What is Chastity Bond?
A chastity bond is a corporate bond that matures, at par, when triggered by an event, for example, a hostile takeover, that raises the cost of the acquisition to the acquirer.
Understanding Chastity Bond
A chastity bond is one of a number of measures expected to prevent the hostile takeover of a company. This type of bond matures promptly upon the completion of a trigger event like a takeover or a change in control of the issuer. The term probably comes from the fact that its objective is to prevent unjustifiable consideration from unwanted corporate admirers.
Chastity bonds are corporate bonds expected to prevent hostile takeovers, in light of the reason that if a large issue of these bonds mature and become endless supply of a takeover, the overall purchase price might turn out to be restrictively costly to the acquirer.
This anti-takeover measure is reasonably like one more strategy known as the Macaroni Defense, in which a large issue of bonds must be reclaimed upon a takeover or change of control, subsequently growing (like macaroni) the purchase price that the acquirer must pay. The main difference is that chastity bonds mature at par, though bonds issued in a Macaroni Defense are redeemable at a substantial premium.
Chastity bonds act in much the same way to different tactics intended to block a takeover as they blow up the value of the target company, making a deal more costly for the acquirer. Comparative strategies including common stock of the target company incorporate poison pills, shareholder rights plans which empower existing shareholders to purchase extra shares of the target company at a discount, making the deal more costly, or extra shares of securing company at a discount, weakening the value of the combined company after a completed acquisition.
Risks of a Chastity Bond Defense
Chastity bonds are ordinarily issued by a targeted company when a potential acquirer unveils their purchase expectations. These bonds can be an effective obstacle in the event that the hostile bid is made at the best offer price of a possible acquirer. Nonetheless, in the event that the initial bid is well below what the procuring company is at last ready to pay, the extra deal cost from the chastity bonds may not have an effect.
While expanding the debt obligations of a company might dissuade a hostile takeover bid, would it be advisable for it succeed the strategy would burden the existing company with extra debt. Unexpectedly, the expansion of liabilities to the balance sheet could, over the long term, make a company more powerless against a future hostile acquisition as in its debilitated state it might lack the financial strength to stay independent.
- The term, chastity bond, logical comes from the fact that its objective is to prevent unjustifiable consideration from unwanted corporate admirers.
- A chastity bond is a corporate bond that matures, at par, when triggered by an event, like a hostile takeover, that raises the cost of the acquisition to the acquirer.
- Chastity bonds are normally issued by a targeted company when a potential acquirer discloses their purchase expectations.