Toeholds and takeovers

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