Abstract

Between 1990 and 2005, 3,479 control offers were made for public U.S. targets. In only 1.21% of these cases, the control bidder had previously established a toehold. However, over that same period, we find a high incidence of partial acquisitions. Given the relative rarity of toeholds, are the partial acquisitions evidence of buyers establishing positions in anticipation of future control offers? We examine the long-run performance of targets in partial acquisitions prior to the transaction and find that partial acquisitions involving poorly-performing targets are more likely to be followed by control offers. However, in over 85% of these cases, the acquirer of control is not the same firm as the partial buyer. We find evidence suggesting that the abnormal return the time of the partial acquisition may be in anticipation of a subsequent control offer. We find preliminary evidence suggesting that bidders use substitution pricing in determining their offer premia when the control offer follows a partial acquisition. This substitution effect holds even when the control offer occurs between one and two years after the partial offer, and also if the control bidder is different from the partial acquisition bidder. These results suggest that firms are adjusting their control offer premiums in response to stock return movements that can be attributed to prior acquisition activity.