Sale Of Crown Jewels

Sale of crown jewels of a company is a drastic attempt to ward off a hostile takeover or relieve severe financial stress of a debt burden. In either case, a company's best operating assets are sold, essentially changing the entire nature of the company and leaving it with a different set of growth prospects and shareholder support.

A hostile bid can be defended in a number of ways — a target company can adopt a poison pill, it can seek a white knight or it could make its own acquisition that would make it unattractive to the bidder. Another tactic is the sale of so-called crown jewels, or the assets that a hostile bidder is seeking in the first place. This tactic is sometimes used by conglomerates, which often attract hostile bidders because they can trade at a price below their break-up value due to the "conglomerate discount." Buy the conglomerate at a discount and sell off the pieces for a profit — that's the play of a hostile bidder. But if the target company sells its crown jewels to another party, the profit opportunity disappears. (If the crown jewels are put up for sale in a competitive bidding process, the hostile bidder would have to pay the fair market price, not a discounted one, which would defeat its purpose.)

When a company is too overburdened with debt and is in danger of defaulting on payments, it may be forced to sell crown jewels to relieve the stress and avoid possible bankruptcy. Other operating assets or divisions of the company may not fetch high enough prices to remove the threat that an overleveraged balance sheet poses. The crown jewels must be sold so that the company survives as a going concern.

The sale of crown jewels will generally leave the remnants of a company in less attractive or slower-growing markets. There may be a decrease in brand equity value of the company, and diminished sales and earnings growth prospects resulting from the loss of talented management, product innovation, manufacturing efficiency or geographic markets. Shareholders who invested because of the crown jewels would flee if they are sold.