Kamikaze Defense

A Japanese-style defense strategy against hostile takeovers

What is Kamikaze Defense?

Kamikaze defense refers to a type of strategy that a target company can take to defend against a hostile takeover. “Kamikaze” means “divine wind” in Japanese. It was originally a special attack unit of the Japanese army, particularly responsible for performing suicide attacks. In the business world, it represents an anti-takeover strategy that causes damages to the target company itself.

 

Kamikaze Defense

 

Summary

  • The Kamikaze defense is a defense strategy against a hostile takeover. The target company takes actions that damage its value, and thus makes it less appealing to the hostile acquirer.
  • Examples of Kamikaze defense include the sale-of-the-crown-jewels strategy, the fat-man strategy, and the scorched-earth strategy.
  • Target companies usually take the Kamikaze defense as a last resort, since it is possible that the company cannot recover from the damage.

 

Understanding Kamikaze Defense

Kamikaze defense is a type of strategy that a target company can take to avoid a hostile takeover. A hostile takeover happens when a company (the acquirer) tries to acquire another company (the target), as the management of the target company is unwilling to make this deal. It usually appears among public companies, as the shareholders are not in the management team.

The acquirer can purchase shares directly from the public shareholders, even though the management of the target disagrees with the acquisition. The acquirer may also reach the deal by replacing the target’s management team.

Target companies can apply defensive strategies to avoid being taken over. These defensive strategies can be categorized into pre-offer defenses and post-offer defenses. Pre-offer defenses are employed to avoid possible bidding offers, while post-offer defenses are implemented when a threat’s actually taken place. Kamikaze defense is a post-offer defense, as it is usually the last resort when other defensive strategies do not work.

The name “Kamikaze” reveals the nature of the strategy, which can be detrimental to the company that implements it. The mechanism of Kamikaze defense is to take actions that are unfavorable to the target company’s business operation or financial condition, and thus makes the target less appealing to the hostile acquirer. The actions may include selling some of the company’s assets, issuing debts to a disadvantageous level, making an acquisition that is unfavorable to the acquirer, reducing the cash available, and so on.

 

Kamikaze Defense Strategies

Below are some examples of Kamikaze defense strategies that a target company can make.

 

1. Sale-of-the-Crown-Jewels Strategy

The target company can defend itself against a hostile takeover by selling its crown jewels – the most valuable business units or assets of the company. These are usually the parts of the business with high profitability or strong growth prospect, which attract the acquirer for the acquisition the most. The crown-jewel assets vary in different companies, especially in different industries. The acquirer company may no longer be interested in taking over the target after it has sold its prized part.

Regarded as a “Kamikaze” action, this strategy damages the target’s value. To minimize the damage, the target can sell its asset to a friendly party, known as the “white knight,” and then purchase it back after the hostile acquirer gives up the deal.

 

2. Fat-Man Strategy

Through the fat-man strategy, the target company acquires other companies and assets to bloat its balance sheet, which turns it into a “fat man.” The acquisition will make the target company less appealing to the acquirer, especially when it essentially increases the target’s debt load or reduces its cash available without a visible potential of synergy.

 

3. Scorched-Earth Strategy

A scorched-earth strategy is originally a military strategy that prevents invaders from taking advantage of the local resources, such as crops and infrastructures, by destroying them before retreating. This logic also works in the business world. A target company may sell its assets, take a load of debt to damage its value, and thus turn into a less attractive target.

 

4. Other Defense Strategies

The Kamikaze defense is usually the last resort that a target company takes since the strategy is detrimental to its value. A target may probably fail to recover even after successfully avoiding the takeover, as the damage can be so fatal. Thus, companies usually try other alternatives before taking such a suicidal step.

The white-knight strategy is an example. A target seeks a friendly acquirer who bids at fair consideration to disrupt a deal from a hostile acquirer. Although the strategy does not allow the target to remain independent anymore, the damage is much milder than the Kamikaze defense.

 

More Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Hostile Takeovers vs Friendly Takeovers
  • Poison Pill
  • Pre-Offer Defense Mechanism
  • Shark Repellent

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