Toeholds, Bid Jumps, and Expected Payoffs in Takeovers

Abstract

We estimate sequentially outcome-probabilities and expected payoffs associated with first-, second- and final bids in a large sample of tender offer contests. Rival bids arrive quickly and produce large bid-jumps. Greater bidder toeholds (pre-bid ownership of target shares) reduce the probability of competition and target resistance and are associated with both lower bid-premiums and lower pre-bid target stock-price runups. The expected payoff to target shareholders is increasing in the bid-premium and in the probability of competition, but decreasing in the bidder's toehold. The initial bidder's expected payoff is significantly positive in the "rival-bidder-win" outcome, in part reflecting gains from the pending toehold-sale. Despite these dramatic toehold effects, only half of the initial bidders acquire toeholds.

Keywords: Takeover contest, tender offer, toeholds, bidding, bid jumps, rival bidders

JEL Classification: G34