Working Paper: CEPR ID: DP1486
Authors: Jeremy Bulow; Ming Huang; Paul Klemperer
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.
Keywords: toeholds; takeovers; auctions; mergers; corporate acquisitions; footholds; winners curse; common value auctions
JEL Codes: G30; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Owning a toehold in a takeover target (G34) | Increased probability of winning the auction (D44) |
| Owning a toehold in a takeover target (G34) | Enhanced expected profits (G19) |
| Toehold ownership (Q15) | More aggressive bidding (D44) |
| More aggressive bidding (D44) | Increased likelihood of winning for the toeholder (C24) |
| Toehold ownership (Q15) | Increased risk of the winner's curse for competitors (D44) |
| Increased risk of the winner's curse for competitors (D44) | Competitors bid conservatively (D44) |
| Increase in a bidder's toehold (D44) | Higher likelihood of winning the auction (D44) |
| Increase in a bidder's toehold (D44) | Higher average prices paid when winning (D44) |
| Multiple bidders having toeholds (D44) | Complicates bidding strategies and outcomes (D44) |