Merger Negotiations and the Toehold Puzzle

Merger Negotiations and the Toehold Puzzle

Sandra Betton, B. Espen Eckbo, Karin Thorburn

Series number :

Serial Number: 

Date posted :

May 01 2005

Last revised :

November 06 2018
SSRN Share


  • Toehold • 
  • merger • 
  • tender offer • 
  • takeover contest • 
  • bidding theory • 
  • target resistance • 
  • markup pricing • 
  • breakup fee • 
  • lockup • 
  • termination agreement

Surprisingly, bidders rarely acquire a target stake (toehold) prior to launching control bids, despite paying large takeover premiums. At the same time, toeholds are large when they occur, and toehold bidding is the norm in hostile takeovers.

To explain these observations, we develop and test an auction-based takeover model in which toeholds antagonize some (rational) targets, causing these to reject merger negotiations. Optimal toeholds are either zero (to avoid rejection costs) or greater than a threshold so that toehold benefits offset rejection costs. We estimate the toehold threshold, which averages as much as 9\% across 10,000 initial control bids for U.S. public targets, and show that the probability of toehold bidding decreases in the threshold estimate as predicted. The threshold model is also consistent with higher toehold frequencies in hostile bids, and with the steady decline in toehold bidding since the 1980s.

Published in

Published in: 
Publication Title: 
Journal of Financial Economics
Volume 91, Issue 2, February 2009, Pages 158-178


Real name:
Sandra Betton