| dc.description.abstract | Target firms often face a takeover threat from raiders with prior
stakes in its ownership (toeholds). Previous literature has shown
that, when takeovers are modeled as standard auctions, toeholds
induce more aggressive bids from raiders, which has two important
consequences for the selling process: (i) the board of directors
is no longer indifferent about the sale procedure used to get the
highest price, and (ii) the target may not be assigned to the highest-
value raider. This paper characterizes how the price-maximizing
procedure should be in the presence of asymmetric toeholds.
Our central result is that the optimal rule needs to be implemented
by a discriminatory mechanism quite different from conventional
auction formats. By imposing an extra-charge against high-toehold
bidders, the optimal mechanism is able to extract more surplus
from raiders who bid more aggressively. As a result, nonbidding
shareholders benefit unambiguously from the toehold asymmetry.
Furthermore, as this bias restores the symmetry in bidders’
expected payoffs, the proposed mechanism also allows to allocate
efficiently the target among them. | |
