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Optimal takeover contests with toeholds

  • Loyola, Gino

This paper characterizes how a target firm should be sold when the possible buyers (bidders) have prior stakes in its ownership (toeholds). We find that the optimal mechanism needs to be implemented by a non-standard auction which imposes a bias against bidders with high toeholds. This discriminatory procedure is such that the target´s average sale price is increasing in both the size of the common toehold and the degree of asymmetry in these stakes. It is also shown that a simple mechanism of sequential negotiation replicates the main properties of the optimal procedure and yields a higher average selling price than the standard auctions commonly used in takeover battles.

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File URL: http://e-archivo.uc3m.es/bitstream/handle/10016/2729/we083217.pdf?sequence=1
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Paper provided by Universidad Carlos III de Madrid. Departamento de Economía in its series UC3M Working papers. Economics with number we083217.

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Date of creation: Feb 2008
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Handle: RePEc:cte:werepe:we083217
Contact details of provider: Web page: http://www.eco.uc3m.es/

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  1. ehiel, Philippe & Benny Moldovanu & Ennio Stacchetti, 1994. "How (not) to sell nuclear weapons," Discussion Paper Serie B 288, University of Bonn, Germany.
  2. Jeremy I. Bulow & Paul D. Klemperer, 2007. "When are Auctions Best?," NBER Working Papers 13268, National Bureau of Economic Research, Inc.
  3. Dasgupta, Sudipto & Tsui, Kevin, 2003. "A "matching auction" for targets with heterogeneous bidders," Journal of Financial Intermediation, Elsevier, vol. 12(4), pages 331-364, October.
  4. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Finance 9903005, EconWPA.
  5. Cramton, Peter & Schwartz, Alan, 1991. "Using Auction Theory to Inform Takeover Regulation," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(1), pages 27-53, Spring.
  6. John G. Riley & William Samuelson, 1979. "Optimal Auctions," UCLA Economics Working Papers 152, UCLA Department of Economics.
  7. Goergen, M. & Renneboog, L.D.R., 2002. "Shareholder Wealth Effects of European Domestic and Cross-Border Takeover Bids," Discussion Paper 2002-50, Tilburg University, Center for Economic Research.
  8. Betton, Sandra & Eckbo, B Espen & Thorburn, Karin S, 2005. "The Toehold Puzzle," CEPR Discussion Papers 5084, C.E.P.R. Discussion Papers.
  9. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-90, October.
  10. 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.
  11. repec:adr:anecst:y:2008:i:90:p:09 is not listed on IDEAS
  12. David Ettinger, 2008. "Auctions and shareholdings," Post-Print hal-00701303, HAL.
  13. Paul Povel & Rajdeep Singh, 2006. "Takeover Contests with Asymmetric Bidders," Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1399-1431.
  14. Colin Campbell & Dan Levin, 2006. "When and why not to auction," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(3), pages 583-596, 04.
  15. Povel, Paul & Singh, Rajdeep, 2004. "Using bidder asymmetry to increase seller revenue," Economics Letters, Elsevier, vol. 84(1), pages 17-20, July.
  16. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1999. "Multidimensional Mechanism Design for Auctions with Externalities," Journal of Economic Theory, Elsevier, vol. 85(2), pages 258-293, April.
  17. Goldman, Eitan & Qian, Jun, 2005. "Optimal toeholds in takeover contests," Journal of Financial Economics, Elsevier, vol. 77(2), pages 321-346, August.
  18. Jacob K. Goeree & Emiel Maasland & Sander Onderstal & John L. Turner, 2005. "How (Not) to Raise Money," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 897-926, August.
  19. Loyola, Gino, 2007. "How to sell to buyers with crossholdings," UC3M Working papers. Economics we075025, Universidad Carlos III de Madrid. Departamento de Economía.
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