What Is the Pac-Man Defense?
Let me explain the Pac-Man defense directly: it's a defensive tactic that a targeted firm uses in a hostile takeover situation. If you're the target, you turn around and try to acquire the company that's coming after you. To scare off those would-be acquirers, you might use any method available, including tapping into your war chest for cash to buy a majority stake in their company.
Key Takeaways
In a Pac-Man defense, if your company is targeted in a hostile takeover, you fight back by seeking to gain financial control of the situation. You might choose to sell off certain key assets to keep them out of the acquirer's hands. You could also buy back some of your own shares from the hostile company or try to purchase some of theirs. To fund these actions, you might get outside financing or use your own war chest of available funds.
Understanding the Pac-Man Defense
Think about the actual Pac-Man video game, where the player is chased by ghosts but can eat a power pellet to turn around and eat them instead. Companies use a similar approach to avoid a hostile takeover: you turn the tables on the acquirer and mount a bid to take them over. During the acquiring phase, the takeover company might start buying large amounts of your stocks to gain control. As a counter, you begin buying back your shares and purchasing shares of the acquiring company.
It helps if you have a war chest ready, giving you the means to mount this defense. Your war chest is that buffer of cash set aside for uncertain events, like taking over another company. Typically, it's invested in liquid assets such as Treasury bills and bank deposits that you can access on demand.
Remember, a smaller or equivalent company can avoid a hostile takeover by using the Pac-Man defense.
Special Considerations
For some companies, the Pac-Man defense is one of the few options when facing a hostile takeover attempt. Without getting aggressive and fighting back, you might have no chance of surviving. However, this strategy can be expensive and may increase your debts. Your shareholders could suffer losses or see lower dividends in future years.
Examples of the Pac-Man Defense
Take 1982, when Bendix Corp. tried to acquire Martin Marietta by purchasing a controlling amount of its stocks. Bendix technically became the owner on paper, but Martin Marietta's management fought back by selling off its chemical, cement, and aluminum divisions, and borrowing over $1 billion to counter the move. The conflict ended with Allied Corp. acquiring Bendix.
In February 1988, after a month-long fight starting with E-II Holdings Inc.'s offer for American Brands Inc., American Brands bought E-II for $2.7 billion. They financed it through existing lines of credit and a private placement of commercial paper.
Finally, in October 2013, Jos. A. Bank launched a bid to take over competitor Men’s Wearhouse. Men’s Wearhouse rejected it and countered with its own offers. During negotiations, Jos. A. Bank bought Eddie Bauer to gain more market control. In the end, Men’s Wearhouse bought Jos. A. Bank for $1.8 billion.
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