“THE TOEHOLD PROBLEM”: NOTES

This notes are meant as background for devising whether an acquisition of a target firm might lead the acquiring player in a position from which it can significantly foreclose the market to new entrants. In particular, the economic literature has shown that, whenever a firm attempts to launch a takeover bid over a target company in which it already has an ownership stake (a ‘toehold’), other potential bidders may suffer from a competitive disadvantage in contesting the takeover. This would shield the incumbent from the competitive pressure of potential entrants, and would yield a situation in which new entrants are discouraged from entering the market. As Bulow, Huang and Klemperer (1999) conclude, “a controlling minority shareholder may therefore be effectively immune to outside offers”. In what follows, I summarize the findings of the mainstream economic literature on the so-called ‘toehold problem’. Section 1 introduces the general issue of almost-common value auctions, in which slight asymmetries between the bidders determine a vicious circle, which ultimately results in the advantaged player always winning the auction (at a low price). Section 2 describes the specific case of toeholds, i.e. the case in which one bidder in an auction has an ownership stake in the property being sold. I dra