Toeholds and Takeovers
Stanford University; National Bureau of Economic Research (NBER)
Cornell University - Samuel Curtis Johnson Graduate School of Management
University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)
Journal of Political Economy, Vol. 107, No. 3, June 1999
Toeholds have an enormous impact in "common-value" takeover battles, such as those between two financial bidders. This contrasts with the small impact of a toehold in a "private-value" auction. Our results are consistent with empirical findings that a toehold helps a buyer win an auction, sometimes very cheaply. A controlling minority shareholder may therefore be effectively immune to outside offers. A target may benefit by requiring "best and final" sealed-bid offers or by selling a cheap toehold or options to a "white knight." Our analysis extends to regulators selling "stranded assets," creditors bidding in bankruptcy auctions, and so forth.
JEL Classification: G34Accepted Paper Series
Date posted: May 19, 1999
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