The Pac-Man defense is a tactical response employed by a firm targeted in a hostile takeover scenario. In this strategy, the target firm attempts to turn the tables by trying to acquire the would-be acquirer. Leveraging various means, including utilizing a war chest of cash to purchase a stake in the offending company, the target firm aims to deter the hostile takeover.
Key Takeaways
- In the Pac-Man defense, the target company fights back, seeking financial control and leveraging assets to rebuff the acquiring entity.
- Tactics may include selling off vital assets, repurchasing shares, and buying shares of the hostile company.
- Funding for these maneuvers may come from external financing or an internal war chest of cash reserves.
Understanding the Pac-Man Defense
Much like the Pac-Man video game, where the player consumes power pellets to turn the tide against chasing ghosts, companies can deploy similar tactics to fend off hostile takeovers. By turning the tables through counter-actions and strategic purchases, the target company aims to outmaneuver the acquirer.
During an aggressive takeover attempt, the acquisitive firm often starts buying significant shares to dominate the target company. The target can counter this move by repurchasing its own shares and acquiring shares of the hostile company.
A well-equipped war chest—funds reserved for tackling unforeseen adverse events—plays a pivotal role in enabling a Pac-Man defense. Typically held in liquid assets like Treasury bills and bank deposits, these funds are readily accessible for immediate use against a threat.
Special Considerations
The Pac-Man defense is a crucial option for some businesses facing hostile takeovers. It’s a powerful countermeasure, but one fraught with risk, often leading to higher debts and potential losses for shareholders due to the costs involved. Carefully weighing these risks is imperative for management before deploying this defense.
Real-World Examples of the Pac-Man Defense
Bendix Corp. vs. Martin Marietta (1982)
In 1982, Bendix Corp. aimed to take over Martin Marietta by purchasing a controlling share. Although initially successful, Martin Marietta’s management responded by divesting key divisions and securing substantial loans, eventually leading to Bendix’s acquisition by Allied Corp.
American Brands Inc. vs. E-II Holdings Inc. (1988)
Following a hostile bid from E-II Holdings Inc., American Brands executed a counteroffer, ultimately buying E-II for $2.7 billion. This strategic acquisition was funded through lines of credit and commercial paper placements.
Men’s Wearhouse vs. Jos. A. Bank (2013)
In October 2013, Jos. A. Bank initiated a takeover attempt on Men’s Wearhouse. Responding with a counterbid, Men’s Wearhouse ultimately acquired Jos. A. Bank for $1.8 billion, with Jos. A. Bank earlier buying Eddie Bauer to bolster its market position.
Related Terms: Takeover, War chest, Company acquisition, Hostile takeover strategy, Corporate defense tactics.
References
- Bendix. “History”.
- U.S. Securities and Exchange Commission. “The Men’s Wearhouse 2014 Form 10-K”, Page 11.
