Toehold Purchase

What Is a Toehold Purchase?

A toehold purchase is an accumulation of under 5% of a target firm's outstanding stock by one more company or individual investor in light of a specific goal. On the off chance that the toehold purchase is made by another company, it very well might be a forerunner to an acquisition strategy, for example, a takeover bid or tender offer.

Assuming an individual investor makes the toehold purchase, they as a rule accompany their purchase with demands that the target company do whatever it may take to increase the shareholder value of the firm.

Understanding a Toehold Purchase

A toehold purchase by a company might be a signal that it is keen on ultimately securing the target firm. This potential acquirer can unobtrusively accumulate up to 5% for its toehold as it thinks about its strategic options. Be that as it may, assuming that it passes the 5% boundary, it must file a Schedule 13D with the Securities and Exchange Commission (SEC). It must likewise clarify for the target firm recorded as a hard copy the justification for the purchase of 5% or a greater amount of its stock. Filing a Schedule 13D likewise tells the public of how the company is proposing to manage its toehold purchase.

A toehold purchase by an investor typically means they expect to stir up the target firm in some ways trying to support the firm's market value. This activist investor would report to the company's Board of Directors in a public letter that they have developed a material stake, frame their purposes behind the investment, and propose (or demand) specific actions to increase shareholder value. This warning to the public can, and frequently does, happen before the 5% mark is reached.

Special Considerations

Laying out a toehold position is one tactic a company can take on as it seeks after an acquisition of a publicly traded company. In the event that the gaining company is planning a hostile takeover of a target company, laying out a toehold position permits it to start purchasing shares of the target without being distinguished by the company's management. The strategy empowers the potential gaining company to stay unnoticed to the extent that this would be possible while it positions itself trying to assume command over the target company.

When the obtaining company is ready to unveil its takeover goals, it will frequently do as such through a tender offer. The obtaining company will offer to buy shares from the target firm's shareholders, normally at a price over the current market price. The obtaining company can sidestep the need to get endorsement from the target firm's board of directors by making its tender offer straightforwardly to the shareholders and offering them a premium price as a temptation to acknowledge the offer. For this tactic to work, the getting company will for the most part have to gain the endorsement of a majority of the shareholders.

The Williams Act is a federal law that safeguards shareholders during hostile takeover endeavors by guaranteeing obtaining companies reveal important facts, for example, their financing source and plans for the company after the takeover completion.

Illustration of a Toehold Purchase

Paul Singer of Elliott Management Corporation, an unmistakable activist investor, has had a lot of progress with the strategy of making toehold purchases, disturbing for changes at his targeted investment, and afterward at last cashing out at substantial profits in the event that his proposals or demands are executed successfully.

In November 2016, Singer revealed a 4% holding in Cognizant Technology Solutions along with his thoughts for lifting profitability and returning cash to shareholders. He likewise demanded change at the board of directors' level. The outcomes were swift. In February 2017, Cognizant agreed to replace three new independent directors and committed to plans to grow profit margins and return capital to shareholders.

Features

• A company or investor can discreetly store up a toehold purchase of a target company's stock without telling the target firm or recording a Schedule 13D with the Securities and Exchange Commission (SEC).
• Activist investors use toehold purchases to pressure companies to satisfy certain needs, for example, carrying out changes that would increase shareholder value.
• A toehold purchase is the point at which a company or individual investor buys under 5% of a target firm's outstanding stock.
• A toehold purchase can be the forerunner of a company's endeavor to secure the target firm.