What is a Godfather Offer?
What is the purpose of a godfather offer?
A godfather offer is a powerful tactic used by a company or investor that sets out to acquire a target company that does not wish to be acquired.
The aggressive approach seeks to put overwhelming pressure on the target company to bow down to the acquiring company’s purchasing demands.
Process of a godfather offer
In most cases, the acquiring company will present a public tender offer that significantly exceeds the target company’s current share prices.
As the price per share offered is by design exceedingly generous, shareholders will typically need little convincing to sell.
Even if the target company’s board of directors refuses to sell, they have a fiduciary duty to shareholders. As such, the shareholders can take legal action to ensure the company upholds their fiduciary duty by selling the company.
By implication, when it comes to godfather offers, the future of the target company is essentially in the shareholders’ hands.
Is this type of tender offer effective?
Generally speaking, godfather offers are considered to be a very effective means of acquiring companies that do not wish to sell.
After all, shareholders are highly incentivized to sell their shares considering the generous premium they are being offered. This is particularly true in cases where the current price of the shares is dismal or trending downwards.
Another reason godfather offers tend to be effective concerns companies’ fiduciary duty to shareholders. This obligation makes it practically futile to refuse a godfather offer once the wheels are in motion.
Companies or investors that choose to use a godfather offer also have the advantage of bypassing a company’s board of directors and engaging directly with its shareholders.
Example of a godfather offer
To better understand how a godfather offer works, consider the following hypothetical example:
Imagine that Company A seeks to acquire Company B. Company B states that they are not interested in selling.
Company A puts out a tender offer to buy Company B’s shares for $100 a share, even though its shares are currently priced at only $60 a share.
Company B still does not want to sell. However, it eventually accepts Company A’s offer to sell due to mounting pressure from its shareholders.
Why is it called a godfather offer?
As you may have suspected, this term borrows its name from the classic mafia book series (and later, film series), “The Godfather.”
In the namesake book and film adaptation, the character Don Vito Corleone, utters the now-famous line:
“I'm gonna make him an offer he can't refuse.”
In the context of the book and film, the ‘offer’ in question represents a very real threat to a person’s livelihood. It is Don Vito Coleone’s way of assuring his godson that he will do whatever it takes — including heinous acts — to ensure that he gets the movie role he has always dreamed of.
Are godfather offers legal?
While they may seem heavy-handed, godfather offers are completely legal (as long as they follow proper protocol for tender offers and other relevant processes).
It is worth remembering that although godfather offers are indeed intended to seem demanding and harsh, they should not be at all reminiscent of Don Vito Corleone’s threats of illegal activity.
A godfather offer is a type of heavy-handed takeover bid. It usually results in a positive outcome for the acquiring company, due to the overwhelming pressure it places on the target company to sell.