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Toeholds as an M&A strategy?
Abstract
“Toeholds” are a merger-and-acquisition (M&A) strategy, where a company buys a limited number of shares in a target firm prior to initiating M&A discussions with the target firm. Toeholds can lower the risk and cost of an acquisition. But this strategy carries risks of its own. The authors examine potential positive and negative consequences of using toeholds. © 2010 Wiley Periodicals, Inc.
The aim of the study is to understand The Impact of Companies Mergers and Acquisitions on the Employees’ Perception for Layoffs.
High profile deals emphasize the costs of the merger and acquisition (M&A) process particularly when deals fail before closure. However, beyond anecdotal evidence, we do not know why some M&A deals in the electricity and gas industries are abandoned. We analyze a sample of over 5000 M&As in the electricity and gas industries. The three most important factors affecting M&A abandonment are if the acquirer engaged in a divestiture at the same time, whether the target firm was publicly owned, and if the acquirer already had a toe-hold (part ownership) in the target firm at the time of the M&A deal. An M&A deal is 10.17% less likely to be abandoned if the acquirer engaged in a divestiture at the same time. An M&A involving a publicly owned target firm is 9.87% more likely to be abandoned. Lastly, an M&A in which the acquirer had a toe-hold in the target company is 7.87% more likely to be abandoned. Our findings show that policy makers and practitioners should be aware that the M&A process is affected by often over-looked deal or firm specific factors.
To date, a few empirical studies exist that investigate the use of earnout contracts in mergers and acquisitions (M&As). However, two limitations can be attested. First, the studies predominantly investigate earnouts in Anglo-American economies and it is questionable whether we can generalize on these findings for other economies. Second, while earnouts have become an increasingly popular way of coping with information asymmetries and reducing the risk of overpayment in takeovers, less is known about what really drives the design of such contracts. To answer these questions, we conduct an event study that examines abnormal returns for different M&A contracts for a cross-industry sample of German acquirers. The novel aspect of this article is that we explicitly present a theoretical model to discuss the effect of technological-induced information asymmetries on the design of earnout contracts. While we find support for the fact that capital markets favour the use of earnouts when uncertainty and the buyer’s ability to reduce technological-induced information asymmetry is high, a too-long earnout period specified in the contract appears to be detrimental.
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