Pac-Man

What Is Pac-Man?

Pac-Man is a high-risk hostile takeover defense tactic that involves the target company attempting to acquire control of the company that bid for it by purchasing large amounts of its stock. This retaliatory measure is designed to deter the prospective buyer.

Pac-Man defenses are named after the popular video game originating out of Japan in 1980. In the game, the player has several ghosts chasing and trying to eliminate it. The objective, other than eating all the small white circles in the maze, is to strike back and gobble up these same aggressive and determined predators, a feat made possible only after consuming flashing dots called power pellets.

Understanding Pac-Man

In normal business practices, a company that wants to buy another company will make a friendly approach to the board of directors (B of D) of that target company. After weighing its options, the target may respectfully decline, leading the interested party to walk away.

Sometimes, the prospective buyer might decide not to give up, though. Instead, it could opt to dig its heels in and go directly to the company's shareholders to drum up enough support to replace management and potentially get the acquisition approved.

Should takeover advances turn hostile, the target company's board has several tools at its disposal to make life difficult for the prospective buyer. They include adopting a poison pill defense, installing a staggered board structure, seeking a white knight, or taking the Pac-Man route.

The latter option involves turning the tables on the acquirer by tabling a bid for it. Rather than give up, the target company turns aggressive, buying back its shares and purchasing shares of the acquiring company in the hope that such action will scare off the unwanted predator.

Criticism of Pac-Man

Pac-Man is one of the most dangerous anti-takeover measures and is usually only considered as a last resort. The money required to launch such a defense can be considerable, stripping away resources that could be used to solidify the company’s position and leading shareholders to suffer losses and lower dividends for years to come.

If the target doesn’t have a significant war chest to pursue this path, it might be forced to sell off its own assets to raise the necessary funds. If the assets offloaded are core to the company, it’s reasonable to assume that continuing operations will be damaged.

War chests are intended to be used for acquisitions but can be implemented for defensive tactics. They are usually made up of liquid assets that can be accessed quickly, such as short-term investments, bank deposits, cash, and Treasury bills.

Alternatively, the target may opt to raise capital for its defense by taking on debt. Adding leverage means increased interest expense and potentially overstretching the company’s balance sheet, leaving it more vulnerable to an unexpected market shock.

Another major pitfall of a Pac-Man defense is time. Orchestrating these measures steals management’s attention away from the day-to-day running of the business, potentially resulting in other important issues becoming neglected.

Real World Examples

The dangers associated with Pac-Man defenses put many companies off exploring this path. Still, those brave and desperate enough to pursue such drastic action can take heart from a handful of cases where such an approach paid off.

The Pac-Man defense was first successfully employed in 1982. Having accumulated a controlling amount of Martin Marietta’s stock, Bendix Corp. was poised to take over the company it had targeted.

Martin Marietta had other ideas, though, retaliating by selling off its chemical, cement, and aluminum divisions, and borrowing over $1 billion to counter the acquisition. Marietta purchased a significant amount of Bendix stock, but both companies were financially damaged through this process.

Though Marietta was aiming to implement a Pac-Man defense, in the end, Allied Corp. acquired Bendix, which is considered a white knight defensive strategy.

In 1988, American Brands launched a successful Pac-Man defense, buying the company, E-II Holdings Inc., that was attempting to acquire it for $2.7 billion. American Brands financed the merger through existing lines of credit (LOC) and a private placement of commercial paper.

Yet another example is of car company Porsche attempting to buy Volkswagen. Beginning in 2005, Porsche attempted to purchase Volkswagen by buying a considerable amount of its stock. When Porsche suffered financial difficulty during the 2008 financial crisis, Volkswagen implemented a Pac-Man defense and bought shares of Porsche that had dropped in price, eventually outright buying Porsche in 2012.