What is a Friendly Takeover

A friendly takeover is a proposal in which a target company's management and board of directors agree to a merger or acquisition by another company that is subject to shareholder and U.S. Department of Justice (DOJ) approval.

BREAKING DOWN Friendly Takeover

In a friendly takeover, a public offer of stock or cash is made by the acquiring firm, and the board of the target firm will publicly approve the buyout terms, which may yet be subject to shareholder or regulatory approval. This stands in contrast to a hostile takeover, where the company being acquired does not approve of the buyout and fights against the acquisition. In most cases, if the board approves a buyout offer from an acquiring firm, the shareholders will vote to pass it as well. The key determinant in whether the buyout will occur is the price per share being offered. The acquiring company will offer a premium to the current market price, but the size of this premium (given the company's growth prospects) will determine the overall support for the buyout within the target company.

Example: Friendly Takeover of Aetna By CVS

In December 2017, drugstore chain CVS Health Corp. (CVS) announced that it would acquire health insurer Aetna Inc. (AET) for $69 billion in cash and stock. CVS Health and Aetna shareholders approved the merger between the two health-care giants on March 13, 2018, bringing the combined organization one step closer to finalizing a deal that could transform the industry. While the companies now await approval of the deal by the Department of Justice, they expect the transaction to close in the second half of 2018. By further disrupting the much maligned pharmacy benefits management market and transforming CVS’s pharmacy storefronts into community medical hubs for primary care and basic procedures, the two companies believe they can reign in health care costs, offer consumers access to high quality, more affordable care where and when they need it, and more effectively help patients stay on their prescribed drug regimens, especially those with chronic conditions that require medications to avoid hospitalizations.

This was a friendly takeover as it was primarily about a supplier and its customer joining forces, in what is called a vertical merger. This type of merger can enhance a firm’s ability to coordinate across interlocking lines of business and save the merged organization money. In this case, it also has the potential to translate into better care, more affordable drug prices and lower insurance premiums for the firm’s customers. This friendly takeover also came at a time when health-care companies and providers, including insurers, drugstores, doctors and hospitals were coming under pressure to lower costs. As of 2016, U.S. health spending equaled 17.9% of the nation’s gross domestic product and is expected to reach approximately 19.7% by 2026. In addition, rumors of Amazon’s (AMZN) potential entry into the pharmacy industry likely spurred CVS’s bid, as Amazon already sells over-the-counter drugs, including an exclusive line of Perrigo (PRGO) products.