What Is a Kamikaze Defense?

What Is a Kamikaze Defense?

Let me explain what a kamikaze defense is—it's a defensive strategy that a company's management might turn to in order to stop another company from taking it over.

You know how it's named after those suicidal attacks by Japanese pilots in World War II? Well, these strategies don't usually destroy the company outright, but they do involve actions that hurt the business operations or financial health. The goal here is to make the target company less appealing to the hostile bidder. It's a desperate move, but the idea is to scare off the takeover attempt.

Key Takeaways

To sum it up quickly, a kamikaze defense is something management uses to block a takeover by deliberately damaging the company. This includes tactics like selling off the crown jewels, applying scorched earth policies, or using the fat man strategy. Remember, these are extreme steps that aim to thwart the bid but often leave lasting harm.

Understanding Kamikaze Defenses

If you're running a company and you don't want it falling into someone else's hands, a kamikaze defense could be your last option. In a typical acquisition, an interested party builds a stake and makes an offer to the board. If the board turns it down—say, because they think it's undervalued—the bidder might go hostile.

At that point, you could look for a white knight, a friendly acquirer who keeps things intact. That's better than a hostile one that might break everything apart. Another option is a poison pill, which is tough on shareholders but not as destructive as a full kamikaze approach. With kamikaze, you might win, but the company ends up weakened.

Here's something important: these defenses are often about protecting management's jobs or the founders' legacy, not helping regular shareholders. They rarely benefit the average investor.

Types of Kamikaze Defenses

There are a few main ways companies make themselves unappealing as takeover targets, and they all come at a high cost. Let me walk you through them.

Selling the Crown Jewels

In this approach, management sells off the company's best assets to raise cash and deter the bidder. For instance, if your firm has prime real estate that the acquirer wants cheap, selling it on the open market might get a better price and stop the takeover. But you're losing those assets for good, which can cripple future operations.

Scorched Earth Policy

This one's named after military tactics where retreating forces destroy resources to hinder the enemy—it's risky and sometimes illegal. In business, management might fire key employees or neglect maintenance, wrecking equipment. It could slow the bidder, but you risk lawsuits, especially if it endangers workers or leads to an injunction.

Fat Man Strategy

Here, the company piles on debt to buy assets or even other firms, making itself too big or messy to acquire. If done right, it just makes you too large to swallow, and the company might still function. But if the buys are overpriced or a bad match, you're left with crushing debt that could sink the firm later, even if the takeover fails.