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Finance From A to Z: Week 11 (K)

Finance From A to Z: Week 11 (K)

K is for Kamikaze Defence:

What is the Kamikaze Defence?

Suicidal Kamikaze strikes were a tactic used by Japanese pilots to severely damage or sink Allied naval ships during World War II. However, in the financial sector, a kamikaze defence is a defensive tactic that a firm's management will use as a last resort to thwart a hostile acquisition by another corporation. The use of kamikaze defences entails taking actions that are harmful to a company's operations or financial standing. That being said, while the strategy’s namesake originally resulted in the loss of the pilot and aircraft, a kamikaze defence, in practice, rarely destroys the company. Instead, kamikaze defences only deliberately inflict damage to the extent that the target company’s attractiveness to the hostile bidder falls significantly. Evidently, it is desperate in nature and attempts to thwart the takeover bid.

When can Kamikaze Defences be implemented?

Given that the kamikaze defence generally results in a company nearly being killed to save it from acquisition, the board must conduct a cost-benefit analysis to determine whether it is worth it or not. In some cases, the risk associated with the strategy may be too high and will consequently fail to be implemented. Shareholders, for example, may oppose nuking the company because shareholders rarely benefit from kamikaze defence. For these reasons, the kamikaze defence is generally regarded as a last resort given that the result of its successful implementation renders the company weaker than before.

When the kamikaze defence is actually approved by the board, however, there are many ways in which an organization can go about it. First, the company may opt to sell their crown jewels, otherwise known as its most prized assets, to render it less of an attractive target for takeover and raising the company cash in the process. Second, the fat man strategy may be employed wherein the management piles on debt and buys a lot of assets or even other companies to make the company less desirable. The objective of the fat man strategy is to render the company too big and unwieldy for acquisition. Finally, a scorched earth policy can be used by a company to gut itself of assets that might be valuable to its opponents.

All of these strategies have significant consequences. By selling their crown jewels, the company will essentially lose a large portion of its identity. When using the fat man strategy, there is a chance that the new acquisitions are overpriced or a poor fit for the company. As a result, the takeover target might survive the hostile takeover attempt only to fail later on due to excessive debt. Last but not least, the loss and destruction of essential assets that comes with implementing a scorched earth policy may cause unrecoverable damage. Moreover, the manner in which this destruction occurs may leave the company vulnerable to lawsuits and injunctions.

Alternatives to the Kamikaze Defence

Given the destructive nature of the kamikaze defence, a company’s board may seek alternative methods to save itself. The most common of these is known as the White Knight strategy, which is arguably the most mild in nature of any of the aforementioned strategies. In essence, the white knight strategy involves a company searching for a friendlier acquisition by another company. This acquisition would come with bids at a significantly fairer price, which would not only disrupt a bid from a hostile company but also allow the target company to prevent unnecessary damages from being incurred via a kamikaze defence. Of course, the downside to this idea is that the company loses its independence in the process, but having seen the alternatives, the white knight strategy may very well be a company’s best bet, potentially allowing the current management to stay on board and the business to run as usual. 

Anyways, that’s all for this week’s submission! Thanks for tuning in. Please share your thoughts below and be sure to read our next Finance from A to Z submission, which ties in directly to this one!

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