Toeholds and bid deferral

Abstract

This paper introduces a new rationale for toeholds: to benefit from a lower bid premium through waiting to bid, contingent on rivals not emerging. An intending bidder has an incentive to acquire a toehold without bidding when the likelihood of a rival bid is low. If the toehold does not attract a rival bid, the toeholder subsequently bids first at a lower premium than by bidding coincident with the toehold purchase. But if a rival bid is triggered, the toeholder can sellout to the rival or bid second. As the likelihood of a bidding contest increases the option of bid deferral is less valuable. We employ a standard risk neutral valuation procedure to determine whether a bid should optimally be coincident with a toehold purchase or deferred. We document (i) negative deferred bidder abnormal returns at bid when the higher than expected bid premium is revealed, and (ii) significantly higher bidder abnormal returns at toehold and lower bid premiums for optimally deferring bidders relative to non-optimally deferring bidders.