Toehold Acquisitions as Option Games

This paper studies how a pre-bid minority ownership (toehold) in the target firm can improve the acquirer’s position in the takeover process by reducing the information asymmetry. Using a dynamic real options approach to compare the takeover options (with and without a toehold), the bidder can optimally choose the acquisition mode and the toehold size. Toehold acquisitions are more likely to occur under low market uncertainty, low expected synergies and high synergies uncertainty. These results suggest that managers’ overconfidence, market and synergies uncertainty, and asymmetry of information can help explaining the choice of toeholds when defining the acquisition strategy.