Godfather Offer
A highly favorable takeover bid made by an acquiring company to a target company.
What is a Godfather Offer?
A godfather offer is a highly favorable takeover bid made by an acquiring company to a target company.
The takeover bid is highly favorable as it offers to buy shares of the target company at a higher premium than what is currently available in the market.
The offer ensures that the target company's shareholders sell enough shares to transfer the controlling interest to the acquiring company.
A common reason for an acquiring company to submit a godfather offer to another is to bypass the target company's board of directors and present the proposal directly to its shareholders.
The high premium the shareholders receive incentivizes them to make higher returns on their investments. This allows the acquirer to convince enough shareholders to sell their shares to gain a controlling interest in the company.
Therefore, creating difficulty for the target company's board of directors to find reasons to convince the shareholders that the offer they received was not in their best interest.
This allows the acquirer to convince enough shareholders to sell their shares to gain a controlling interest in the company.
Key Takeaways
- A Godfather Offer is a takeover bid with terms that are extremely attractive to the target company’s shareholders, making it difficult or impossible for them to refuse the offer.
- The term "Godfather offer" comes from the 1972 classic mafia movie "The Godfather." ".....an offer he can't refuse." It is the famous line from the movie mentioned. This line became one of the most famous quotes said in a mafia movie to this date.
- Providing companies with such an offer is perfectly legal. Given how overwhelmingly good the proposal is for the target company, it usually leads to the desired outcome for the acquiring organization.
- The takeover bid is highly favorable as it offers to buy shares of the target company at a higher premium than what is currently available in the market.
Origin of the Godfather Offer
The term "Godfather offer" comes from the 1972 classic mafia movie "The Godfather," in which the protagonist Vito Corleone played by Marlon Brando, tells his godson that he will help his singing career by giving a studio producer an "offer that he cannot refuse.
This line became one of the most famous quotes said in a mafia movie to this date. Although the tone of the offer in the film seemed innocent, it was perceived as a threat, as failure to do so would get the studio producer killed.
Therefore, providing companies with such an offer is perfectly legal and usually leads to the desired outcome for the acquiring organization, given how overwhelmingly good the proposal is for the target company.
If the senior management of the target company refused the offer, shareholders could rebel against the decision by initiating lawsuits against the senior leadership.
This is because the board's fiduciary duty is to look out for the best interests of the shareholders, particularly in periods where the company's share price has been weak or declining for a long time.
Therefore, an offer they can't refuse, which would be to sell their shares at an exorbitant price, would be an excellent option.
Example of a Godfather Offer
It is an offer in which the price proposed by an acquiring company is much higher than the market price.
In such situations, even if the board is not happy with the offer, it is subject to action, keeping shareholders' best interests in mind.
A few examples of companies that were purchased at an extremely high premium are.
Texas Instruments acquired National Semiconductor
In 2011, Texas Instruments (TXN) purchased National Semiconductor (NSM) for $6.5 billion in cash, combining two of the largest providers of analog semiconductors.
Texas Instruments paid $25 a share for National Semiconductor, a 78% premium to the target company's closing price of $14.07 the previous day.
The acquisition would help Texas Instruments capture 17% of the market for analog chips, which convert sound and heat digital signals and are used in everything from smartphones to thermostats.
Abbott Labs acquired Advanced Medical Optics
In 2009, Abbott Laboratories Inc (ABT.N) bought Advanced Medical Optics (EYE.N) for close to $1.4 billion, making it a leader in Lasik laser vision correction and the second-biggest player in cataract surgical lenses.
Abbott Labs paid $22 a share, a 150% premium to Advanced Medical Opticals (AMO) 's closing price the previous day.
AMO had also lost almost two-thirds of its value because of a weak economy and reduced demand for elective Lasik procedures.
Abbott, which currently sells no-eye products, would hold a strong position in the market. It would also help their diversification strategy, which had allowed them to become a top-performing large U.S. healthcare company during the COVID-19 pandemic.
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