Toeholds and Takeovers

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" scaled‐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.