What is the Macaroni Defense?

Companies adopt a macaroni defense by issuing bonds that are redeemable at a high price in the event of a change in control.

How Does the Macaroni Defense Work?

For example, let's assume that Company ABC wants to buy Company XYZ. Company XYZ doesn't want to sell because in the board's opinion Company ABC makes terrible products and will run the company's brand into the ground. To thwart the effort, Company XYZ issues $10 million of bonds that are redeemable for 150% of par value if there is a change in control at Company XYZ. So, a person who buys a Company XYZ bond with a $1,000 face value would have the right to redeem that bond for $1,500 if Company ABC buys Company XYZ. Company ABC, seeing this redemption as a cost on top of buying Company XYZ, backs off the deal.

Why Does the Macaroni Defense Matter?

Like pasta in water, the bonds involved in a macaroni defense expand when things get hot. For potential acquirers, this can make a deal very hard to swallow.