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What Is A Godfather Offer
A godfather offer refers to an offer made by an acquirer to a target company that is so generous that it is difficult to refuse.
Essentially, a godfather offer is so generous that if the target company’s board refuses it, it will anger the shareholders and potentially be considered a breach of the board’s fiduciary duties.
The name godfather offer comes from the movie The Godfather where a punch line in the movie says “I’m gonna make him an offer he can’t refuse”.
This line has become famous and has been used in corporate finance to refer to takeover bids significantly over the target’s current market price.
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Why Make A Godfather Offer
Godfather offers are highly effective in ensuring that the target company shareholders sell a sufficient number of shares allowing an acquirer to achieve a controlling interest.
One reason why a company may submit a godfather offer to another company is that they can bypass the target company’s board of directors and submit the offer directly to the shareholders.
Since the offer is so generous, the shareholders stand to make good profits by selling.
At the same time, it will be very difficult for the target company’s board of directors to find reasonable arguments to convince the shareholders that the offer is not in their best interest.
By interacting directly with the target’s shareholders, the acquirer can potentially convince a sufficient number of shareholders to sell their shares so the acquirer purchases a controlling interest.
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How Godfather Offers Work
When a company wishes to acquire a controlling interest in another company, it must find a way to acquire a sufficient number of voting stocks to be able to control the future of the organization.
If the acquirer wants to take over another company quickly, it can offer a purchase price significantly higher than the target’s prevailing market price.
When the board of directors of a target company receives a very generous offer, it may be difficult for them to refuse the offer without facing various consequences.
Since the board of directors has to act in the best interest of the shareholders, they may have no other alternative but to recommend that the shareholders accept the takeover bid.
The mechanics of a godfather offer is exactly identical to that of a tender offer.
In essence, the acquiring company submits an offer to the target company expressing its willingness to purchase a substantial number of shares in the company at a fixed price.
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Godfather Offer Example
Let’s look at an example of a godfather other to better understand the concept.
Company XYZ is a high-tech company that has been growing rapidly over the past years.
Company ABC considers acquiring Company XYZ will bring synergistic benefits and be highly profitable long-term.
Company XYZ’s shares trade at about $50 per share.
Company ABC knows that it will be difficult to convince the target company’s board of directors to sell.
As a result, Company ABC offers a 100% premium over the target’s shares and offers to buy the shares at $100 per share.
This is considered a godfather offer as it’s so generous that the board of directors will have a hard time refusing it.
If the target’s board refuses to sell even at $100 per share, it will create many dissatisfied shareholders who may get into a proxy fight joining forces so the acquirer can get acquire a controlling interest.
Also, by refusing such a generous offer, the board of directors may expose themselves to lawsuits for breaching their fiduciary duties.
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Godfather Offer FAQ
Why is it called the Godfather offer?
It’s called a “Godfather Offer” as the name comes from the 1972 Mafia movie “The Godfather”.
In this movie, there is a famous line where Al Pacino says “I’ll make him an offer he can’t refuse.”
This line was transposed in business to refer to a tender offer so attractive that the target company cannot refuse it.
Why can’t you refuse a Godfather offer?
A Godfather offer is difficult to refuse by the target company’s shareholders or board of directors as it’s so favorable.
For example, if a company’s shares are trading at $35 per share and the acquirer offers $80 to purchase the shares, that represents a 128% premium.
It will be difficult for the target’s board to recommend that the shareholders refuse such an offer.
Why are Godfather offers so effective?
Godfather offers are so effective as the tender offer is so favorable to the target that it’s very difficult to refuse.
When a company wants to acquire another company by bypassing the board and ensuring a successful outcome, submitting a tender offer directly to the shareholders of the target at ridiculously favorable terms will generally produce the desired outcome.
Are Godfather offers legal?
Godfather offers are perfectly legal and usually lead to the desired outcome for the acquiring organization.
The offer is so overwhelmingly good for the target company that it’s hard for them to refuse the tender offer.
Takeaways
So there you have it folks!
What is a godfather offer?
In mergers and acquisitions, a godfather offer is such a ridiculously favorable offer an acquirer makes to purchase the shares of the target that refusing it may result in various legal and financial responsibilities for the target’s board.
A godfather offer is fundamentally a tender offer which is an offer made by one company to the shareholders of another company to buy their shares at a certain price.
Now that you know what is a Godfather offer and how it works, good luck with your research!
