What it means
Most businesses are not evenly valuable across their operations. One division, one drug patent or one long-term customer contract often accounts for the bulk of the enterprise value, while the rest of the operation is fairly ordinary.
Working out which parts are the crown jewels is a basic step in valuation, insurance and risk planning. In mergers and acquisitions the term takes on a much sharper meaning.
A hostile bidder usually wants the crown jewels specifically, so the target's board can defend itself by agreeing to sell those assets to a friendly third party or granting that party an option to buy them. Remove the prize and the bid loses its logic.
This is known as the crown jewel defence, and it is both aggressive and contentious. Directors owe duties to shareholders, and deliberately disposing of the best assets to block a premium offer can destroy value for the very people the board is supposed to serve.
Courts in several jurisdictions have struck down such arrangements where they appeared designed to entrench management rather than to secure a better price. A softer version is the crown jewel lock-up, where a friendly rival bidder is granted an option over key assets as an inducement to enter the contest.
That can raise the eventual price by creating genuine competition, which is far easier to defend as being in shareholders' interests. The distinction usually turns on whether the board ran an honest auction or simply picked a favourite.
Outside takeovers, "crown jewels" is standard language in cyber security, insurance and business continuity planning. It labels the systems, data or facilities whose loss would be existential rather than merely painful, and it drives where the protection budget goes first.
In practice
Real-world examples.
Example
A biotechnology company with one approved drug and a thin pipeline receives an unsolicited offer. Its board identifies the approved drug's patent estate as the crown jewel and explores licensing it exclusively to a partner, which would leave the bidder buying a research operation rather than a revenue stream.
Example
A diversified industrial group runs an internal review and finds that a single aerospace fasteners unit produces 70% of group operating profit on 20% of group revenue. Management restructures its insurance, key-person cover and disaster recovery planning around that one site, and stops treating all facilities as equally important.
Example
A retailer's chief information officer maps its systems and concludes that the customer database and the pricing engine are the crown jewels, while the internal booking tools are not. The security budget is reallocated so that those two systems get continuous monitoring and offline backups, while lower-tier systems keep standard protection.
Formula
Calculation
Crown jewel share of value = (crown jewel EBITDA x its valuation multiple) / total enterprise value
Consider a specialty chemicals group with two divisions. The coatings division earns EBITDA of $90,000,000 and comparable businesses trade at 12 times EBITDA, giving 90,000,000 x 12 = $1,080,000,000. The distribution division earns EBITDA of $60,000,000 but is a low-margin logistics business trading at 2 times EBITDA, giving 60,000,000 x 2 = $120,000,000.
Total enterprise value is $1,080,000,000 + $120,000,000 = $1,200,000,000, and the coatings division accounts for $1,080,000,000 / $1,200,000,000 = 90% of it. With 200,000,000 shares in issue, the standalone value is $1,200,000,000 / 200,000,000 = $6.00 per share.
A hostile bidder offers $7.00 per share, which values the group at 200,000,000 x $7.00 = $1,400,000,000 and represents a premium of $1.00 per share, or $1.00 / $6.00 = 16.7%. If the board grants a friendly buyer an option over coatings at $1,080,000,000, the bidder is left chasing a distribution business worth $120,000,000 plus a pile of cash, and typically withdraws. Shareholders lose the $1,400,000,000 - $1,200,000,000 = $200,000,000 premium, which is why this defence is so heavily litigated.Case study
Seen in the real world.
Ashgrove Chemicals is a fictional, illustrative group with two very different divisions: a specialty coatings business earning $90,000,000 of EBITDA, and a commodity distribution arm earning $60,000,000. On peer multiples of 12 times and 2 times, the enterprise was worth about $1,200,000,000, with coatings representing 90% of that value.
When an overseas rival launched a hostile offer at $1,400,000,000, Ashgrove's board split. One faction wanted to grant a friendly private equity firm an option over coatings at $1,080,000,000, which would almost certainly have caused the bidder to walk. The other faction pointed out that shareholders would then lose a $200,000,000 premium in order to preserve the independence of a business the board itself ran.
In this illustrative account, the second view prevailed and the board instead ran a formal auction, inviting the private equity firm to bid for the whole company. Two rounds later the shares were sold at $7.60, worth $1,520,000,000 in total. The crown jewels were still the reason anyone wanted the company; the difference was that the board used them to attract competition rather than to block it.
Watch out
Common mistakes.
- Treating the crown jewel defence as a routine tactic. It exposes directors to serious legal risk in most jurisdictions, because deliberately destroying the attraction of a premium offer is hard to reconcile with a duty to shareholders.
- Assuming the biggest division is the crown jewel. Value follows profitability and multiple, not revenue, and a low-margin unit with half the turnover can be worth a fraction of a smaller high-margin one.
- Identifying crown jewels only when a bid arrives. The analysis is far more useful as a standing part of risk, insurance and continuity planning than as an emergency exercise under time pressure.
Questions
People also ask.
Is the crown jewel defence legal?
It depends on the jurisdiction and the facts, and courts generally look at whether the board was seeking the best available price for shareholders or protecting its own position.
How do I identify my own company's crown jewels?
Value each business unit or asset separately using appropriate multiples, then ask which ones a buyer would refuse to do without, and which losses the business could not survive.
Does the term only apply to takeovers?
No, it is used widely in cyber security and continuity planning to mark the systems and data whose loss would threaten the survival of the business.
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