Sale of Crown Jewels: What It is, How It Works

What Is a Sale Of Crown Jewels?

A sale of crown jewels is a last-ditch strategy employed by a company to ward off a hostile takeover or relieve the 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.

Understanding a Sale Of Crown Jewels

A company’s crown jewels are its most valuable assets. These prized possessions could be the company’s customer database, production or manufacturing facilities, intellectual property, or a particular line of business that registers the highest revenues and profit.

Crown jewels are crucial to a company’s success, so selling them is not a decision that is taken lightly. Management will be mindful that offloading its best assets could well ruin it and prompt shareholders to flee, yet sometimes is left with no other alternative.

Sale Of Crown Jewels Requirements

Generally, there are two cases in which a company might view the disposing of its crown jewels as a necessary course of action. 

Avoiding Bankruptcy

Perhaps the most obvious threat that could force a company’s hand is if it is overburdened with debt and in danger of defaulting on payments. Other operating assets or divisions of the company may not fetch high enough prices to remove the risks that an overleveraged balance sheet poses, meaning that the only way for it to survive as a going concern and avoid bankruptcy is to offload the crown jewels.

Preventing a Hostile Takeover

Crown jewels may also be sold to prevent another company from taking it over against management’s wishes. Should the prospective buyer not take no for an answer and begin engaging in other strategies to get the acquisition approved, the only option left could be to sell-off the target company’s prized possessions to a friendly third-party.

A sale of crown jewels, or a "crown jewel defense,” is one of several methods used to thwart the advances of a hostile bidder. The logic behind it is simple: force the predator to lose interest by offloading the assets that it is so desperately trying to get its hands on.

This tactic is sometimes used by conglomerates. Corporations made up of a number of different, seemingly unrelated businesses often attract hostile bidders because they can trade at a price below their break-up value. The so-called conglomerate discount means it is sometimes possible to buy these massive, sprawling companies on the cheap and then sell off the pieces for a profit.

That profit opportunity may soon vanish, though, should the target company offload its crown jewels to another party. 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.

Criticism of a Sale of Crown Jewels

There's not much to like about the sale of crown jewels. Taking such action risks killing the company, so it can only be justified in times of extreme desperation and, even then, might not be supported by everyone.

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 the 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.

Serious debt problems might leave the company with no choice but to swallow this pill. Shareholders, however, are likely to be less forgiving if the crown jewels are sold to prevent a takeover. Receiving cash or shares in a newly formed company is arguably a far more appealing and lucrative option than holding onto a stock stripped of its best features.

News that the crown jewels are being offloaded will almost certainly lead to a massive sell-off in the shares. Those who were slow to react will suddenly find themselves with an investment worth a fraction of what it used to trade for—and little hope of a quick turnaround.