DEFINITION of Fat Man Strategy
A fat man strategy is a takeover defense tactic that involves the acquisition of a business or assets by a target company. The strategy is based on the premise that the bulked-up company — the "fat man" — would have reduced appeal to a hostile bidder, especially if the acquisition increases the acquirer's debt load or decreases available cash.
BREAKING DOWN Fat Man Strategy
A fat man strategy is a type of kamikaze defense tactic, which inflicts potentially irreversible damage on a company to prevent it from falling into hostile hands. However, it involves adding assets rather than divesting them as is the case with other kamikaze defense strategies. A disadvantage of this tactic is that acquisition candidates need to be identified well in advance of a hostile bid. Otherwise, there may be insufficient time to complete a fat man transaction.
As a takeover defense, the effectiveness of the fat man strategy remains mixed at best. As institutional investors have come to dominate equity ownership patterns, as opposed to individuals, executing a fat man strategy to fend off an acquirer would be a very difficult sell to a board of directors. Few institutional investors would willingly go along with a plan to sabotage short-term value in hopes it saves a business's management team.
The rapid exchange of information, particularly with multiple dedicated business news outlets makes the viability of the fat man strategy suspect at best. As alternatives, takeover defense plays called a suicide pill or scorched earth policy, might be more effective today. The scorched earth policy, similar to the fat man strategy's deliberate attempts to tank valuation, seeks to sell as many high-value assets as possible, hence leaving little for a potential acquirer.