Kamikaze Defense
Term used in finance to showcase companies' defensive strategy to avoid a hostile takeover
What Is a Kamikaze Defense?
"Kamikaze Defense" is a popular term used in finance to showcase companies' defensive strategy to avoid a hostile takeover.
A hostile takeover occurs when a company tries to acquire or buy another company against its will. For example, the acquiring company might have reason to believe that the target company is undervalued and has the potential to generate significant profits and be a successful business move.
During a hostile takeover, the target company's management often opposes the acquisition because they fear that the acquiring company might change the company's landscape and strategy.
The term kamikaze defense strategy is named after the suicidal kamikaze attacks utilized by Japanese pilots in World War II.
When implemented correctly and strategically, the kamikaze defense strategy enables the company to deter a hostile takeover and negotiate a more favorable deal that aligns with the target company's management desires.
Key Takeaways
- "Kamikaze Defense" is a financial term describing a company's strategy to fend off a hostile takeover by making itself less attractive to potential acquirers.
- In a kamikaze defense, targeted companies may resort to harmful actions like taking on excessive debt, selling valuable assets, or engaging in wasteful spending to deter acquisition attempts.
- The primary aim of kamikaze defense is to dissuade potential acquirers by making the targeted company financially less appealing, thus thwarting hostile takeover attempts.
- While effective in deterring takeovers, kamikaze defense tactics can harm stakeholders and may lead to legal and ethical challenges if executed recklessly or unethically.
- Kamikaze's defense tactics include selling crown jewel assets, accumulating debt, and adopting a scorched-earth approach. These strategies aim to complicate acquisitions and discourage hostile takeovers.
How does the Kamikaze defense occur?
In a kamikaze defense situation, the company that is being targeted will be pushed to take actions that are harmful to the company to make the buying opportunity for the acquiring company less attractive.
These actions can include taking on a large amount of debt, selling off valuable assets, or engaging in harmful spending sprees that don't add any value to the firm to make it less attractive financially.
The primary objective of the Kamikaze Defense is to make the targeted company less appealing to the acquiring company, potentially dissuading them from pursuing the hostile takeover.
While a kamikaze defense can effectively deter a hostile takeover, it's typically considered a last-resort strategy the targeted company's management employs to thwart the acquisition attempt.
Note
The tactics used to make the company less attractive financially can harm all the stakeholders in the company in the long run.
Some tactics employed in kamikaze defense, such as taking on excessive debt, may temporarily deter a hostile takeover but could lead to bankruptcy if undertaken recklessly, jeopardizing the company's long-term financial stability.
Companies that apply kamikaze defense strategies must be careful because some methods can be unethical or illegal. If done recklessly, this will result in other legal problems for the company, which it is in its interest to avoid.
Types of Kamikaze Defenses
In finance, kamikaze defense strategies have various types and strategies that all lead to the same goal: blocking a hostile takeover. We will provide you with some types used in the corporate world when facing a takeover:
Sale-of-the-Crown-Jewels Strategy
One such tactic involves selling off the company's crown jewel assets, its most lucrative and prized possessions, to dissuade potential acquirers.
By parting ways with these assets, the company reduces its attractiveness as a target while strengthening its cash reserves. However, this maneuver comes with its own set of challenges.
While it may avoid the initial takeover bid, the company loses valuable assets essential for future operations, potentially compromising its long-term viability.
Note
To mitigate the risk, some companies opt to sell these assets to friendly parties, also known as "white knights," with plans to repurchase them once the threat of takeover subsides.
Fat-Man Strategy
Another kamikaze defense is the 'fat man' strategy, wherein the target company intentionally accumulates debt and acquires additional assets or businesses, bloating its balance sheet and rendering itself too complicated for acquisition.
While this may deter potential acquirers due to the increased financial burden and lack of synergies, it poses significant risks if the acquisitions are overpriced or incompatible, leading to financial instability and potential failure in the long run.
Scorched-Earth Strategy
Borrowing its name from a wartime tactic, the scorched-earth strategy involves deliberately devaluing the company by selling off assets, taking on excessive debt, or neglecting maintenance and operations.
Similar to its military counterpart, this approach aims to deter invaders by leaving nothing of value behind.
Note
While effective in the short term, this strategy can have severe legal ramifications if executed improperly, such as endangering employees or breaching contractual obligations.
Other Defense Strategies
Given their harmful effects on the company's value and long-term prospects, Kamikaze defenses are often viewed as a last resort. Companies may explore alternative strategies before employing such drastic measures, such as seeking friendly acquirers through the white-knight approach.
While giving up independence, this strategy offers a less damaging alternative than kamikaze defenses, allowing the company to retain some stability and continuity.
Example of Kamikaze Defense
In 2014, Allergan's pharmaceutical company faced a hostile takeover bid from Valeant Pharmaceuticals and activist investor Bill Ackman's Hedge fund (Pershing Square Capital). Allergan's management team employed several kamikaze defense tactics to fight off the hostile takeover.
A poison pill defense strategy was used in which Allergan issued many new shares of stock to existing shareholders at a steep discount. This made it more expensive for the acquiring companies to acquire Allergan, as the value of their existing shares would be diluted.
After that, Allergan also engaged in a white-knight defense, seeking a friendly company to make a counter-offer to acquire it. This resulted in a bidding war between Actavis and Allergan, which they eventually acquired for $66 billion.
Finally, Allergan's use of various defense strategies proved successful as they fended off a hostile takeover and secured a more favorable outcome for the company and stakeholders.
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