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The Toehold Puzzle

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  • Betton, Sandra
  • Eckbo, B Espen
  • Thorburn, Karin S

Abstract

The substantial control premium in corporate takeovers makes a compelling case for acquiring target shares (a toehold) prior to launching a bid. Nevertheless, with a sample exceeding ten thousand initial control bids for public targets, we show that toehold bidding has declined steadily since the early 1980s and is now surprisingly rare. At the same time, the average toehold is large (twenty percent), and toeholds are the norm in hostile bids. To explain this puzzle, we develop and test a two-stage takeover model in which optimal toeholds centre on either zero or a positive threshold. Toehold bidding gives rise to target-borne toehold costs, causing some targets to reject negotiations. In our sample, an average toehold threshold of nine percent is required to compensate the bidder for the expected cost of rejection. With liquidity costs, thresholds of this size may well induce a broad range of bidders to select zero toehold. As predicted, the probability of toehold bidding decreases and the toehold size increases with the threshold estimate. The model also predicts toehold bidding in hostile bids, as we observe.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5084.

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Date of creation: May 2005
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Handle: RePEc:cpr:ceprdp:5084

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Related research

Keywords: bid failure; Bidding strategy; merger; tender offer; termination fee; toehold;

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References

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  1. Walkling, Ralph A., 1985. "Predicting Tender Offer Success: A Logistic Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 461-478, December.
  2. Schwert, G. William, 1996. "Markup pricing in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 41(2), pages 153-192, June.
  3. Eckbo, B. Espen & Thorburn, Karin S., 2004. "Bidding in mandatory bankruptcy auctions: Theory and evidence," Discussion Papers 2004/16, Department of Business and Management Science, Norwegian School of Economics.
  4. Burkart, Mike, 1995. " Initial Shareholdings and Overbidding in Takeover Contests," Journal of Finance, American Finance Association, vol. 50(5), pages 1491-1515, December.
  5. Comment, Robert & Schwert, G. William, 1995. "Poison or placebo? Evidence on the deterrence and wealth effects of modern antitakeover measures," Journal of Financial Economics, Elsevier, vol. 39(1), pages 3-43, September.
  6. Singh, Rajdeep, 1998. "Takeover Bidding with Toeholds: The Case of the Owner's Curse," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 679-704.
  7. Betton, Sandra & Eckbo, B Espen, 2000. "Toeholds, Bid Jumps, and Expected Payoffs in Takeovers," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 841-82.
  8. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Finance 9903005, EconWPA.
  9. Fishman, Michael J, 1989. " Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions," Journal of Finance, American Finance Association, vol. 44(1), pages 41-57, March.
  10. Eckbo, B. Espen & Langohr, Herwig, 1989. "Information disclosure, method of payment, and takeover premiums : Public and private tender offers in France," Journal of Financial Economics, Elsevier, vol. 24(2), pages 363-403.
  11. Officer, Micah S., 2003. "Termination fees in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 69(3), pages 431-467, September.
  12. Burch, Timothy R., 2001. "Locking out rival bidders: The use of lockup options in corporate mergers," Journal of Financial Economics, Elsevier, vol. 60(1), pages 103-141, April.
  13. Eckbo, B Espen & Giammarino, Ronald M & Heinkel, Robert L, 1990. "Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 651-75.
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Cited by:
  1. Akhigbe, Aigbe & Martin, Anna D. & Whyte, Ann Marie, 2007. "Partial acquisitions, the acquisition probability hypothesis, and the abnormal returns to partial targets," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3080-3101, October.
  2. David Ettinger, 2009. "Takeover Contests, Toeholds and Deterrence," Post-Print hal-00702428, HAL.
  3. Gino Loyola, 2008. "Optimal takeover contests with toeholds," Economics Working Papers we083217, Universidad Carlos III, Departamento de Economía.
  4. James W. Roberts & Andrew Sweeting, 2011. "When Should Sellers Use Auctions?," NBER Working Papers 17624, National Bureau of Economic Research, Inc.
  5. Eckbo, B. Espen, 2009. "Bidding strategies and takeover premiums: A review," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 149-178, February.

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