A Kamikaze defense is an extreme but sometimes necessary strategy employed by a company’s management to prevent a takeover by another company.
Although the name is derived from the dire and self-sacrificing kamikaze tactics utilized by Japanese forces during World War II, the goal is not to destroy the company. In reality, a kamikaze defense involves adopting measures that critically impact the company’s business operations or financial health. The aim is to make the target company less appealing to an aggressive acquirer, effectively blocking the takeover attempt. Although risky, the approach hopes to deter hostile bids.
Key Takeaways
- Defensive Strategy: A kamikaze defense is a deliberate move by management to thwart takeover attempts.
- Risky Measures: While it protects against acquisition, it involves damaging the company’s value.
- Types: Common methods include selling key assets, scorched earth policies, and the fat man strategy.
Understanding Kamikaze Defenses
When management doesn’t want their company to be acquired, they may resort to a kamikaze defense as a last-resort tactic.
During an acquisition process, an interested party typically acquires a minor stake in the target company and proposes an offer to the board of directors. Should the board reject the offer—often due to believing the proposal vastly undervalues the company—the interested party might escalate to aggressive measures to gain control.
This can lead to a hostile takeover attempt against the board’s wishes. In response, the target company might seek aid from a white knight—a friendly party interested in preserving the company’s current operations.
Another common defense is the poison pill, generally seen as unfriendly to shareholders but mild compared to full kamikaze strategies. While a kamikaze defense may eventually succeed, it can leave the company in a fragile state. Often, these defenses are carried out to protect the interests of the company’s founders or current management rather than regular shareholders.
Types of Kamikaze Defenses
Selling the Crown Jewels
Selling the crown jewels is when management liquidates the company’s most valuable assets, rendering the company less attractive to the hostile bidder and raising capital.
For instance, a struggling company that owns prime commercial real estate might sell this to deter takeover attempts aiming to acquire this property at a bargain. While this strategy can be successful, it removes significant resources from future business operations, potentially causing long-term harm.
Scorched Earth Policy
A scorched earth policy mirrors a disturbing, often illegal military strategy where a retreating force destroys resources to hinder the enemy.
In corporate terms, management might dispose of key assets valuable to the suitor or engage in counterproductive actions like firing skilled employees and neglecting essential maintenance. While this can severely reduce the company’s allure, it poses significant legal risks and operational harms.
Fat Man Strategy
The fat man strategy involves increasing the company’s debt load and buying additional assets or other firms to make the target too cumbersome and less attractive for acquisition.
Although this makes the company harder to acquire, it can backfire if the new acquisitions don’t align strategically or financially with the company. This kamikaze strategy leaves the target company loaded with detrimental debt, risking long-term stability even if the hostile takeover attempt fails.
In concluding, kamikaze defenses are high-risk strategies employed only as a last resort. They can offer short-term protection against hostile takeovers but may leave the company weakened and vulnerable in the long run.
Related Terms: Poison Pill, White Knight, Takeover Defense, Corporate Strategy.
