Macaroni Defense
What Is the Macaroni Defense?
The macaroni defense is one of many approaches a company might embrace to prevent an undesirable acquisition, or a hostile takeover. In the macaroni defense, the target company issues a large number of bonds with the condition that they must be reclaimed at a high price on the off chance that it is at any point dominated.
Figuring out the Macaroni Defense
At the point when a company needs to procure control of another company, it will as a rule start by making a friendly approach to its board of directors (B of D). In the wake of weighing up its options, the target may consciously decline, maybe in light of the fact that it accepts the bid is too low or for different reasons.
At that stage, the prospective buyer can either walk away or put up a fight. Rather than regarding management's resistance, it could endeavor to sidestep it by introducing its bid through a tender offer to shareholders.
Should takeover advances turn unfriendly or hostile, the target company's board has several tools at its disposal to cause all kinds of problems for the prospective buyer and ruin its advances. One of these options is the macaroni defense.
The target company issues a gigantic amount of corporate bonds that must be repaid at a mandatory higher redemption value if the company is dominated. All in all, on the off chance that the hostile bidder prevails with regards to gaining the company, it will be forced to pay back the money investors loaned the previous system plus a lot extra, really raising the overall purchase price.
This anti-takeover defense strategy is named this way since, supposing that a bidder attempts to purchase the company, the redemption price of the bonds extends like macaroni in a pot of bubbling water.
Illustration of the Macaroni Defense
Company XYZ is having some difficulty preventing Company ABC from taking it over. Management dismissed an initial bid since it fears ABC is definitely not a solid match and plans to layoff heaps of staff, however ABC is declining to surrender and has had the option to scrounge up support for its goal from a portion of XYZ's shareholders, a large number of which are enticed by the substantial premium price being offered.
In response, and in the wake of talking with its advisers, XYZ chooses the macaroni defense. Corporate bonds are issued to raise $250 million, with a condition that they must be recovered, or paid back right on time, at 200% of their par value in the event of a takeover. This means in the event that ABC prevails with regards to gaining XYZ, it will out of nowhere wind up balance a $500 million bill.
Analysis of the Macaroni Defense
Bonds with these types of conditions joined may be sufficient to put off a raider from buying the target company. In any case, as most other anti-takeover measures, getting freedom from undesirable hunters will in general include some significant downfalls.
The clearest downside of this strategy is that the company will in any case need to repay the principal of the bond eventually, and up to that point will be committed to fork out the periodic interest payments appended to it. Should the company be burdened with loads of debt, it could experience issues regarding these liabilities and become monetarily disabled for quite a long time into the future.
Special Considerations
The macaroni defense is just one of several anti-takeover defenses that a company could decide to use. Different methods incorporate leveraged recapitalization, a golden parachute, greenmail, and a poison pill.
Highlights
- Like most anti-takeover measures, preventing an undesirable takeover will in general include some major disadvantages.
- The macaroni defense prevents an undesirable acquisition by giving a large number of bonds that must be reclaimed at a high price in the event of a takeover.
- That means that assuming the hostile bidder prevails with regards to gaining the company, it will be forced to repay loans gave by investors to substantially more than they're worth.
