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Optimal Toeholds in Takeover Contests

Eitan Goldman

Indiana University - Department of Finance

Jun Qian

Boston College - Finance Department; University of Pennsylvania - Wharton Financial Institutions Center; China Academy of Financial Research (CAFR)

March 2004

In this paper we offer an explanation for the empirical anomaly that most raiders do not acquire the maximum possible toehold prior to announcing a takeover bid. By endogenously modeling the target value following an unsuccessful takeover we demonstrate that a raider may optimally choose to acquire a small toehold even if the toehold acquisition does not drive up the pre-tender offer target price. This occurs because although a large toehold increases profits if the takeover succeeds it also conveys a higher level of managerial entrenchment, and hence a lower firm value, if the takeover fails. In the paper we derive new predictions regarding how the optimal toehold and how target firm value following a failed takeover vary in the cross section. Extending the basic model we examine the impact of the presence of a rival bidder and of dilution on the initial bidder's toehold strategy.

Number of Pages in PDF File: 43

Keywords: Toehold, entrenchment, free-rider problem, takeover, tender offer

JEL Classification: G34, D8, K22

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Date posted: August 3, 2003  

Suggested Citation

Goldman, Eitan and Qian, Jun, Optimal Toeholds in Takeover Contests (March 2004). Available at SSRN: http://ssrn.com/abstract=422020 or http://dx.doi.org/10.2139/ssrn.422020

Contact Information

Eitan Goldman
Indiana University - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
812-856-0749 (Phone)
Jun Qian (Contact Author)
Boston College - Finance Department ( email )
Wallace E. Carroll School of Management
330 Fulton Hall
Chestnut Hill, MA 02467
United States
617-552-3145 (Phone)
617-552-0431 (Fax)
HOME PAGE: http://www2.bc.edu/~qianju
University of Pennsylvania - Wharton Financial Institutions Center
2306 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104
United States
HOME PAGE: http://fic.wharton.upenn.edu/fic/
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030

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