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Strategic Toeholds in Takeovers

Author

Listed:
  • Herve Alexandre

    (Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres, DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Christian At

    (CRESE - Centre de REcherches sur les Stratégies Economiques (UR 3190) - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE])

  • Catherine Refait-Alexandre

    (CRESE - Centre de REcherches sur les Stratégies Economiques (UR 3190) - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE])

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 o↵er 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

  • Herve Alexandre & Christian At & Catherine Refait-Alexandre, 2023. "Strategic Toeholds in Takeovers," Working Papers hal-04604654, HAL.
    • Handle: RePEc:hal:wpaper:hal-04604654
    Note: View the original document on HAL open archive server: https://hal.science/hal-04604654v1
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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.
    2. Burkart, Mike, 1995. "Initial Shareholdings and Overbidding in Takeover Contests," Journal of Finance, American Finance Association, vol. 50(5), pages 1491-1515, December.
    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.
    4. Goldman, Eitan & Qian, Jun, 2005. "Optimal toeholds in takeover contests," Journal of Financial Economics, Elsevier, vol. 77(2), pages 321-346, August.
    5. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    6. Shleifer, Andrei & Wolfenzon, Daniel, 2002. "Investor protection and equity markets," Journal of Financial Economics, Elsevier, vol. 66(1), pages 3-27, October.
    7. 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.
    8. Paige Parker Ouimet, 2013. "What Motivates Minority Acquisitions? The Trade-Offs between a Partial Equity Stake and Complete Integration," The Review of Financial Studies, Society for Financial Studies, vol. 26(4), pages 1021-1047.
    9. Mike Burkart & Denis Gromb & Fausto Panunzi, 1998. "Why Higher Takeover Premia Protect Minority Shareholders," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 172-204, February.
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    11. 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.
    12. Zhou, Jing & Lan, Wei, 2018. "Investor protection and cross-border acquisitions by Chinese listed firms: The moderating role of institutional shareholders," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 438-450.
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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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