What is a Macaroni Defense?

A Macaroni Defense is a defensive tactic used by a company against a hostile takeover bid. During a Macaroni Defense maneuver, a corporation that is a potential takeover target, issues a large number of bonds with an exceptionally high discount on the redemption value. This essentially means that in the event of a takeover, these bonds will have to be redeemed at a much higher value. The rationale behind trying to prevent a hostile takeover or any such unwelcome merger or acquisition is that in most situations, the bids for such companies are too low. Additionally, any merger or acquisition usually evokes fears of corporate restructuring and layoffs. As such, defensive tactics such as Macaroni Defense and other similar maneuvers almost always rely on preventing the merger/acquisition by somehow manipulating the stock prices or bond prices of takeover targets.

How Does the Macaroni Defense Work?

The origin of the term Macaroni Defense can be ascribed to the similarities between the expansion of the redemption price of the bonds of the target corporation and the enlargement of macaroni (a type of pasta) in a pot full of boiling water. There is usually a twofold effect of the Macaroni Defense maneuver - on the one hand, it makes the entire takeover deal economically unappealing, while on the other, it severely limits the powers of the potential acquirer. However, even if a Macaroni Defense maneuver does lead to a successful dissuasion of a takeover bid, the corporation is still prone to being overburdened with excessive debt and the difficulties associated with making high interest payments. Often times, hostile takeover targets resort to poison pills, golden parachutes, scorched earth policies, lobster traps, green mail and leveraged recapitalization as effective anti-takeover defense mechanisms. 

Illustration of a Macaroni Defense Maneuver

Let us assume that company C1 wishes to acquire company C2 via a hostile takeover. However, the management at C2 is averse to the idea of this acquisition, especially because it believes that such a move would irreparably damage the reputation of C2. As such, to dissuade C1 in its takeover efforts, the board of directors at C2 issues $100 million worth of corporate bonds that are redeemable at 165% of par value in case of a successful takeover. This means that any investor interested in acquiring $10,000 worth of such corporate bonds, for example, will gain the right to redeem the entirety of his/her investment at $16,500 post acquisition. From the perspective of C1, this additional cost of $6,500 for every redeemed corporate bond worth $10,000 is plainly too high to merit proceeding with the takeover bid. As such, C1 finally backs off from the acquisition deal.

Macaroni Defense vs. Poison Pills

Macaroni Defense maneuvers and poison pills are two popular anti-takeover defense mechanisms employed by potential takeover targets. While Macaroni Defense relies on the issuance of bonds, poison pills involve the target corporation issuing rights to all existing shareholders (except the hostile bidder) to either purchase preferred stock or common stock of the company at a predetermined price. This predetermined price usually works out to about 200% of the rights exercise price, making the entire takeover deal extremely expensive for the hostile bidder. Another similar, but much more extreme anti-takeover defense mechanism is the suicide pill, that involves the board of directors dissolving the entire company in order to prevent a hostile takeover bid.

Related Topics

• Corporate Governance Law (Intro)
• What is Business Governance?
• Berle-Means Thesis 
• Corporate Governance Rating Definition
• Who are the members of a corporation?
• Corporate Charter
• Shareholder Register
• Common Stock
• Preferred Stock
• Par Value
• Authorized Shares
• Issued Shares of Stock
• Unissued Shares of Stock
• Outstanding Shares
• Institutional Shares
• Dual Class Shares
• What is a closely-held corporation?
• Close Corporation Plan Definition
• What is a Private Company vs a Public Company?
• What is the role and purpose of the corporation?
• What is the Agency theory of corporate governance?
• Shareholder-Centric Perspective
• Shareholder Value
• What is the Stakeholder theory of corporate governance?
  
• What is the role & rights of Shareholders in the corporation?
  
• Shareholder Democracy Definition
• Quorum Definition
• Information Circular
• Straight and Cumulative Voting
• Statutory (Straight)
  
• Cumulative Voting
• Plurality Voting
• Class Voting Shareholders
• Changing the Voting Rules
• Supermajority (Voting)
• Shareholder Sponsored Proposal 
• What are the variations on attributes of Ownership structure?
• Stock Split
• What are the fiduciary duties owed by shareholders?
• When is a shareholder personally liable for corporate obligations?
• Appraisal Rights
• Dissenter's Rights
• Say on Pay Rights
• How can shareholder enforce their rights (direct and derivative actions)?
• Amotion
• What is the process for bringing a Derivative action?
• What are corporate vote Proxies?
• Proxy Statement
• Proxy Fight or Contest Definition & Explanation 
• What is Shareholder Activism and the significance of Institutional Investors?
• Activist Investor
• Overview of Board of Directors
• Board Decision Making
• Advisory Board (Observer Directors)
• What is the role of the Board of Directors?
• Board of Trustees
• Board of Governors
• What is the composition of the board of directors?
• Chairman of the Board
• CEO as Chairman of the Board
• Inside Director
  
• Outside Director
• Outside Director or Non-Executive Director Definition
• Independent Outside Director
• Budget Committee
• Audit Committee
• Compensation Committee
• Nomination Committee (Corporate Board)
• What standards govern the actions of the board of directors?
• Duty of Candor Definition
• Duty of Care (Board of Directors)
• Duty of Loyalty (Directors) 
• Self-Dealing
• Board Evaluation Definition
• What is the Business Judgment Rule?
• What is D&O insurance?
• Codetermination (Foreign)
• What is the role of Managers of the corporation?
• What standards govern manager actions?
• Chief Executive Officer (CEO)
• Chief Financial Officer
• Chief Information Officer (CIO)
• Chief Investment Officer (CIO)
• Chief Legal Officer
• Chief Operating Officer
• Chief Risk Officer
• Chief Security Officer
• Chief Technology Officer (CTO)
• What are the primary state and federal corporate governance laws?
• What is the role of the state in corporate governance?
• What is the role of Securities Laws in corporate governance?
• What is the role of the Foreign Corrupt Practices Act in corporate governance?
• What is the Sarbanes-Oxley Act (SOX) effect on corporate governance?
• Sarbanes-Oxley Act (SOX)
• What is the Dodd-Frank Wall Street Reform and Consumer Protection Act effect on corporate governance?
• Corporate Monitors
• What industry organization standards affect corporate governance?
• How do proxy advisory firms affect corporate governance?
• What is the role of ethics in corporate governance?
• What are the major causes of corporate governance issues?
• What are the access to information issues?
• What are decision-making structure issues?
• What are the power struggle or competition issues?
• Holding Company
• What are hostile takeovers and defenses to hostile takeovers?
• Williams Act
• Staggered Board
• Shark Repellent Defenses?
• Poison Pill Defenses?
• Flip Over Poison Pill Definition
• Flip In Poison Pill Definition
  
• Voting Poison Pill Plan
• Delay-Tactic Defenses?
• Legal Lockup Defenses?
• White Knight and Pac Man Defenses?
• Jonestown Defense
• Lady Macbeth Strategy
• Macaroni Defense
• Yellow Knight
• Back-end Plan Definition
• Backflip Takeover Definition
• Dead Hand Provision Definition
• Kamikaze Defense
• Operating Company Property Company Model
• Whitemail
• Scorched Earth Policy Definition
• Revlon Rule
• What are benefit-alignment issues?
• Cadbury Rules Definition