Discussion Paper Details

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Title: Toeholds and Takeovers

Author(s): Jeremy I. Bulow, Ming Huang and Paul Klemperer

Publication Date: October 1996

Keyword(s): Auctions, Common Value Auctions, Corporate Acquisitions, Footholds, Mergers, Takeovers, Toeholds and Winner's Curse

Programme Area(s): Financial Economics and Industrial Organization

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 favourable terms, or by running a sealed bid auction.

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Bibliographic Reference

Bulow, J, Huang, M and Klemperer, P. 1996. 'Toeholds and Takeovers'. London, Centre for Economic Policy Research.