Toeholds and Takeovers

Klemperer, Paul; Huang, Ming; Bulow, Jeremy

doi:10.2139/ssrn.160888

Toeholds and Takeovers

Nuffield College, Economics Working Paper No. 1998-W4&121; and CRSP Working Paper No. 405

34 Pages Posted: 16 May 2000

See all articles by Paul Klemperer

Paul Klemperer

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

Ming Huang

Cornell University - Samuel Curtis Johnson Graduate School of Management

Jeremy Bulow

Stanford University; National Bureau of Economic Research (NBER)

There are 2 versions of this paper

Date Written: February 1998

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.

JEL Classification: G34, D44, G30

Suggested Citation: Suggested Citation

Klemperer, Paul and Huang, Ming and Bulow, Jeremy I., Toeholds and Takeovers (February 1998). Nuffield College, Economics Working Paper No. 1998-W4&121; and CRSP Working Paper No. 405, Available at SSRN: https://ssrn.com/abstract=160888 or http://dx.doi.org/10.2139/ssrn.160888