What Does a Godfather Offer?
A Godfather offer is a definitive takeover bid by an acquirer to a target firm. The offer is often too attractive relative to the target’s share price, making it difficult for management to refuse without potentially angering shareholders and breaking their fiduciary obligation.
A Godfather offer is named after the Francis Ford Coppola film. The name comes from the film’s iconic phrase, “I’m going to make him an offer he can’t refuse.” One of the most famous movie quotes is this:
How Godfather Offers Work
The Godfather offer is a subtle but forceful demand: do as I say, or else.
However, unlike Don Corleone in the movie, the purchasing firm is not suggesting it would kill someone if it didn’t get its way. However, this forceful approach poses a vulnerable position for a targeted firm that does not wish to be acquired.
The target’s board of directors may struggle to refuse a public tender offer that offers shareholders a favorable price for their shares. If management refuses to sell and rejects the proposal, shareholders may sue or revolt against the target firm for failing to protect shareholders’ interests.
Most Godfather offers—”do as I say, or else”—are harsh.
When the target company’s stock price has been stagnant or dropping for a long time, it becomes difficult for management to reject a Godfather offer. Long-term investors may be more willing to sell out at a higher price.
Example of Godfather Offer
Company A develops specialized technology and is promising. Its solutions might change the world; therefore, larger firms are sniffing around and considering acquisitions.
Company A’s management team discreetly rejects all offers, saying it won’t sell its potential to another company. This method deters predators for a few months until one becomes aggressive.
C Company, a financially strong industry giant, makes a substantial Godfather offer to shareholders after losing patience with Company A. Company A receives an offer of $70 per share, a 75% premium over its current market price.
Company A’s board is furious and refuses to sell at any price, while its stockholders approve the sale and won’t accept no. Stuff gets messy quickly. In a proxy war, disgruntled shareholders collaborate to gain power and accept the acquisition. They also threaten to sue top management for not favoring them.
Conclusion
- An acquirer’s Godfather offer is an irrefutable takeover bid.
- The offer often comes with a high premium relative to the company’s share price, making it hard for management to refuse.
- Rejected bids may lead shareholders to sue or revolt against the target company’s board for fiduciary responsibility violations.
