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.

Other methods to prevent a hostile takeover include golden parachute, green mail, people pill and poison pill.

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.

RELATED TERMS
  1. Mandatory Redemption Schedule

    The mandatory redemption schedule includes specified dates when ...
  2. Call Date

    The call date is the date on which a bond can be redeemed before ...
  3. Redemption

    Redemption involves the return of mutual fund shares or the return ...
  4. Anti-Takeover Measure

    In order to block hostile bids for control of a company, the ...
  5. Call Privilege

    The provision in a bond indenture that gives the bond issuer ...
  6. Series E Bond

    Series E Bonds were originally issued to finance the United States’ ...
Related Articles
  1. Investing

    Savings Bonds For Income And Safety

    Bonds offer undeniable benefits to investors, including safety and tax advantages.
  2. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  3. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  4. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  5. Investing

    Bond Call Features: Don't Get Caught Off Guard

    Learn why early redemption occurs and how to avoid potential losses.
  6. Investing

    Six biggest bond risks

    Bonds can be a great tool to generate income, but investors need to be aware of the pitfalls and risks of holding corporate and/or government securities.
  7. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  8. Retirement

    Should I Invest in Bonds After I Retire?

    Yes, retirees should invest in bonds, but remember that not all bonds are safe investments. Seek the help of a financial advisor.
RELATED FAQS
  1. Why would a company choose to repurchase in lieu of redeem?

    Learn the difference between a stock repurchase and a stock redemption, and find out about the reasons why a company might ... Read Answer >>
  2. What risk factors should investors consider before purchasing a callable bond?

    Understand the difference between callable and non-callable bonds and consider all the various risk factors associated with ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center