Toeholds and Takeovers

Toeholds have an enormous impact in quot;common-valuequot; takeover battles, such as those between two financial bidders. This contrasts with the small impact of a toehold in a quot;private-valuequot; 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 quot;best and finalquot; sealed-bid offers or by selling a cheap toehold or options to a quot;white knight.quot; Our analysis extends to regulators selling quot;stranded assets,quot; creditors bidding in bankruptcy auctions, and so forth