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Kamikaze defence definition

kamikaze defence

A kamikaze defence is a defensive merger and acquisition (M&A) strategy used by a targeted company to prevent its hostile takeover by another company, typically a bigger rival or an activist hedge fund.

Key takeaways:

  • Kamikaze defence is a term used in finance to describe a company's aggressive tactics to ward off a hostile takeover attempt by making itself less attractive to the acquiring company.

  • Some examples of kamikaze defence strategies include selling off valuable assets, taking on a large amount of debt, or issuing new shares to dilute the value of the company.

  • Kamikaze defence strategies are controversial because they can negatively impact the company's shareholders and employees, as well as the acquiring company and its shareholders.

  • The use of kamikaze defence strategies can also have legal implications, as they may be viewed as a breach of the company's fiduciary duties to act in the best interests of its shareholders.

This defensive strategy is named after Japanese kamikaze pilots who deliberately crashed their planes into enemy targets during World War 2.

The purpose behind the kamikaze defence is to make the target company unattractive to prospective buyers by undertaking measures that are damaging to the target company’s financial conditions and business performance. This article explains what kamikaze defence means and details various kamikaze defence strategies.

What is a kamikaze defence?

To understand the kamikaze defence meaning, we will first have to learn about hostile takeovers

In the corporate world, most M&As occur in a cordial manner where a potential buyer first approaches a target company’s board with a takeover offer. The target company’s board may reject the offer or ask the buyer to increase its bid. If the target company’s board finds the proposal acceptable, it will recommend that its shareholders accept the takeover offer.

A hostile takeover refers to the acquisition of a company against the wishes of its board. In such a scenario, the acquirer will directly approach the target company’s shareholders to buy shares on the open market or gather shareholder votes to win corporate ballots.

A hostile takeover generally occurs when the buyer feels that the target company is undervalued or when activist investors want to change the company. The target company may resort to last-ditch strategies like the kamikaze defence to foil such hostile takeover attempts.

Types of kamikaze defences

The kamikaze defence is a last resort to keep hostile buyers at bay. The self-inflicted harm incurred through the use of this defensive M&A strategy leaves the company in a weakened state. Here are a few kamikaze defence strategies, including explanations of how they work.

  1. Selling the crown jewels

A targeted company implementing this strategy will sell its ‘crown jewels’ or most valuable assets to make it an unattractive M&A target. This strategy is damaging, leaving the company with weak growth prospects and questionable economic sustainability. 

For example, a company might sell off a highly profitable part of its business that generates substantial revenue. The disposal would make the company unattractive but would also diminish its future earnings and dividend-paying capabilities. 

  1. Scorched earth policy

Scorched earth policy is a kamikaze defence strategy named after a warfare tactic in which a retreating army deliberately destroys property and crops so that an advancing enemy cannot use them.

A company pursuing a scorched earth strategy could fire employees or sell equipment and machinery crucial to company operations. A scorched earth policy is a highly aggressive strategy that risks legal repercussions being taken against the company.

  1. Fat man strategy 

In the fat man strategy, a company will start taking on enormous amounts of new debt and purchasing unnecessary assets to make itself an unattractive takeover target. This tactic leaves the company with a bloated balance sheet, non-complementary assets, increased debt burden and little cash.

The fat man strategy differs from the two previous tactics because it involves buying assets rather than selling them. The results, however, will be equally detrimental to the company’s financial health. 

The implementation of kamikaze defence strategies is rare, especially in publicly listed companies with institutional investors as shareholders – including pension, insurance and mutual funds. These institutional investors own significant stakes in companies and hold considerable influence over the company’s board. Such shareholders are receptive to reasonable takeover bids and prefer amicable solutions to self-sabotaging kamikaze defence tactics.

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