DEFINITION of Macaroni Defense
The Macaroni Defense is one of many approaches a company may adopt to prevent an unwanted acquisition, or a hostile takeover. Takeovers are quite common, but in many cases, the target company is opposed to it because it believes the bid is too low or other reasons. There are many preemptive or reactive defensive strategies that management can use during merger and acquisition activity, and almost all of these strategies are aimed at affecting the value of the target's stock price, or corporate bonds in the Macaroni Defense.
In the Macaroni Defense, the target company issues a large number of bonds with the condition they must be redeemed at a high price if the company is taken over. The issuance has to be big enough to scare off the raider.
BREAKING DOWN Macaroni Defense
Why is it called the Macaroni Defense? Because if a bidder tries to purchase the company, the redemption price of the bonds expands like macaroni in a pot. The downside of the strategy is that the company may saddle itself with too much debt and have difficulty making the interest payments, even if it successfully dissuades a takeover. Takeover-target companies can also use leveraged recapitalization to make themselves less attractive to the bidding firm.
Example of Blocking a Hostile Takeover
In July 2015, generic pharmaceutical company Mylan attempted to to block a hostile takeover bid by Israeli company Teva Pharmaceutical Industries by setting up an independent Dutch foundation, Stichting Preferred Shares Mylan. The foundation was able to issue or purchase preferred Mylan shares when it deemed its stakeholder interests were at risk. Stichting Preferred Shares planned to use its voting rights to oppose the Teva bid after exercising a call option to acquire preferred shares in Mylan and enabling it to own half the company. A few days later, Teva withdrew its bid for Mylan after it reached a deal with Allergan to acquire Allergan Generics.