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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

(forthcoming Journal of Political Economy). 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, 1999. "Toeholds and Takeovers," Finance 9903005, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:9903005
    Note: Type of Document - Tex/pdf; prepared on PC; to print on HP/PostScript/; pages: 34 ; figures: included in document. We never published this piece and now we would like to reduce our mailing and xerox cost by posting it.
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    JEL classification:

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

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