What is Chastity Bond?
- A chastity bond is a corporate bond that matures, at par, when triggered by an event, such as a hostile takeover, that raises the cost of the acquisition to the acquirer.
- Chastity bonds are typically issued by a targeted company when a potential acquirer makes public their purchase intentions.
- The term, chastity bond, likely comes from the fact that its objective is to prevent unwarranted attention from unwelcome corporate suitors.
Understanding Chastity Bond
A chastity bond is one of a number of measures intended to prevent the hostile takeover of a company. This type of bond matures immediately upon the completion of a trigger event such as a takeover or a change in control of the issuer. The term likely comes from the fact that its objective is to prevent unwarranted attention from unwelcome corporate suitors.
Chastity bonds are corporate bonds intended to dissuade hostile takeovers, based on the premise that if a large issue of these bonds mature and become payable upon completion of a takeover, the overall purchase price may become prohibitively expensive to the acquirer.
This anti-takeover measure is conceptually similar to another strategy known as the Macaroni Defense, in which a large issue of bonds must be redeemed upon a takeover or change of control, thereby expanding (like macaroni) the purchase price that the acquirer must pay. The only difference is that chastity bonds mature at par, whereas bonds issued in a Macaroni Defense are redeemable at a substantial premium.
Chastity bonds act similarly to other tactics meant to block a takeover as they inflate the value of the target company, making a deal more expensive for the acquirer. Similar strategies involving common stock of the target company include poison pills, shareholder rights plans which enable existing shareholders to purchase additional shares of the target company at a discount, making the deal more expensive, or additional shares of acquiring company at a discount, diluting the value of the combined company after a completed acquisition.
Risks of a Chastity Bond Defense
Chastity bonds are typically issued by a targeted company when a potential acquirer makes public their purchase intentions. These bonds can be an effective deterrent if the hostile bid is made at the best offer price of a potential acquirer. However, if the initial bid is well below what the acquiring company is ultimately willing to pay, the additional deal cost from the chastity bonds may not make a difference.
While increasing the debt obligations of a company may deter a hostile takeover bid, should it succeed the strategy would saddle the existing company with additional debt. Ironically, the addition of liabilities to the balance sheet could, over the long term, make a company more vulnerable to a future hostile acquisition as in its weakened state it may lack the financial strength to remain independent.