What is a Target Company in an Acquisition?

A target company is an entity that has been selected as a takeover candidate by an acquirer. The selection is usually made based on certain minimum criteria that the acquirer has established. For example, a target company must have revenue that exceeds a certain threshold level, it has a reasonable revenue and profit growth rate, its products complement those of the acquirer, and it sells into a geographic region not already addressed by the acquirer.

Target Company Resistance Methods

There are several techniques available to a target company that does not want to be acquired. The primary tools are as follows:

Poison pill. A poison pill makes the company less attractive by allowing existing shareholders (except the acquirer) to purchase additional shares at a discount. This dilutes the ownership interest of the hostile bidder and increases the cost of the takeover. It often discourages unwanted bidders by making the acquisition prohibitively expensive.
White knight. The target company seeks out a more favorable company, known as a "white knight," to acquire them instead of the hostile bidder. The white knight offers better terms, protects management, and often maintains the company's existing strategies and culture. This method allows the target to avoid being taken over by an unwanted party.
Crown jewel defense. In this tactic, the target company sells or threatens to sell its most valuable assets (the "crown jewels") to reduce its attractiveness. By disposing of key divisions, the hostile bidder may no longer find the acquisition worthwhile. However, this method can weaken the company even if the takeover attempt fails.
Pac-man defense. The target company tries to turn the tables by attempting to acquire the hostile bidder instead. This aggressive and bold move can either force the bidder to retreat or lead to a negotiated settlement. It requires substantial financial resources and is typically used by companies that are strong enough to counterattack.
Greenmail. The target company offers to buy back its own stock from the hostile bidder at a premium price to stop the takeover attempt. In exchange, the hostile bidder agrees to halt the acquisition. While this strategy can be effective, it is controversial and can be costly for the target company's shareholders.

What is a Target Company in a Lawsuit?

The target company term can be used to indicate a business that is being targeted with a lawsuit. A plaintiff will usually not initiate a lawsuit unless it considers the odds of a favorable outcome to be relatively high, and only if the target company has sufficient resources (or insurance) to afford to pay for any settlements.

Example of a Target Company

Eskimo Construction builds cold-weather facilities, and wants to expand the geographical range of the firm’s offerings. Accordingly, it devises acquisition criteria as companies that engage in wet weather construction, with revenues of no greater than $10 million and consistent profitability of at least 5%. Based on these criteria, it selects Deluge Construction as a target company.