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. The crown jewel defense is a last-resort defense since the target company will be intentionally destroying part of its value, with the hope that the acquirer drops its hostile bid.
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 assets in terms of profitability, future business prospects, or asset value.
A company’s crown jewels depend on the industry and nature of the business. For example, a company that operates as a manufacturer in the automobile industry may consider its crown jewels the production and manufacturing factories or techniques that it uses.
How a Crown Jewel Defense Works
Here is an example of how this takeover defense strategy works:
- Company A makes a bid to purchase Company B.
- Company B rejects the bid.
- Company A pursues the acquisition anyway by offering to buy shares of Company B at a 10% premium.
- Company B, fearing that Company A may be successful in achieving a controlling interest in the company through share purchases, decides to intentionally destroy company value by selling valuable assets.
- Since the most valuable assets of the company are gone, Company A retracts its bid for Company B and abandons its acquisition plans.
In a crown jewel defense, the target company sells off valuable assets to reduce its attractiveness. Notice that in a crown jewel defense, the target company is essentially destroying value and damaging itself to escape a hostile takeover.
Rationale Behind a Crown Jewel Defense
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.
Example – A “Better” Crown Jewel Defense Strategy
Let us consider a more optimized crown jewel defense strategy in which Company B sells its assets to a friendly third party.
- Company A makes a bid to purchase Company B.
- Company B rejects the bid.
- Company A pursues the acquisition anyways by offering to buy shares of Company B at a 10% premium.
- Company B reaches out to a friendly company – Company C – 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.
- Since the most valuable assets of Company B are gone, Company A retracts its hostile bid.
- With the hostile bidder gone, Company B repurchases its assets from Company C at the predetermined price.
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.
