Crown Jewel Option
Definition
A Crown Jewel Option is a tactic used by companies to fend off hostile takeover attempts. In this defensive measure, the company being targeted for takeover grants an option to a friendly third party or partner to purchase some of the company’s most valuable assets—often referred to as “crown jewel” assets—at an advantageous price. This option typically becomes effective if the hostile takeover bid succeeds. The idea is to make the company less attractive to the acquirer by threatening to deprive it of its most valuable assets.
Examples
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Tech Corp and Friendly Tech Inc.: Tech Corp, a technology company, is facing an unsolicited takeover bid from a larger competitor. To thwart the takeover, Tech Corp grants an option to Friendly Tech Inc., a trusted partner, to buy its highly profitable software division at a below-market price if the takeover goes through.
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Manufacturing Inc. and Friendly Partners LLP: Manufacturing Inc. is under threat of a hostile takeover from Corporate Raiders Ltd. To prevent this, Manufacturing Inc. signs a deal with Friendly Partners LLP, giving them the option to acquire the company’s most advanced production facility at a significant discount if the hostile takeover is successful.
Frequently Asked Questions (FAQs)
Q1: What is the main purpose of a Crown Jewel Option? A: The main purpose of a Crown Jewel Option is to make the targeted company less attractive to the bidder by potentially stripping the company of its most valuable assets, thus discouraging the takeover.
Q2: Are Crown Jewel Options legal? A: Yes, Crown Jewel Options are legal, but the specifics can vary depending on local laws and regulations governing corporate governance and mergers and acquisitions.
Q3: How does a Crown Jewel Option affect shareholders? A: While a Crown Jewel Option can help prevent unwanted takeovers, it may not always align with shareholder interests. If executed, selling crown jewels at a lower price could diminish the overall value of the company.
Q4: Can a Crown Jewel Option be reversed? A: A Crown Jewel Option, once granted and if triggered, typically cannot be reversed unless both the original company and the friendly third party agree to nullify the agreement, subject to legal and regulatory constraints.
Q5: What is the difference between a Crown Jewel Option and a Poison Pill? A: While both are defensive mechanisms against takeovers, a Poison Pill dilutes the acquirer’s stake or makes the takeover more costly. In contrast, a Crown Jewel Option involves selling key assets to a friendly entity to devalue the firm in the eyes of the acquirer.
Related Terms with Definitions
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Poison Pill: A strategy employed by companies to prevent or discourage hostile takeovers by making the company’s stock less attractive to the acquirer.
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Takeover Bid: An offer made by one company to acquire control of another, typically by purchasing a majority of its stock.
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Golden Parachute: A clause in executive employment contracts that provides significant benefits if the executives lose their jobs due to a takeover.
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White Knight: A more favorable company that acquires the target company experiencing a hostile takeover bid, in contrast to the hostile bidder.
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Mergers and Acquisitions (M&A): A general term that refers to the consolidation of companies or assets. M&A can include a variety of transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.
Online References
- Investopedia: Crown Jewel
- Corporate Finance Institute: Crown Jewel Defense
- Harvard Law: Poison Pills and Crown Jewels
Suggested Books for Further Studies
- “Mergers and Acquisitions For Dummies” by Bill Snow
- “Corporate Finance: A Focused Approach” by Michael C. Ehrhardt and Eugene F. Brigham
- “The Art of M&A: A Merger Acquisition Buyout Guide” by Stanley Foster Reed, Alexandra Reed Lajoux, and Paul Pignataro
Accounting Basics: “Crown Jewel Option” Fundamentals Quiz
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