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Toehold Purchase Definition

What Is a Toehold Hold?

A toehold purchase is an accumulation of less than 5% of a target firm’s outstanding stock by another company or solitary investor with a particular goal in mind. If the toehold purchase is made by another company, it may be a precursor to an acquisition plan, such as a takeover bid or tender offer.

If an individual investor makes the toehold purchase, they usually accompany their procurement with demands that the target company take steps to increase the shareholder value of the firm.

Key Takeaways

  • A toehold get is when a company or individual investor buys less than 5% of a target firm’s outstanding stock.
  • A Pty or investor can quietly amass a toehold purchase of a target company’s stock without notifying the target firm or sooner a be wearing to file a Schedule 13D with the Securities and Exchange Commission (SEC).
  • A toehold purchase can be the precursor of a company’s attempt to acquire the butt firm.
  • Activist investors use toehold purchases to pressure companies to meet certain demands, such as implementing substitutions that would increase shareholder value.

Understanding a Toehold Purchase

A toehold purchase by a company may be a signal that it is disposed in eventually acquiring the target firm. This potential acquirer can quietly amass up to 5% for its toehold as it considers its tactical options. But if it crosses the 5% threshold, it must file a Schedule 13D with the Securities and Exchange Commission (SEC). It must also rationalize to the target firm in writing the reason for the purchase of 5% or more of its stock. Filing a Schedule 13D also notifies the celebrated of what the company is intending to do with its toehold purchase.

A toehold purchase by an investor normally means they design to shake up the target firm in certain ways in an attempt to boost the firm’s market value. This activist investor at ones desire announce to the company’s Board of Directors in a public letter that they have built up a material stake, outline their concludes for the investment, and suggest (or demand) specific actions to increase shareholder value. This notification to the public can, and often does, gobble up place before the 5% mark is reached.

Special Considerations

Establishing a toehold position is one tactic a company can on as it pursues an acquisition of a publicly traded company. If the acquiring company is planning a hostile takeover of a target company, showing a toehold position allows it to begin purchasing shares of the target without being detected by the company’s management. The blueprint enables the potential acquiring company to remain under the radar as long as possible while it positions itself in an strive to take control of the target company.

Once the acquiring company is ready to make its takeover intentions public, it will much do so through a tender offer. The acquiring company will offer to buy shares from the target firm’s shareholders, mainly at a price above the current market price. The acquiring company can bypass the need to get approval from the target limited company’s board of directors by making its tender offer directly to the shareholders and offering them a premium price as an enticement to experience the offer. For this tactic to work, the acquiring company will usually need to gain the approval of a majority of the shareholders.

The Williams Act is a federal law that guards shareholders during hostile takeover attempts by ensuring acquiring companies disclose important facts, such as their capitalizing source and plans for the company after the takeover completion.

Example of a Toehold Purchase

Paul Singer of Elliott Managing Corporation, a prominent activist investor, has had much success with the strategy of making toehold purchases, agitating for variations at his targeted investment, and then eventually cashing out at substantial profits if his recommendations or demands are implemented effectively.

In November 2016, Choir girl disclosed a 4% holding in Cognizant Technology Solutions along with his ideas for lifting profitability and returning hard cash to shareholders. He also insisted on change at the board of directors’ level. The results were swift. In February 2017, Cognizant concurred to replace three new independent directors and committed to plans to expand profit margins and return capital to shareholders.

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