Optimal Takeover Contests with Toeholds

This paper characterizes how a target firm should be sold when raiders have prior stakes in its ownership (toeholds). We find that the optimal mechanism needs to be implemented by a non-standard auction which imposes a bias against buyers with high toeholds. This discriminatory procedure is so that the target's average sale price is increasing in both the size of the common toehold and the asymmetry in these stakes. Furthermore, a simple mechanism of sequential negotiation replicates the main properties of the optimal procedure and outperforms, in terms of average selling price, the standard auctions commonly used in takeover battles