What is a Target Firm
A target firm is a company that has been chosen as an attractive merger or acquisition option by a potential acquirer. A takeover attempt can take on many different flavors, depending on the attitude of the target firm toward the acquirer. If management and shareholders are in favor of the transaction, then a friendly and orderly transaction can take place. When there is opposition to the transaction, the target firm may attempt a variety of hostile actions hoping to thwart the takeover attempt.
Beyond outright takeover attempts, as has been the historical norm, shareholder activism is a modern twist on the definition of 'target firm.' For instance, as the importance of gender equality, environmental concerns, and cybersecurity issues grow in popularity — it's common for the media, analysts and shareholders to 'target' a firm for a variety of shareholder/stakeholder activism efforts.
BREAKING DOWN Target Firm
Target firms are often acquired at a price more than their fair market value. This has come to be widely known as a premium. This is rational when the acquiring firm perceives an additional strategic value to the acquisition, such as greater economies of scale. These economies do not always materialize, however, since there can be additional hidden costs associated with the integration of two firms. Particularly for business operations with deeper cultural or social differences than previously recognized.
In the case of mergers and acquisitions, friendly takeover attempts are far more common, although hostile takeover attempts tend to dominate the news. In reality, hostile takeover attempts of the movie variety are far more costly and time-consuming than potential acquirers would prefer.
In financial jargon, a target firm has traditionally been considered a 'target' for acquisition; more contemporary definitions also lump target firms with shareholder activism campaigns. Shareholder activism is a modern approach to driving change, without the messy hassle of expensive takeover attempts. As such, it's not uncommon to hear a company or industry described as a "target" of ESG led shareholder engagement initiatives.