Getting to Know Each Other: The Role of Toeholds in Acquisitions

50 Pages Posted: 16 Nov 2012 Last revised: 6 Nov 2013

See all articles by Paul Povel

Paul Povel

University of Houston - Department of Finance, C.T. Bauer College of Business

Giorgo Sertsios

Universidad de los Andes, Chile

Date Written: November 5, 2013

Abstract

We analyze the role of toeholds (non-controlling but significant equity stakes) as a source of information for a bidder. A toehold provides an opportunity to interact with the target and its management and in the process get a better sense of the possible synergies from a merger or takeover. A bidder considering taking over a target will take a toehold beforehand if the informational benefits are large. Our model makes the following predictions: (i) a toehold is more beneficial if a target is opaque, i.e., if it is generally harder to value potential synergies with the target; (ii) a toehold is incrementally more beneficial if a bidder initially finds it harder than others to assess the value of potential synergies; (iii) that incremental benefit is less important, however, if the target is opaque; (iv) the benefits from having a toehold are smaller if the number of potential rival bidders is higher. We test these predictions using a large sample of majority acquisitions of private and public companies for which we have information regarding whether the acquirer had a toehold in the target company prior to the majority acquisition. We find evidence consistent with our hypotheses, and thus with the idea that potential acquirers of a target use toeholds to improve their information about possible synergies with the target.

Keywords: Mergers & Acquisitions, Takeovers, Toeholds, Auctions

JEL Classification: G34, G24, G32, D44

Suggested Citation

Povel, Paul and Sertsios, Giorgo, Getting to Know Each Other: The Role of Toeholds in Acquisitions (November 5, 2013). Available at SSRN: https://ssrn.com/abstract=2176481 or http://dx.doi.org/10.2139/ssrn.2176481

Paul Povel (Contact Author)

University of Houston - Department of Finance, C.T. Bauer College of Business ( email )

University of Houston
334 Melcher Hall
Houston, TX 77204
United States
713-743-4759 (Phone)

HOME PAGE: http://www.bauer.uh.edu/povel

Giorgo Sertsios

Universidad de los Andes, Chile ( email )

Mons. Álvaro del Portillo
Las Condes
Santiago, 12.455
Chile

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