What Is a Kamikaze Defense?

The management of a corporation may employ a kamikaze defense as a defensive tactic to stop a takeover by another company. Though these tactics are named after the suicide assaults carried out by Japanese pilots in World War II, they rarely lead to the company’s demise. On the other hand, a kamikaze defense entails actions that are harmful to the company’s finances or business operations. Reducing the target company’s appeal to a hostile bidder is the goal. Although a kamikaze defense is desperate, the takeover attempt is hoped to be rebuffed.

Knowing How to Avoid Kamikaze Attacks

As a last resort, a corporation may employ a kamikaze defense if management does not want the company to end up in the hands of another party. During the intended acquisition process, a potential buyer often accumulates modest ownership in the target business before presenting the board of directors with a purchase offer. Let us say that the board rejects the offer. This will always happen if the board and financial advisors feel the offer significantly undervalues the business. The potential acquirer may use a more assertive strategy to seize business control. Let’s say that the parties seeking to acquire something feel that their urgent conversations are not yielding results. Then, against the board’s wishes, they can try to take over hostilely.

The target business could then look for a white knight in response. This amicable party would typically hold together the company’s present business operations. Instead of upsetting or ruining their business, which is frequently what happens after a successful hostile takeover, the current management would typically prefer that.

Using a poison pill is another takeover defense strategy. Though it is often viewed as an unfriendly move for shareholders, it is not as bad as complete kamikaze methods. Although a kamikaze defense might be successful, it would leave the organization vulnerable.

Different Kamikaze Defense Types

Businesses can reduce their attractiveness as acquisition targets in several ways, usually at significant financial expense.

Crown Jewels for Sale

When a business sells its crown jewels, management does it to raise money and make the organization a less desirable target.

For instance, a financially troubled company may own significant real estate in strategic locations. Obtaining that real estate at below-market rates may be the goal of the hostile takeover. The company might be able to prevent the takeover and obtain more money by selling commercial real estate on the open market. However, due to this kamikaze defense, the corporation will no longer be able to use that land for operations, which could have serious consequences.

Burning Earth Strategy

The military tactic known as “scorched earth” refers to a morally problematic and frequently unlawful tactic when an army in retreat burns crops and supplies to impede an enemy’s advance. In addition to trying to destroy assets that could be valuable to its opponents, the management of a corporation that follows a scorched earth policy may also be taking legal risks.

One such scenario is that they fire knowledgeable workers who are hard to replace and neglect to do routine maintenance, which leads to equipment destruction. If employees are put in danger or the people behind the takeover offer receive an injunction, this kamikaze defense could lead to significant legal issues.

The Fat Man’s Method

The Fat Man strategy aims to make the company less appealing as a takeover target by having the management pile up debt and buy a lot of assets, including other businesses. In its most effective form, the fat guy plan makes the target company too big and awkward for the other corporations to buy. The larger company may still be profitable but would be too enormous to acquire.

The kamikaze effect, however, becomes relevant if the recent purchases were too costly or ill-suited for the business. In that scenario, the target of the hostile acquisition may survive, but it may fail later because of overwhelming debt. 

Conclusion

• A kamikaze defense is a defensive tactic that a company’s management employs to fend off takeover attempts by rival businesses.
• A Kamikaze defense intentionally causes harm to the company to avert a takeover.
• Selling the crown jewels, scorched earth strategies, and the fat man strategy are all examples of kamikaze defenses.