What is a Godfather Offer?
A Godfather offer is essentially an offer that is so ridiculously favorable, that to refuse it would be a dereliction of financial responsibility. It most often occurs in the context of mergers and acquisitions, and refers to an offer made by one company to purchase or take over another company.
The Godfather Tender Offer
A Godfather offer is usually a tender offer. It involves a company or investor putting forth an offer to a target company’s shareholders. The potential acquiring investor offers to pay the shareholders an absurdly favorable amount for their shares – for example, offering shareholders $80 a share when the current market price is only $50 a share.
One reason Godfather tender offers are so effective is that a company is able to offer shareholders a favorable deal without permission or involvement from the target company’s board of directors. The individual or group representing the acquiring company can make the offer and interact directly with the target’s shareholders.
Origin of the Godfather Offer
The term “Godfather offer” originated from the classic 1972 Mafia film – “The Godfather” – in which the patriarch – played by Marlon Brando – talks about making someone “an offer they can’t refuse”. However, in the movie the offer is hard to refuse not because it’s so attractive, but because of the severe consequences threatened if the offer is not accepted.
In the takeover world, however, a Godfather offer is more of an attractive promise than a horrifying threat – so lucrative that the receiving party would be foolish to refuse.
Example of a Godfather Offer
Godfather offers are extremely common in mergers and acquisitions, specifically in the context of a hostile takeover. In such a situation, the targeted company doesn’t want to be acquired. However, the bidding company – the potential acquirer – makes the targeted company’s shareholders a nearly irresistible offer in pursuit of obtaining a controlling equity interest in the target company.
In such a situation, the board of the targeted company can’t dissuade shareholders from refusing the offer because to do so would likely be a breach of its fiduciary responsibility to act in the shareholders’ best interest. Consider again the example of offering $80 a share for a stock selling in the open market for only $50 a share. Faced with such a premium offer, few shareholders are likely to refuse it.
A Godfather offer refers to “an offer that can’t be refused”. Such an offer is designed to benefit both the party extending the offer and the shareholders who receive the offer. The shareholders can turn a handsome profit by aiding the acquirer in obtaining its desired equity interest in the target company.
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