Definition
The Crown Jewels Defense is a strategy used by companies to prevent hostile takeovers. In this strategy, the company sells off its most attractive assets, or “crown jewels,” making it less appealing to the potential acquirer. The goal is to deter the takeover attempt by reducing the value or attractiveness of the target company.
Key Takeaways
- The Crown Jewels Defense is a strategic tactic employed by a company to prevent hostile takeovers. The company safeguards its most valuable and attractive assets, often termed ‘Crown Jewels’, to discourage or fend off acquisition attempts.
- Crown Jewels Defense can involve a range of strategies including, but not limited to, selling off the valuable assets to a friendly third party, creating legal roadblocks to their sale, or even destroying the assets. This is done to make the company less attractive to the potential acquirer.
- While this approach can be effective in discouraging hostile takeovers, it might also harm the company in the long run as it may lead to the loss or impairment of important assets. Therefore, it is often considered a strategy of last resort.
Importance
The Crown Jewels Defense is a critical tool within the sphere of corporate finance and it plays a significant role in the defense against hostile takeovers.
As a tactic, it involves the sale or threat of sale of the most valuable or attractive assets (the ‘crown jewels’) of a company when under the threat of a hostile takeover.
This strategy has significant implications as it discourages potential hostile bidders, as they may view the company, post-asset sale, as less attractive or valuable.
Furthermore, it provides a safety net for the company as the sold assets can generate funds, which might be used to implement other tactics to prevent the takeover.
Hence, understanding the Crown Jewels Defense is fundamental to comprehend the landscape of corporate control battles and corporate self-defense strategies.
Explanation
The Crown Jewels Defense, in the sphere of finance, essentially serves as a strategy against hostile takeovers. If a company perceives the risk of unwelcome takeover atttempts, they might deploy the Crown Jewels Defense as an act of self-protection.
The purpose is essentially to metaphorically wrap their most attractive and valuable assets (the “crown jewels”) in layers of defense, to ensure that the acquiring company will encounter difficulty or less value in their potential acquisition. The Crown Jewels Defense can be employed in various ways, but commonly it involves selling off the valuable ‘jewel’ assets to a third party, or to management.
Sometimes the company may even purposefully plan to have these assets deteriorate in the event of a takeover attempt, thus making the company less appealing to hostile bidders. This tactic is employed as a deterrent to protect the company’s independence, even though it may sometimes significantly alter the company’s strengths and operational capability.
Examples of Crown Jewels Defense
The term “Crown Jewels Defense” in finance refers to a type of defensive tactic that a company uses to prevent a hostile takeover. This defense involves the sale or threat of sale of critical assets or key subsidiaries of the company in question when a hostile takeover is imminent. Here are three real world examples:
Martin Marietta Materials’ Attempt to Takeover Vulcan Materials (2011): Vulcan Materials, the U.S. largest producer of construction aggregates, resorted to a Crown Jewels Defense to counter a hostile takeover bid by Martin Marietta Materials. Vulcan threatened to sell large portions of its most profitable assets to make itself less attractive to Martin Marietta, helping it resist the takeover.
Airgas’s Defense Against Air Products and Chemicals (2010): Air Products attempted a hostile takeover of Airgas. In response, Airgas used a series of defense tactics including lawsuits, a poison pill, staggered board terms, and a crown jewels defense. Specifically, Airgas claimed that the takeover could force them to sell the company’s most valuable assets, thereby making the takeover much less attractive.
Pennzoil- Getty Oil (1984): Texaco made a bold attempt at a hostile takeover of Getty Oil after Pennzoil had already made a takeover agreement. Getty threatened to sell off some of its high-value assets in response to Texaco’s bid, effectively using a crown jewels defense. However, a predicate legal battle between Texaco and Pennzoil overshadowed these measures, leading to Texaco’s bankruptcy.
FAQ: Crown Jewels Defense
What is Crown Jewels Defense?
The Crown Jewels Defense is a strategy implemented by a company to discourage hostile takeovers. In this approach, the company sells or threatens to sell valuable assets (crown jewels) to make it less attractive to the potential acquirer.
When is the Crown Jewels Defense used?
It’s used when a company is facing a hostile takeover attempt. This strategy prevents the takeover, as the acquirer may be attracted to the company for these specific valuable assets.
What are the advantages and disadvantages of the Crown Jewels Defense?
The main advantage of the Crown Jewels Defense is that it can help a company to remain independent. However, this strategy also has disadvantages, as selling off valuable assets can harm the company’s future profitability and stability.
Is Crown Jewels Defense a common practice in corporate finance?
While it’s not the most common, this practice can be applied by companies in dire situations as a desperate measure to fend off unwanted takeovers. Just like any drastic measure, it should be handled with caution.
Related Entrepreneurship Terms
- Poison Pill: A defense strategy used by corporations to prevent or deter hostile takeover attempts.
- White Knight: A person or company that comes to the aid of a company facing a hostile takeover, often by buying the company at a fair consideration.
- Takeover Bid: An offer made to shareholders to purchase their shares, either directly or indirectly, in order to gain controlling interest in a company.
- Hostile Takeover: An acquisition of a company that is not agreed upon by the company’s management.
- Golden Parachute: A large financial compensation guaranteed to company executives should the company be taken over by another firm and the executives are terminated as a result of the merger or takeover.
Sources for More Information
- Investopedia: An extensive resource for investing, stocks, and personal finance. This website frequently publishes articles explaining complex finance terms.
- Financial Times: An international daily newspaper printed in broadsheet and published digitally that focuses on business and economic current affairs. It can provide in-depth articles and analyses about various finance terms.
- Corporate Finance Institute: Offers online certifications and designations for finance and banking professionals. It offers extensive resources on corporate finance terms and strategies.
- Zacks Finance: An online portal providing professional grade financial research and insights. It offers articles on many financial topics, including detailed definitions and explanations of various terms.
