What is Crown Jewel Defense?
Crown Jewel Defense strategy is an anti-takeover strategy applied during the M&A by the target company by selling off the most valuable assets of its company just to reduce the attractiveness from the hostile takeover and it is basically the last-resort strategy to be applied to stop the takeover.
We can define Crown Jewels Defense as a takeover defense strategy where the target firm agrees to sell off or sells off its most valuable assets to a third party in order to become a less attractive acquisition target.
- This defense strategy is applied to avoid a future hostile takeover by another company. Since the most valuable assets are sold off to a friendly third party, the target company becomes less attractive to the unfriendly bidder.
- The friendly third party to whom the valuable assets are sold is known as a white knight. Since the target company becomes less attractive, it might eventually compel the purchasing company to withdraw the bid.
- When this hostile bidder cancels its bid, then the target company again purchases back these assets from the friendly third party at a predetermined price. So this type of defense strategy does not necessarily always destroy the target company.
For example, in a telecommunications company, the research and development team (R&D) is a highly valuable department. This division is termed as the telecommunication company’s crown jewel. When a hostile bid is made, then the company may respond to this hostile bidding by selling off its research and development division to another company or spinning it off into a separate corporation.
What are Crown Jewels?
The most valuable units of a corporation based on characteristics like profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance., asset value, and prospects are known as Crown Jewels. The crown jewels may also include the line of business that produces the most popular items that a company sells or a department which has all the intellectual property for a particular project that may have great value in the future after the completion of the project. Crown Jewels of a corporation are protected and guarded heavily and allow certain people to access the trade secrets and the proprietary information since the crown jewels are worth a lot of money.
A company’s crown jewels vary from other companies as it depends on the industry and nature of the business. So to fully understand this strategy is we must be aware of what crown jewels are.
How Crown Jewel Works?
Let us have a look at the process of this defense strategy –
- Company X makes a bid to acquire Company Y.
- Company Y does not approve the bid and rejects it.
- Company X still pursues the acquisition and offers Company Y a 15% premium to buy its shares.
- In this situation, Company Y reaches out to a friendly third party company- Company Z, to purchase Company Y’s valuable assets. The two companies- Company Y and Company Z, sign an agreement that Company Y will buy back its assets at a slight premium once the hostile bidder- Company X, retracts its bid.
- Since the most valuable assets of Company Y are sold off, Company X withdraws its bid as Company Y becomes less attractive for acquisition.
- Since the hostile bidder- Company X, is out of the picture and has retracted its bid Company Y buys back its assets from Company Z at the predetermined slightly premium price.
It can be concluded from the process that in a crown jewels defense, the target company intentionally destroys its value by selling off its most valuable assets and kills the company to stop it from being acquired. Since the target company sells off its valuable assets, it becomes less attractive to the potential bidder.
Example – Sun Pharma vs. Taro
We can consider the Sun Pharma vs. Taro a perfect example of Crown Jewels Defense. There was an agreement made between Sun Pharma and Israeli company Taro related to a merger of Taro in May 2007. Some violations of terms happened as per Taro, and it unilaterally terminated this agreement with Sun Pharma. In spite of acquiring a 36% stake for Rs 470 crore, Sun Pharma has been injuncted by the Supreme Court of Israel for non-closure of the deal. Taro has implemented various defense strategies like crown jewels defense and sold off its Irish unit along with non-disclosure of financials to keep away Sun Pharma. The deal between Sun Pharma and Taro is still looming in uncertainty.
It is often assumed that a crown jewels defense strategy essentially destroys the target company and kills it. But this is a misconception. This strategy can also be used in a better manner where the target company sells off the valuable assets to a friendly third party and later repurchases those assets once the hostile bidder retracts its bidding.
Crown Jewels Defense Video
This article has been a guide to what is Crown Jewel Defense. Here we discuss how crown jewel defense works along with the practical example of Sun Pharma vs. Taro. You may learn more about M&A from the following articles –