Kamikaze Defense

Kamikaze Defense

Investopedia / Sabrina Jiang

What Is a Kamikaze Defense?

A Kamikaze defense is a defensive strategy sometimes resorted to by a company's management to prevent a takeover by another company.

While these strategies are named after the suicidal kamikaze attacks used by Japanese pilots during World War II, they rarely destroy the company. Nevertheless, a kamikaze defense involves taking measures that are detrimental to the firm's business operations or financial condition. The idea is to reduce the target company’s attractiveness to a hostile bidder. A kamikaze defense is desperate, but the hope is that the takeover bid will be thwarted.

Key Takeaways

  • A Kamikaze defense is a defensive strategy sometimes resorted to by a company's management to prevent a takeover by another company.
  • A Kamikaze defense deliberately inflicts damage on the company to prevent a takeover.
  • Kamikaze defenses include selling the crown jewels, scorched earth policies, and the fat man strategy.

Understanding Kamikaze Defenses

A company where management does not want it to fall into another group's hands may try a kamikaze defense as a last resort.

In an intended acquisition process, an interested party will usually build up a small stake in the target company and approach the board of directors with an offer to buy the company. Suppose the board rebuffs the offer, which would invariably be the case if the board and its financial advisors believed that the offer substantially undervalued the company. Then, the interested party could assume a more aggressive stance to take over the company. Suppose the would-be acquirers feel like they are getting nowhere with more pressing negotiations. In that case, they may attempt a hostile takeover against the board's wishes.

In response, the target company could seek out a white knight. This friendly party would generally hold together the current business operations of the company. Existing management would usually prefer that rather than disrupting or dismantling their company, which is often the end result of a successful hostile takeover.

Another takeover defense mechanism is the adoption of a poison pill. That is generally considered a shareholder-unfriendly move, but it is mild in comparison to full kamikaze strategies. A kamikaze defense may succeed in the end, but the company would leave itself in a weakened state.

Kamikaze defenses are often undertaken by management to protect their own interests or at the behest of the company's founders and their heirs. Kamikaze defenses rarely work to the benefit of ordinary shareholders.

Types of Kamikaze Defenses

There are several different ways that companies can make themselves less attractive takeover targets, usually at considerable cost to themselves.

Selling the Crown Jewels

When a company sells the crown jewels, management sells off its best assets to make it a less attractive target and raise cash.

For example, a struggling firm might own valuable commercial real estate in key locations. The hostile takeover might be aimed at getting that real estate at below-market prices. By selling that commercial real estate in the market, the firm might get more money for it and deter the takeover. On the other hand, this kamikaze defense also means the company loses the use of that property for future operations, which could be highly damaging.

Scorched Earth Policy

The scorched earth policy is named after a morally dubious and often illegal military strategy in which a retreating army destroys crops and supplies to slow down an enemy advance. When a company's management pursues a scorched earth policy, they also try to remove assets that might be valuable to their opponents and run legal risks.

For example, they could fire skilled employees who are difficult to replace and fail to perform proper maintenance, ultimately destroying equipment. This kamikaze defense can cause serious legal problems if workers are endangered or the parties behind the takeover bid get an injunction.

Fat Man Strategy

In the fat man strategy, the company's management loads up on debt and acquires lots of assets or even other firms to make the company a less attractive takeover target. At its best, the fat man strategy simply makes the target company too large and unwieldy for the other company to acquire. The resulting larger company might still be viable, just too big to buy.

On the other hand, the kamikaze aspect comes into play if the new acquisitions were overpriced or a poor fit for the company. If that happens, the takeover target might survive the hostile takeover attempt only to fail later on due to excessive debt.