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.

RELATED TERMS
  1. Takeover

    A takeover occurs when an acquiring company makes a bid in an ...
  2. Takeover Bid

    A takeover bid is a corporate action in which an acquiring company ...
  3. Hostile Takeover Bid

    A hostile takeover bid occurs when an entity attempts to take ...
  4. Mergers and Acquisitions - M&A

    Mergers and acquisitions (M&A) is a general term that refers ...
  5. Killer Bees

    Killer bees helped companies avoid takeovers, during the 198 ...
  6. Friendly Takeover

    A friendly takeover occurs when a target company's management ...
Related Articles
  1. Investing

    Why Do Companies Care About Their Stock Prices?

    A company's stock price reflects the company's earnings potential, its future viability, determines management compensation can play a critical role in mergers and acquisitions.
  2. Small Business

    What Merger and Acquisition (M&A) Firms Do

    For a business planning to make a deal, it can be intimidating. This is why merger and acquisition firms step in to lead the buying and selling process.
  3. Know Your Shareholder Rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company.
  4. Investing

    How mergers and acquisitions can affect a company

    M&A can have a profound effect on a company’s growth prospects and outlook, but with a significant degree of risk.
  5. Personal Finance

    How Target Can Expand Internationally

    Target needs to get back onto the international scene in order to take on its largest competitors. There's only one way to do it, and it involves the Internet.
  6. Small Business

    The Buy Side of the M&A Process

    Mergers and acquisitions can anywhere from months to years, depending on the complexity of the deal and the companies involved.
  7. Investing

    Methods used in valuing private companies

    There are a few methods for calculating the valuation of a private company. By using financial information from peer groups, we can estimate the valuation of a target firm.
  8. Investing

    What is private equity?

    Although few people actually understands the industry, private equity (PE) has gained a great amount of influence in today's financial marketplace. Check out what it is and how it operates.
  9. Insights

    Is F5 Networks a Potential Acquisition Target? (FFIV, GS)

    There’s more upside left for shareholders, given the news of multiple suitors for F5 Networks.
  10. Investing

    Do Mergers Save Or Cost Consumers Money?

    A merger or acquisition can actually be beneficial to the customer - find out how, in this article.
RELATED FAQS
  1. How company stocks move during an acquisition

    During an acquisition, there's a short-term impact on the stock prices of both companies. Typically, the target company's ... Read Answer >>
  2. What's the difference between a merger and a hostile takeover?

    Understand the difference between a merger and a hostile takeover, including the different ways one company can acquire another, ... Read Answer >>
  3. How can a company buy back shares to fend off a hostile takeover?

    Learn about why a business might use a stock buyback to thwart a hostile takeover attempt by reducing its total assets and ... Read Answer >>
  4. What happens to the shares of a company that has been the object of a hostile takeover?

    Learn about the effect on the share price of companies that are targets of hostile takeovers, which are tactics used by famed ... Read Answer >>
  5. What is the difference between a merger and an acquisition?

    Learn about the legal differences between a corporate merger and corporate acquisition – terms used when companies are either ... Read Answer >>
  6. How does a merger affect the shareholders?

    Explore the impact of a merger and understand how the process affects shareholders of the newly merged firm in terms of stock ... Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center