What Is the Fat Man Strategy?
The fat man strategy is a defensive move made by a company in order to thwart a takeover attempt. If a target company's executives receive an unwanted offer for the company that shareholders might be inclined to accept, they quickly take on new debt and purchase undesirable assets in an attempt to make the company an unattractive purchase.
In other words, the executives turn their own company into a bloated mess, overloaded with unsuitable or questionable assets, too much debt, and too little cash.
- A fat man strategy relies on piling up debt and acquiring questionable assets to prevent a corporate takeover.
- The strategy is carried out by company executives unwilling to cede control.
- Shareholders typically disapprove of the fat man strategy as it involves sabotaging the company's performance.
Understanding the Fat Man Strategy
Corporate acquisitions are a common occurrence in the business world, as companies grow by gobbling up rivals or complementary businesses. The target company's board of directors may be open to the idea of selling, especially if the price offered is decent. Or, the executives might resist ceding control and decide to fight the takeover.
Over the years, a number of anti-takeover measures have been concocted to help companies thwart advances. The fat man strategy is one of the most aggressive moves.
How to Fatten Up
As its name implies, the target company fattens itself up in order to become as unattractive as possible to its would-be acquirer. This is achieved mainly by burdening the company with new resources, particularly those that the acquiring company is known to dislike.
In an extreme case, the target company can change its profile entirely, becoming a different kind of company. In any case, it becomes a company with a lot of debt on its balance sheet. The acquirer may shift its attention to more attractive target companies.
Disadvantages of the Fat Man Strategy
The effectiveness of the fat man strategy remains mixed at best. Like the kamikaze defense, a tactic that involves selling rather than acquiring assets, it can inflict irreversible damage on the company. Shareholders certainly won't welcome the change.
Fat man strategies are highly self-destructive and extremely difficult to pull off, especially if institutional investors are watching.
The chances of pulling off a fat man strategy are relatively slim. A company would need to know of a threatened takeover well in advance to pull it off. Even deliberately lousy corporate expenditures take time.
When Shareholders Resist
Another notable hurdle is shareholder resistance. Few shareholders would endorse a plan that destroys the short-term future of a company they invest in. Institutional investors have the power to thwart such a plan.
Institutional investors, such as mutual funds and pension funds, buy huge blocks of stock and often exercise considerable influence in a company's boardroom. They are likely to be receptive to a decent takeover price, or at least likely to prefer it to an alternative that sabotages the company's financial performance for the foreseeable future.