What Is Friendly Takeover?
A friendly takeover is the act of target company's management and board of directors agreeing to be absorbed by an acquiring company.
- A friendly takeover is a scenario in which a target company is willingly acquired by another company.
- Friendly takeovers are subject to approval by the target company's shareholders, who generally greenlight deals only if they believe the price per share offer is reasonable.
- Friendly takeover deals must achieve regulatory approval by the U.S. Department of Justice (DOJ).
- Friendly takeovers stand in stark contrast to hostile takeovers, where the company being acquired does not approve of the buyout, and often fights against the acquisition.
Understanding Friendly Takeover
A friendly takeover is typically subject to approval by both the target company’s shareholders and the U.S. Department of Justice (DOJ). In situations where the DOJ fails to grant approval for a friendly takeover, it's typically because the deal violates antitrust (anti-monopoly) laws.
In a friendly takeover, a public offer of stock or cash is made by the acquiring firm. The board of the target firm will publicly approve the buyout terms, which subsequently must be greenlit by shareholders and regulators, in order to continue moving forward. Friendly takeovers stand in stark contrast to hostile takeovers, where the company being acquired does not approve of the buyout, and often fights against the acquisition.
In a majority of cases, if the board approves a buyout offer from an acquiring firm, the shareholders follow suit, by likewise voting for the deal’s passage. In most prospective friendly takeovers, the price per share that's being offered is the chief consideration, ultimately determining whether or not a deal is approved.
For this reason, the acquiring company usually seeks to offer fair buyout terms, such as buying shares at a premium to the current market price. The size of this premium, given the company's growth prospects, will determine the target company's support for the buyout.
Takeovers initially seen as friendly may turn hostile when a target company’s board and shareholders reject the buyout terms.
Friendly Takeover Example
In December 2017, drugstore chain CVS Health Corp. (CVS) announced it would acquire health insurer Aetna Inc. (AET) for $69 billion in cash and stock. Both companies' shareholders approved the merger in March 2018, bringing the combined organization one step closer to finalizing a deal that would ultimately transform the healthcare industry.
The DOJ approved the merger in October 2018 on the condition that Aetna follow through on its plan to sell its Medicare Part D business to WellCare Health Plans. CVS and Aetna completed their merger the following month.
By transforming many CVS storefronts into community medical hubs for primary care and basic procedures, the merged company has sought to reign in health care costs by helping patients comply with prescribed drug regimens which may cut hospitalizations.
This friendly takeover came at a time when healthcare 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 (GDP) and is expected to reach approximately 19.7% by 2026.