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Toeholds and Takeovers

Author

Listed:
  • Jeremy Bulow

    (Graduate School of Business, Stanford University, USA)

  • Ming Huang

    (Graduate School of Business, University of Chicago, USA)

  • Paul Klemperer

    (Nuffield College, Oxford, UK)

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.

Suggested Citation

  • Jeremy Bulow & Ming Huang & Paul Klemperer, 1996. "Toeholds and Takeovers," Finance 9608001, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:9608001
    Note: Type of Document - Postscript; prepared on UNIX Sparc LaTeX; to print on HP/PostScript; pages: 36 ; figures: included
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    toeholds; takeovers; auctions; mergers; corporate acquisitions; footholds; winner's curse; common value auctions;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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