the target firm can improve the acquirer’s position in the takeover process by reducing the information asymmetry. Using a dynamic real options approach to compare the takeover options (with and without a toehold), the bidder can optimally choose the acquisition mode and the toehold size. Toehold acquisitions are more likely to occur under low market uncertainty, low expected synergies and high synergies uncertainty. These results suggest that managers’ overconfidence, market and synergies uncertainty, and asymmetry of information can help explaining the choice of toeholds when defining the acquisition strategy.

Suggested Citation

  • Lacerda, José & Pereira, Paulo J. & Rodrigues, Artur, 2021. "Toehold acquisitions as option games," Economics Letters, Elsevier, vol. 209(C).
    • Handle: RePEc:eee:ecolet:v:209:y:2021:i:c:s0165176521003700
    DOI: 10.1016/j.econlet.2021.110093
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    References listed on IDEAS

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    More about this item

    Keywords

    Toeholds; Mergers and acquisitions; Takeovers; Real options;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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