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

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.
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.

Poison Pill: A strategy employed by companies to prevent or discourage hostile takeovers by making the company’s stock less attractive to the acquirer.
Takeover Bid: An offer made by one company to acquire control of another, typically by purchasing a majority of its stock.
Golden Parachute: A clause in executive employment contracts that provides significant benefits if the executives lose their jobs due to a takeover.
White Knight: A more favorable company that acquires the target company experiencing a hostile takeover bid, in contrast to the hostile bidder.
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

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

### What is the primary goal of a Crown Jewel Option? - [x] To make the company less attractive to the acquirer - [ ] To increase the company's stock price - [ ] To quicken the takeover process - [ ] To liquidate the company's assets > **Explanation:** A Crown Jewel Option aims to deter hostile takeovers by threatening to transfer critical assets to a friendly party, thereby making the company less attractive to the potential acquirer. ### Which type of assets are involved in a Crown Jewel Option? - [x] Best and most valuable assets - [ ] Liability-heavy assets - [ ] Less significant assets - [ ] Fixed assets only > **Explanation:** Crown Jewel Options typically involve the company's most valuable and strategic assets—those which would significantly impact the business if lost. ### When does the option to buy assets become effective in a Crown Jewel Option? - [ ] Immediately upon signing - [x] If the hostile takeover bid succeeds - [ ] Once approved by the board - [ ] During an initial public offering (IPO) > **Explanation:** The option in a Crown Jewel Option becomes effective if the hostile takeover bid succeeds, triggering the sale of crucial assets to a friendly party. ### Who typically benefits from the Crown Jewel Option if the hostile takeover occurs? - [x] The partner or friendly company - [ ] The hostile acquirer - [ ] General shareholders - [ ] The company's auditors > **Explanation:** The partner or friendly company benefits as they get to acquire valuable assets at a favorable price, potentially depriving the hostile acquirer of these key resources. ### What is a potential downside of implementing a Crown Jewel Option? - [ ] Decreases market competition - [ ] Increases company debts - [x] May not align with shareholders' interests - [ ] Enhances acquirer's bargaining power > **Explanation:** Selling the most valuable assets at a discount may diminish the overall company value, which can be detrimental to shareholders' interests. ### In what scenario is a Crown Jewel Option executed? - [ ] During routine business operations - [ ] When applying for a loan - [ ] In the event of market expansion - [x] If a hostile takeover attempt is successful > **Explanation:** A Crown Jewel Option is executed if a hostile takeover attempt is successful, thereby transferring key assets to a friendly third party. ### How does a Crown Jewel Option relate to other poison pill strategies? - [x] It is a specific type of poison pill - [ ] It is unrelated to poison pill strategies - [ ] It increases stock liquidity - [ ] It reduces company debts > **Explanation:** A Crown Jewel Option is a specific type of poison pill strategy designed to deter hostile takeovers by making the company less attractive to acquirers. ### Which of the following strategies could be considered a Crown Jewel Option in action? - [ ] Increasing workforce talent acquisition - [x] Granting a partner the right to buy a top-performing division - [ ] Raising capital through equity - [ ] Launching new product lines > **Explanation:** Granting a partner the right to buy a top-performing division at a favorable price if a hostile takeover succeeds is an example of a Crown Jewel Option. ### Which stakeholders are crucial in approving the Crown Jewel Option? - [x] The board of directors and senior management - [ ] The general public - [ ] Competitors - [ ] None of the above > **Explanation:** The board of directors and senior management are crucial in approving and implementing the Crown Jewel Option to ensure it aligns with the company's strategy and legal framework. ### Can a Crown Jewel Option be considered a long-term solution for blocking takeovers? - [ ] Yes, it permanently secures critical assets - [x] No, it’s typically a short-term defensive measure - [ ] Yes, it merges competing companies - [ ] No, it encourages hostile takeovers > **Explanation:** A Crown Jewel Option is a short-term defensive measure intended to discourage a specific takeover attempt rather than serving as a long-term solution.

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Crown Jewel Option