Crown Jewel Defense

Selling off the target company's prized assets to discourage a takeover

What is the Crown Jewel Defense?

The Crown Jewel Defense strategy in mergers and acquisitions (M&A) is when the target company of a hostile takeover sells its most valuable assets to reduce its attractiveness to the hostile bidder. In other words, the crown jewel defense is a last-resort strategy since the target company will be intentionally divesting it’s most valuable assets and destring value with the hopes the acquirer drops its hostile bid.

 

Crown Jewel Defense in M&A diagram

Learn more takeover terms in CFI’s M&A Glossary.

 

What are Crown Jewels?

To fully understand the crown jewel defense strategy, it is important to know what a crown jewel is. Crown jewels are the most profitable or valuable corporate units or assets that belong to the company. In essence, crown jewels are the company’s most prized or valuable asset in terms of profitability, future business prospects, and asset value.

A company’s crown jewels depend on the industry and nature of the business. For example, a company that operates in the automobile industry as a manufacturer may consider its crown jewels the production and manufacturing factories it uses.

 

How a Crown Jewel Defense Works

Here is an example of how the defense strategy works:

  1. Company A makes a bid to purchase Company B.
  2. Company B rejects the bid.
  3. Company A pursues the acquisition anyways by offering to buy shares of Company B at a 10% premium.
  4. Company B, fearing that Company A may be successful in achieving a majority interest in the company through share purchases, decides to intentionally destroy company value by selling valuable assets.
  5. Since the most valuable assets of the company are gone, Company A retracts its bid for Company B.

 

In a crown jewel defense, the target company sells off its most valuable assets to reduce its attractiveness. Notice that in a crown jewel defense, the target company is essentially destroying value and killing the company to prevent it from being acquired.

 

Rationale Behind a Crown Jewel Defense

Recall that in a crown jewel defense, the target company sells its most valuable assets to a third party. However, in a lot of cases, the target company will sell its most valuable assets to a friendly third-party (a white knight). When the hostile bidder drops its bid, the target company will purchase back these assets from the friendly third party at a predetermined price. Therefore, a crown jewel defense does not always destroy the target company.

 

A “Better” Crown Jewel Defense Strategy

In the previous example, Company B sold its most valuable assets to a random third party, thus destroying the company. Let us consider a more optimized crown jewel defense strategy in which Company B sells its assets to a friendly third party.

  1. Company A makes a bid to purchase Company B.
  2. Company B rejects the bid.
  3. Company A pursues the acquisition anyways by offering to buy shares of Company B at a 10% premium.
  4. Company B reaches out to a friendly company – Company C – to them to purchase Company B’s assets for $100 million. Company B and Company C sign an agreement that Company B will purchase back its assets at a slight premium once the hostile bidder is gone.
  5. Since the most valuable assets of Company B are gone, Company A retracts its hostile bid.
  6. With the hostile bidder gone, Company B repurchases its assets from Company C at the predetermined price.

 

There is often the misconception that a crown jewel defense strategy is essentially a company killing itself. In the example above, we showed that a better crown jewel defense strategy would be to sell off assets to a friendly third party and buy back the assets after the hostile bidder abandons the strategy.

To learn more, read CFI’s M&A Glossary.

 

More Resources

CFI is a global provider of financial modeling training and financial analyst certification programs. To continue learning and advancing your career, these additional M&A related resources will be helpful.

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