Toehold Acquisitions as Option Games∗

16 Pages Posted: 18 Sep 2021 Last revised: 20 Dec 2021

See all articles by José Lacerda

José Lacerda

Universidade do Porto

Paulo Jorge Pereira

University of Porto, School of Economics and Management

Artur Rodrigues

University of Minho - NIPE and School of Economics and Management

Abstract

This paper studies how a pre-bid minority ownership (toehold) in the target firm can improve the acquirer’s position in the takeover process by reducing the information asymmetry. Using a dynamic real options approach to compare the takeover options (with and without a toehold), the bidder can optimally choose the acquisition mode and the toehold size. Toehold acquisitions are more likely to occur under low market uncertainty, low expected synergies and high synergies uncertainty. These results suggest that managers’ overconfidence, market and synergies uncertainty, and asymmetry of information can help explaining the choice of toeholds when defining the acquisition strategy.

Keywords: Toeholds, Mergers and Acquisitions, Takeovers, real options

Suggested Citation

Lacerda, José and Pereira, Paulo and Rodrigues, Artur, Toehold Acquisitions as Option Games∗. Available at SSRN: https://ssrn.com/abstract=3926134

José Lacerda

Universidade do Porto ( email )

Rua Dr. Roberto Frias
4200-464 Porto
Portugal

Paulo Pereira (Contact Author)

University of Porto, School of Economics and Management ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal

Artur Rodrigues

University of Minho - NIPE and School of Economics and Management ( email )

School of Economics and Management
Braga, 4710-057
Portugal

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