Toeholds and Takeovers

Posted: 19 May 1999

See all articles by Jeremy Bulow

Jeremy Bulow

Stanford University; National Bureau of Economic Research (NBER)

Ming Huang

Cornell University - Samuel Curtis Johnson Graduate School of Management

Paul Klemperer

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

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Abstract

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: G34

Suggested Citation

Bulow, Jeremy I. and Huang, Ming and Klemperer, Paul, Toeholds and Takeovers. Journal of Political Economy, Vol. 107, No. 3, June 1999. Available at SSRN: https://ssrn.com/abstract=161218

Jeremy I. Bulow

Stanford University ( email )

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National Bureau of Economic Research (NBER)

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Ming Huang

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

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Paul Klemperer (Contact Author)

University of Oxford - Department of Economics ( email )

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United Kingdom
+44 1865 278 588 (Phone)
+44 1865 278 557 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

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