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Strategic Toeholds in Takeovers

Author

Listed:
  • Hervé Alexandre

    (DRM, CNRS, [UMR 7088], Université Paris-Dauphine, PSL, Place du Maréchal de Lattre de Tassigny 75775 PARIS Cedex 16;)

  • Christian At

    (Université de Franche-Comté, CRESE, F-25000 Besançon, France)

  • Catherine Refait-Alexandre

    (Université de Franche-Comté, CRESE, F-25000 Besançon, France)

Abstract

Theoretical literature predicts that raiders should hold part of the shares - a so-called toehold - before a takeover operation. Whereas theoretical results predict that the toehold should be maximal, empirical results reveals heterogeneity in the observed levels of toeholds. Our study explains this gap. We develop a tender offer model with atomistic target shareholders and asymmetric information. We find that it is optimal to acquire a toehold prior to the announcement of the takeover and we determine the optimal level of the toehold. Some particular environments may reduce the optimal level of toeholds: strong dilution mechanisms, soft financial constraints for the bidder, low financial frictions, a high legal protection for investors and not all-cash payment methods. We provide empirical evidence that support our predictions.

Suggested Citation

  • Hervé Alexandre & Christian At & Catherine Refait-Alexandre, 2023. "Strategic Toeholds in Takeovers," Working Papers 2023-10, CRESE.
    • Handle: RePEc:crb:wpaper:2023-10
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    References listed on IDEAS

    as
    1. Singh, Rajdeep, 1998. "Takeover Bidding with Toeholds: The Case of the Owner's Curse," The Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 679-704.
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    3. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 427-454, June.
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    6. Povel, Paul & Sertsios, Giorgo, 2014. "Getting to know each other: The role of toeholds in acquisitions," Journal of Corporate Finance, Elsevier, vol. 26(C), pages 201-224.
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    11. Betton, Sandra & Eckbo, B. Espen & Thorburn, Karin S., 2009. "Merger negotiations and the toehold puzzle," Journal of Financial Economics, Elsevier, vol. 91(2), pages 158-178, February.
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    More about this item

    Keywords

    Toeholds; Takeover; Asymmetric Information; LBO; Financial Constraints; Investor.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment

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