Toehold strategies,takeover laws and rival bidders |
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| Institution: | 1. School of Electronics and Information, Shanghai Dian Ji University, Shanghai, China;2. Alibaba Group, Hangzhou, China;3. School of Data and Computer Science, Sun Yat-Sen University, Guangzhou, China;4. Guangdong Key Laboratory of Big Data Analysis and Processing, Guangzhou, China;5. Department of Industrial System Engineering, National University of Singapore, Singapore;6. Shanghai Institutes for Biological Sciences, Chinese Academy of Sciences, Shanghai, China;7. University of Technology, Sydney, Australia;8. University of Shanghai for Science and Technology, Shanghai, China;9. Department of Computer Science and Engineering, Shanghai Jiao Tong University, Shanghai, China;10. Beijing Key Laboratory of Big Data Management and Analysis Methods, Beijing, China;1. Department of Business Administration, Ling Tung University, Taichung, Taiwan;2. Department of Finance, Feng Chia University, Taichung, Taiwan;3. Department of Industrial Engineering and Management, National Chin-Yi University of Technology, Taichung, Taiwan;4. Department of International Trade, Feng Chia University, Taichung, Taiwan;1. Oklahoma State University, USA;2. Institute of Environmental Sustainability at Loyola University Chicago, USA |
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| Abstract: | Prior to the announcement of a tender offer, the bidding firm is legally allowed to acquire shares in the open market, subject to some limitations. These pre-announcement purchases are known as toeholds. This paper presents a simple model that describes the bidder's optimal toehold acquisition strategy, within an environment that closely parallels the present legal institutions. The model shows that toeholds and bids interact in a complex manner even without the presence of asymmetric information. By examining a simple environment the paper provides a useful alternative hypothesis for tests of other, presumably more complex, models. One of the main implications of our model is that if no competing bidders are expected, no toeholds should be purchased. The paper also demonstrates that the correct specification of an empirical model can be critical. For example, under some parameter values toehold purchases may exhibit a negative cross-sectional correlation with the pre-announcement run up in the stock price. This occurs even though prices are strictly increasing the size of the toehold. Several implications concerning various aspects of merger legislation are considered. For example, we demonstrate that a rule similar to a “fair price” provision has the desirable property that a second bidder arrives and wins if and only if he places a higher value on the target than the initial bidder. |
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