toehold purchase

Case Study Private equity firms and hedge funds sometimes make a toehold purchase in a target company as a way to lower the overall cost of an acquisition. For example, a private equity firm might purchase up to 5% of a target's stock at market prices before making an offer to acquire the remaining shares at a substantial premium. The acquiring firm might also obtain a minority position in order to pressure the board to make certain changes. Either action may well cause other investors to become interested in the firm and enter into a bidding contest for its shares. In November 2005, Carl Icahn announced he had acquired 9.3% of the stock of Canadian-based Fairmont Hotels and Resorts, the owner or operator of over 80 properties including several of Canada's most historic properties. At the time of the announcement, Icahn said that he wanted the firm's management to take steps to increase the firm's undervalued share price. He also stated that the firm's shareholders would benefit if a larger hotel operator acquired the company. The following month Icahn launched a $1.19 billion cash offer of $40 per share to obtain a controlling interest in the company. The firm's directors urged shareholders to reject the offer and later agreed to a $45-per-share cash buyout by a Saudi prince and a Los Angeles-based real estate investment fund. Although Icahn failed in his takeover bid, his toehold purchase put the firm in play and produced a substantial profit for the activist investor.