Definition
The Pac-Man defense is a defensive business strategy used to stave off a hostile takeover, in which a company that is threatened with a hostile takeover “turns the tables” by attempting to acquire its would-be buyer. The name refers to Pac-Man, a video game in which the protagonist is at first chased around a maze of dots by 4 ghosts. However, after eating a “Power Pellet” dot, he is able to chase and devour the ghosts. The term was coined by buyout guru Bruce Wasserstein.
Pac-Man Defense
What is the ‘Pac-Man Defense’
The Pac-Man defense is a defensive tactic used by a targeted firm in a hostile takeover situation. In a Pac-Man defense, the target firm then tries to acquire the company that has made the hostile takeover attempt. In an attempt to scare off the would-be acquirers, the takeover target may use any method to acquire the other company, including dipping into its war chest for cash to buy a majority stake in the other company.
Explaining ‘Pac-Man Defense’
A smaller or equivalent company may avoid a hostile takeover by using the Pac-Man defense.
Pac-Man Game Strategy
In the Pac-Man game, the player has several ghosts chasing and trying to eliminate it. If the player eats a power pellet, he may turn around and eat the ghosts.
War Chest
A company’s war chest is the buffer of cash kept aside for uncertain adverse events, such as taking over a company. A war chest is typically invested in liquid assets such as Treasury bills and bank deposits that are available on demand.
Disadvantages of the Pac-Man Defense
The Pac-Man defense is an expensive strategy that may increase debts for the target company. Shareholders may suffer losses or lower dividends in future years.
Examples of the Pac-Man Defense
In 1982, Bendix Corporation attempted to overtake Martin Marietta by purchasing a controlling amount of its stocks. Bendix Corporation became the owner of the company on paper. However, Martin Marietta’s management reacted by selling off its chemical, cement and aluminum divisions and borrowing over $1 billion to counter the acquisition. The conflict resulted in Allied Corporation acquiring Bendix Corporation.
Further Reading
- Dots, fruit, speed and pills: the Happy Consciousness of – www.tandfonline.com [PDF]
- Defensive Strategies in Takeovers – onlinelibrary.wiley.com [PDF]
- … in the European Union with and without the proposed 13th Company Law Directive; Theoretical application of simple finance theory and transaction cost economics – lup.lub.lu.se [PDF]
- The Pac-Man strategy: roll-up patterns and processes in three industries. – dspace.mit.edu [PDF]
- Vulnerability and Resistance: An Evaluation of Hostile Takeover Defenses Proposed By: Carissa Wilson, International Business & Business Economics – scholarcommons.sc.edu [PDF]
- Cash distributions to shareholders – www.aeaweb.org [PDF]
