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What Is A Crown Jewel Defense
In mergers and acquisitions, a crown jewel defense is a type of defense strategy where the target company sells its most valuable assets following a hostile takeover bid.
The target company’s objective is to sell its most attractive assets, so the acquirer no longer sees value in pursuing the hostile takeover.
As the name suggests, the crown jewel defense consists of a target company selling its “crown jewel”.
This type of defense strategy in M&A is pretty drastic as the target company is adopting a self-destructive measure to protect itself against a hostile takeover.
Typically, this type of defense is implemented when the target has exhausted all other options and the board still considers that selling its best assets will bring more value to the shareholders than accepting the hostile takeover bid.
Crown Jewels
Crown jewels refer to a company’s most valuable assets.
For example, a software company’s crown jewels could be its trade secret and proprietary information.
A real estate company’s crown jewels could be highly prized real estate properties and estates.
The assets are called crown jewels as they are highly valuable to the company.
Defense Strategy
A crown jewel defense is a defense strategy in mergers and acquisitions where a target company sells or transfers its most precious and valuable assets to another company with the objective of rendering itself less attractive as a business.
When a company no longer has its prized assets or trade secret, other companies may not see any benefit in pursuing any type of acquisition, even less so a hostile one.
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Why Use A Crown Jewel Defense
The main reason a crown jewel defense strategy is pursued in M&A is for a target company to render itself less attractive when it is subject to a hostile takeover bid.
Although the crown jewel defense is a self-destructive type of defense, a target company can also use this defense without actually destroying the company.
In certain cases, the target company will find another “friendly” company that agrees to buy the target’s assets and resell them in the future at a pre-determined price.
This friendly company is generally known as the “white knight”.
The idea is to have the white knight hold on to the assets until the acquirer withdraws its hostile takeover bid.
When the hostile takeover bid is off the table, the white knight will transfer back the assets to the target.
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Crown Jewel Defense Pros And Cons
The main advantage of a crown jewel defense is that a target company is able to fend off a hostile takeover bid by making itself less attractive.
There are instances when a target’s board does not believe that the acquisition by the acquirer will result in synergistic outcomes or produce value for its shareholders.
In such a case, the target may consider that selling its main assets to a friendly company will produce better value than allowing the hostile takeover to go through successfully.
On the flip side, a crown jewel defense can be a highly risky venture.
The main risk is that the target is selling off its most valuable assets.
This can lead many shareholders, investors, and company stakeholders to panic.
Another risk is that company stakeholders may consider the target’s board to breach its fiduciary duty by preferring to take a self-destructive path than to accept a hostile takeover bid which usually comes at a premium over the current market price.
A third risk is that the white knight should be carefully selected as it’s crucial that this company act in good faith to acquire the valuable assets and eventually sell them back without misappropriating any trade secrets or proprietary information.
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Crown Jewel Defense Example
Let’s look at an example of a crown jewel defense to illustrate the concept better.
Let’s say that Company ABC (the acquirer) makes an offer to purchase all of the shares of Company XYZ (the target).
The target’s board of directors does not agree with the offer and rejects it.
The acquirer then submits a hostile takeover bid directly to the target’s shareholders by offering a 25% premium over the target’s current market price.
Now that the target’s board has been bypassed, the board quickly finds Company 123 (the white knight) to buy its most valuable assets for a total of $500 million.
The target and the white knight enter into an agreement that the target sells its assets for a predetermined price, and the white knight will sell back the assets to the target when the hostile takeover bid is withdrawn.
Now that the target no longer has its most valuable assets, the acquirer no longer sees any value in purchasing the target’s shares and withdraws its hostile bid.
With the removal of the hostile takeover bid, the white knight sells back to the target the same assets that were sold.
In this transaction, the white knight benefits as it earns a premium and the target benefits by not losing its business to the acquirer.
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Takeaways
So there you have it folks!
What does a crown jewel defense mean?
In a nutshell, a “crown jewel defense” is an anti-takeover defense strategy where the target company gets rid of its most precious assets rendering itself less attractive to the acquirer.
This strategy is typically deployed when the target company has no other alternatives as it is taking a big risk of selling off its most valuable assets.
Typically, the target company will sell its assets to a white knight, a friendly third-party company, that agrees to buy the assets and resell them back to the target in the future.
When the hostile bidder removes its bid, the white knight will sell the assets back to the target.
Now that you know what a crown jewel defense is and how it works, good luck with your research!
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