Toeholds and Takeovers
AbstractPart 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 bidders 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 winners 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.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 1998-W04.
Date of creation: 01 Jul 1998
Date of revision:
Toeholds; Takeovers; Auctions; Mergers; Corporate Acquisitions; Footholds; Winners Curse; Common Value Auctions;
Other versions of this item:
- Bulow, Jeremy I & Huang, Ming & Klemperer, Paul, 1996. "Toeholds and Takeovers," CEPR Discussion Papers 1486, C.E.P.R. Discussion Papers.
- Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Finance 9903005, EconWPA.
- Jeremy Bulow & Ming Huang & Paul Klemperer, 1996. "Toeholds and Takeovers," Finance 9608001, EconWPA.
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
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- Raghavendra Rau, P. & Vermaelen, Theo, 1998. "Glamour, value and the post-acquisition performance of acquiring firms," Journal of Financial Economics, Elsevier, vol. 49(2), pages 223-253, August.
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