Crown Jewel Defense

The "Crown Jewel Defense" refers to a strategic anti-takeover defense employed by a target company to deter hostile takeover attempts

Author: Elliot Meade
Elliot Meade
Elliot Meade
Private Equity | Investment Banking

Elliot currently works as a Private Equity Associate at Greenridge Investment Partners, a middle market fund based in Austin, TX. He was previously an Analyst in Piper Jaffray's Leveraged Finance group, working across all industry verticals on LBOs, acquisition financings, refinancings, and recapitalizations. Prior to Piper Jaffray, he spent 2 years at Citi in the Leveraged Finance Credit Portfolio group focused on origination and ongoing credit monitoring of outstanding loans and was also a member of the Columbia recruiting committee for the Investment Banking Division for incoming summer and full-time analysts.

Elliot has a Bachelor of Arts in Business Management from Columbia University.

Reviewed By: Osman Ahmed
Osman Ahmed
Osman Ahmed
Investment Banking | Private Equity

Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He's currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

Osman holds a Bachelor of Science in Computer Science from the University of Southern California and a Master of Business Administration with concentrations in Finance, Entrepreneurship, and Economics from the University of Chicago Booth School of Business.

Last Updated:October 2, 2023

What is the Crown Jewel Defense?

The crown jewel defense is a strategy in mergers and acquisitions, wherein amid a hostile takeover, the target company sells off its most valuable assets to make it less attractive during the takeover attempt.

Firstly, to be aware of the crown jewel defense strategy, we must know what they are. The exact definition of a crown jewel is "the most attractive thing in a collection or a group." Similarly, for a business, it is the corporation's most valuable unit. 

These units can be categorized according to profitability, total assets, its future prospects, or it can simply be the unit that produces the most popular items or which holds the most Intellectual properties (IPs).

A crown jewel can be anything from:

  • A precious asset
  • A department
  • A product line
  • A trade secret, etc. 

These can vary from company to company and from industry to industry. For example, the crown jewel for an automobile manufacturing company can be a particular production line or factory or even a technique for producing cars. 

Similarly, for a hotel chain, it can be some of the most popular properties the hotel chain owns. Additionally, these can be specific departments in some industries, like the Research and Development (R&D) department in the telecom industry. 

Key Takeaways

  • A crown jewel is a business's most valuable asset. It can be a department, a trade secret, an asset, an Intellectual property, etc. 
  • The crown jewel defense strategy is a strategy to prevent a hostile takeover, where the target company sells off its most valuable assets to make it a less attractive target during the takeover attempt
  • The strategy is done as the acquiring firm often loses interest in acquiring the target company if it loses its most valuable assets
  • It is often used as a final play where a takeover is almost inevitable. Selling these valuable assets can often have negative impacts on the company's future and can hamper its growth potential, and the trust of shareholders.

Understanding The Crown Jewel Defense Strategy

As crown jewels are the most vital part of a business, any information related to them is a heavily guarded secret. Often, only a select few people have access to things like trade secrets and other Intellectual properties, which make the crown jewel that valuable. 

Seeing the importance of these units, information related to these valuable assets is often the main focus of takeover attempts

While attempting any hostile takeover, more often than not, the main focus of the acquiring company is to obtain the information and operations of the target's crown jewels. Because these crown jewels help to distinguish the target company from its competitors, they are often worth a lot of money. 

Seeing how these assets are subject to takeover attempts and are what drives the hostile takeovers, the crown jewel defense strategy involves completely getting rid of these assets to make the firm less appealing and to stop the takeover attempt. 

Often a last-ditch effort by the firm to avoid a hostile takeover attempt. By selling the most valuable units to the company, the acquirer often wouldn’t receive the essential operations and information that made the company worth acquiring. 

This is a disincentive to the acquirer, as they would no longer be getting the main aspects of the business. The target company does not remain worth acquiring, thus stopping the takeover attempt.

How Does Crown Jewel defense Work?

By selling off the most valuable assets, the firm can restructure the company and allows the company to secure separate growth prospects in the future. 

In the case of overburdened debt, the other assets or departments may not fetch enough of a price to help keep the company afloat. Thus selling the crown jewels is often the only way for the company to survive. 

In the case of a hostile takeover, the primary purpose of the seizure is to gain the operations of the crown jewel or to get information and data related to them to know what separates the firm from its competitors. 

Getting rid of these assets and units by selling them off can often make the firm a less valuable target and thus can stop a hostile takeover. Therefore whenever a company feels that a hostile takeover can not be avoided, this defense strategy can often protect it. 

The company intentionally destroys its value by getting rid of the most valuable assets in the hopes that, seeing the absence of the crucial assets, the acquiring company will back off and retract its offers.

Disadvantages of the crown jewel defense

This defense strategy is often a last-resort trick to ward off a takeover because of the potentially disastrous consequences it can have on the company’s future growth. 

This defense strategy essentially and intentionally destroys a company. As most of the valuable assets are sold off, the company is only left with the departments which were poor performers or which are in slow-growing markets. 

As the company severely damages itself, it can also lead to a fall in brand value and reputation, as the most lucrative parts of the business are gone. 

Losing talented management and employees, along with trade secrets and intellectual property, can often lead to lower sales and lower growth potential in the future. 

Trust in the company can fade because the shareholders may be invested in the business due to the crown jewels. In addition, the hit that the company's value takes can also add to the loss of faith from the shareholders.

It is clear why this defense strategy should only be used when no other option is present, as it may damage the company beyond repair. There are, however, ways in which a company can avoid this irrecoverable damage. 

White knight Defense

In various situations, instead of selling the crown jewels to any party, they are sold off to a white knight. This is known as the role of white knights. A white knight is a friendly individual or company who acquires a company or its assets to stop them from being taken offer by force in a hostile takeover. 

Thus the assets are kept out of the control of the acquiring company. When this acquiring company retracts its bid, the target company repurchases the assets from the white knight at a pre-determined price, usually including a repurchase amount with a premium. 

Thus in such a case, the company is not necessarily destroyed as it eventually gets back the ownership of its assets and can also avoid the takeover attempt.

Example of crown Jewel Defense

If we take an example of 2 companies, X and Y, where X is trying to acquire Y through a hostile offer and bids an amount that creates a lot of pressure on Y, as the board is in a position wherein refuting the proposal would be extremely tough.

In such a case, Y can employ the Crown jewel defense to try and ward off the takeover attempt. It can sell off its most valuable asset, which can be some Intellectual property for designs if it is a technology-driven firm, or it can be its most valuable property if it is a hospitality chain.

To avoid permanently losing their most valuable asset, Y can sell these assets to a 3rd party, Z, and can agree to repurchase them at a pre-determined price, with some premium, once the takeover attempt is thwarted. 

As Y no longer has the significant assets which made it a valuable target, acquiring X would no longer be that appetizing to X, and thus it would retract its bid. Y would then repurchase its assets and successfully thwart X's takeover while keeping its assets. 

Sun Pharmaceuticals and Taro Pharmaceuticals: The case of Sun Pharmaceuticals, India's largest pharmaceutical company, and Israeli firm Taro Pharmaceuticals can be seen as an example of a Crown Jewel defense strategy.

On 22 May 2007, Sun Pharmaceuticals signed a $454 million merger deal with Israeli major Taro Pharmaceuticals. 

In the aftermath of the financial crisis after 2006, the offer of Sun Pharmaceuticals was a sort of rescue attempt to help Taro restore its financial position. In addition, for Sun Pharmaceuticals, this was an opportunity to increase market share in the US.

Taro, however, called off the deal in 2008, stating that the offer to acquire Taro at $7.75 per share was not in the company's best interest and was financially inadequate.

In the middle of a flurry of court cases from both ends, Sun Pharmaceuticals faced many difficulties as Taro kept delaying the merger through tactics like the Crown Jewel defense. It sold its Irish Unit, one of its most profitable ones, to keep Sun Pharmaceuticals from succeeding in its takeover attempt. 

Researched and authored by Soumil De | LinkedIn

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