Toeholds, bid jumps, and expected payoffs in takeovers

We estimate sequentially outcome probabilities and expected payoffs associa ted with first, second, and final bids in a large sample of tender offer co ntests. Rival bids arrive quickly and produce large bid jumps. Greater bidd er toeholds (prebid ownership of target shares) reduce the probability of c ompetition and target resistance and are associated with both lower bid pre miums and lower prebid target stock price runups. The expected payoff to ta rget shareholders is increasing in the bid premium and in the probability o f competition, bur decreasing in the bidder's toehold. The initial bidder's expected payoff is significantly positive in the "rival-bidder-win" outcom e, in part reflecting gains from the pending toehold sale. Despite these dr amatic toehold effects, only half of the initial bidders acquire toeholds.