The Pac-Man defense is a response to a hostile takeover bid in which the target tries to buy the company bidding for it. It is named after the arcade game in which the hunted turns on the hunter. The best-known case is Martin Marietta‘s counter-bid for Bendix in 1982, when analysts first used the “Pac-Man” label.
The target launches its own offer for the acquirer's shares.
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Raise the money
It borrows, sells units or brings in a partner to fund the counter-bid.
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Force a negotiation
The bidder must now defend itself, which can stall or reshape the deal.
Where you see it today
The original fight
In 1982 Bendix bid for Martin Marietta, which answered with a bid for Bendix and recruited United Technologies to join it. A contemporary report described the two companies as close to owning each other, and an analyst called the fight damaging to both.
Why it is rare
The tactic risks mutual destruction: Martin Marietta took on heavy debt in 1982, and Bendix was ultimately acquired by a third company, Allied. CNBC’s explainer cites Men’s Wearhouse’s move against Jos. A. Bank in 2013 as a later example.
The modern default: rights plans
Most targets now use other defences. In April 2022 Twitter’s board adopted a limited-duration shareholder rights plan after an unsolicited proposal to buy the company, to stop control being gained through open-market buying without a premium.
AI deals that avoid takeovers
In AI, large companies often license a start-up’s technology and hire its team instead of buying it. The UK Competition and Markets Authority examined whether Microsoft’s hiring of former Inflection AI staff amounted to a merger, and cleared the arrangements in 2024. A target cannot counter-bid for a buyer that never makes a bid.
How it worksLarge payouts to executives on a change of control
Main riskShareholder anger; raises cost of any deal
How to use it
Treat it as a last resort: model the debt load and the cost of winning before bidding back.
Use it only if your company is large enough to buy the bidder and the combination makes strategic sense.
Line up financing and partners in advance; speed decides these contests.
Compare it with a rights plan or a white knight, which are usually cheaper.
In AI, watch for license-and-hire deals that drain talent without a formal bid.
The Business Engineer lens
In AI, control of a company matters less than control of its people and models, so deals increasingly take the form of licences plus hiring rather than takeovers. The Business Engineer maps that acquihire playbook and why classic takeover defences rarely apply to it.
The complete explainer, cleaned up and reformatted for mobile.
The Pac-Man defense is a tactic used by a company that is the subject of a hostile takeover. The Pac-Man defense is a response to a hostile takeover attempt with another hostile takeover attempt. In essence, the company that was the subject of the original takeover turns the tables on the acquiring company by trying to take it over in turn.
Pac-Man Defense
ExplanationThe Pac-Man Defense is a takeover defense strategy employed by a targeted company (the “target”) to counter a hostile takeover attempt by another company (the “acquirer”). It gets its name from the popular video game character Pac-Man, who eats or “swallows” his enemies. In the context of mergers and acquisitions (M&A), the target attempts to “eat” or acquire the acquirer instead, effectively reversing the roles in the takeover bid. The Pac-Man Defense is a high-stakes maneuver that can lead to a dramatic shift in the dynamics of a hostile takeover battle.
Hostile Takeovers
ExplanationA hostile takeover occurs when one company, the acquirer, seeks to purchase a controlling stake or all outstanding shares of another company, the target, without the approval or consent of the target’s management and board of directors. Hostile takeovers are often pursued when the acquirer believes that acquiring the target would be financially beneficial, even if the target’s leadership opposes the deal.
Tactics of the Pac-Man Defense
ExplanationThe Pac-Man Defense involves a series of strategic actions and tactics taken by the target to fend off the hostile takeover. These may include: 1. Counteroffer: The target makes a counteroffer to acquire the acquirer. This counteroffer can be structured to be as attractive as possible to the acquirer’s shareholders, enticing them to accept the target’s bid instead. 2. Leveraging Assets: The target may leverage its own assets, such as borrowing funds or selling non-core assets, to finance the acquisition of the acquirer. 3. Attracting White Knights: The target may seek out alternative buyers, known as white knights, who are willing to acquire the target to prevent the hostile takeover. White knights are typically more palatable to the target’s management and board. 4. Poison Pills: The target may enact or enhance poison pill provisions in its corporate bylaws. Poison pills make it financially unattractive for the acquirer to proceed with the takeover by diluting the acquirer’s ownership or increasing the cost of acquisition. 5. Litigation: Legal action may be taken by the target to challenge the legality or fairness of the hostile takeover bid, potentially delaying the process and creating uncertainties for the acquirer.
Strategic Implications
ExplanationThe Pac-Man Defense is a bold and aggressive strategy that carries significant strategic implications: 1. Ownership Reversal: If successful, the Pac-Man Defense results in a complete reversal of the roles, with the original target becoming the acquirer. This can lead to significant changes in the business landscape and industry dynamics. 2. Financial Risk: Pursuing the Pac-Man Defense can be financially risky for the target, as it may require taking on debt or selling assets to finance the acquisition. If the strategy fails, the target may face financial challenges. 3. Market Impact: News of a Pac-Man Defense can have a substantial impact on the financial markets. It can lead to increased volatility in the stock prices of both the target and the acquirer, as well as uncertainty for investors. 4. Long-Term Viability: The success of the Pac-Man Defense ultimately depends on the target’s ability to manage the acquired company effectively. The target must consider whether it has the expertise and resources to integrate and run the acquirer’s operations.
Historical Examples
ExplanationThe Pac-Man Defense has been deployed in several high-profile takeover battles. One notable example is the 1982 case of Martin Marietta Corporation’s attempted hostile takeover of Bendix Corporation. Bendix initiated the Pac-Man Defense by launching a counteroffer to acquire Martin Marietta. The hostile takeover battle between these two aerospace companies attracted significant attention and ultimately ended with Allied Corporation (later AlliedSignal) acquiring Bendix, preventing Martin Marietta’s takeover. This example highlights the dramatic and strategic nature of the Pac-Man Defense.
Controversy and Criticism
ExplanationThe Pac-Man Defense is a controversial strategy. Critics argue that it can be a short-term tactic that does not necessarily benefit shareholders in the long run. It can also lead to increased financial risks and market uncertainties. Moreover, some view it as a defensive maneuver that may distract management from focusing on the company’s core operations and growth strategies.
Regulatory Scrutiny
ExplanationRegulators and authorities closely monitor takeover battles and defensive strategies. They assess whether actions taken by companies, including the Pac-Man Defense, comply with applicable laws and regulations. Regulatory scrutiny can impact the feasibility and outcomes of takeover defense strategies.
Conclusion
ExplanationThe Pac-Man Defense represents an unconventional and audacious response to hostile takeover attempts. While it can result in a significant shift in ownership and control, it also carries financial, strategic, and regulatory complexities. Companies considering such a defense strategy must weigh the potential benefits against the risks and uncertainties involved. The Pac-Man Defense remains a captivating chapter in the world of mergers and acquisitions, where corporate strategies can resemble high-stakes games of strategy and tactics.
Understanding the Pac-Man defense
The Pac-Man defense is named after the Pac-Man video game.
In the game, the eponymous character is chased by four colored ghosts who are trying to eat him.
If the Pac-Man eats a Power Pellet, however, he can turn around and eliminate the ghosts.
Target companies use the same approach in the hope that the acquiring company abandons its takeover attempt.
The acquiring company may institute a large-scale purchase of the target companyโs shares, but this may be countered by the target company buying back those shares and then purchasing shares in the acquiring company.
How is the Pac-Man defense funded?
The success of the strategy depends on whether the target company has the financial clout to purchase enough shares in the acquiring company to be a credible threat.
This may be facilitated via:
The sale of assets and business units
To generate enough cash to buy large amounts of shares in the acquirer, the target company can sell off non-vital assets or non-core business units.
Capital raises
The target can also borrow cash from a lender or undertake a capital raise funded by retail or institutional investors.
Suppose the latter is done via a share issuance. In that case, it has the advantage of increasing the number of outstanding shares an acquiring company would need to purchase to take a controlling interest.
Accessing a war chest
Which refers to a cash reserve many companies maintain for use in adverse events or to take advantage of unexpected opportunities.
The war chest usually contains assets that can easily be liquidated such as treasury bills and bank deposits.
Pac-Man defense examples
Here are some real-world examples of where the Pac-Man defense has been employed:
Porsche and Volkswagen
As early as 2005, Porsche made several failed attempts to purchase a controlling interest in Volkswagen.
When the company share price decreased in the wake of the GFC, Volkswagen took the opportunity to purchase discounted Porsche shares.
In 1982, Bendix Corporation attempted a hostile takeover of building materials firm Martin Marietta.
The latter sold off multiple business units and borrowed over $1 billion to thwart the attempt, with Bendix Corporation owning 70% of Martin Marietta and Martin Marietta then becoming the owner of 50% of Bendix Corporation.
The Pac-Man defense was used by both companies in the back-and-forth and was an expensive exercise for both parties.
In the end, Allied Corporation acted as a white knight and acquired Bendix Corporation in 1983.
Wolverhampton & Dudley and Marston
British brewery Wolverhampton & Dudley launched a hostile takeover of competitor Marston in 1998 after a friendly takeover failed.
Marston then used the Pac-Man defense to acquire 73.5% of Wolverhampton & Dudley and prevent the takeover.
This was the first time the strategy had been used outside of the United States.
Additional Case Studies
Harman International Industries and Take-Two Interactive: In 1986, Harman International Industries, an audio equipment manufacturer, executed a Pac-Man defense against Take-Two Interactive, a video game publisher. Harman attempted to acquire Take-Two in response to Take-Two’s hostile takeover bid. The situation ended with Take-Two ultimately acquiring a significant stake in Harman.
Clorox and Carl Icahn: In 2011, activist investor Carl Icahn launched a hostile takeover attempt on Clorox, a consumer goods company. Clorox implemented a poison pill defense and explored strategic alternatives to fend off the hostile bid. Although Icahn’s bid was unsuccessful, it highlighted the use of defensive strategies.
Allergan and Valeant Pharmaceuticals: In 2014, Valeant Pharmaceuticals initiated a hostile takeover bid for Allergan, a pharmaceutical company. Allergan employed various defensive measures, including seeking a white knight. Eventually, Actavis (now part of AbbVie) emerged as the white knight and acquired Allergan.
RJR Nabisco and Kohlberg Kravis Roberts & Co. (KKR): The RJR Nabisco takeover battle in the late 1980s became famous for its intense competition between bidders. KKR launched a hostile takeover attempt, and RJR Nabisco’s management explored alternative strategies, including a potential leveraged buyout. Ultimately, KKR succeeded in acquiring RJR Nabisco.
Pfizer and AstraZeneca: In 2014, Pfizer, a pharmaceutical giant, pursued a hostile takeover of AstraZeneca, a British pharmaceutical company. AstraZeneca employed a defense strategy by resisting Pfizer’s offers, citing concerns about the deal’s impact on research and jobs. The bid was eventually withdrawn.
Yahoo and Microsoft: In 2008, Microsoft made a hostile takeover bid for Yahoo, an internet company. Yahoo’s management resisted the offer and explored potential partnerships with other companies, including Google. The Pac-Man defense was not executed in this case, but Yahoo’s actions demonstrated resistance to the takeover.
Airgas and Air Products and Chemicals: Air Products and Chemicals launched a hostile takeover bid for Airgas, a distributor of industrial gases, in 2010. Airgas successfully used defensive tactics, including implementing a poison pill and seeking higher offers. Air Products eventually abandoned its takeover attempt.
Hewlett-Packard (HP) and Xerox: In 2019, Xerox initiated a hostile takeover bid for HP, a multinational information technology company. HP resisted the offer and explored potential defensive measures. The bid faced opposition from HP’s board and shareholders, and Xerox ultimately abandoned the takeover attempt.
Key takeaways
The Pac-Man defense is a tactic used by a company that is the subject of a hostile takeover. In essence, the company turns the tables on the acquiring company by trying to take it over in turn.
The Pac-Man defense depends on the target company having the financial means to purchase a controlling interest in the acquiring company. Money must be raised through the sale of assets and non-core business units. Capital raises and war chests can also be used to fund the defense.
The Pac-Man defense is perhaps best exemplified by Porscheโs failed takeover attempt of Volkswagen. The latter used the Global Financial Crisis to purchase Porsche shares at a discount and ultimately acquire a 100% stake.
Key Highlights about the Pac-Man Defense
Definition: The Pac-Man defense is a strategic tactic employed by a target company facing a hostile takeover attempt. It involves the target company launching its own hostile takeover bid against the acquiring company, effectively turning the tables on the aggressor.
Origin: The term “Pac-Man defense” is inspired by the classic video game Pac-Man, where the protagonist can turn the tables on pursuing ghosts by consuming a Power Pellet. In a similar fashion, the target company aims to thwart the hostile takeover by becoming the aggressor.
Mechanism: The Pac-Man defense involves the target company repurchasing its own shares, buying shares in the acquiring company, or taking other actions to gain a controlling interest in the acquiring company. This strategy is executed in the hope that the aggressor will abandon its takeover attempt.
Funding: The success of the Pac-Man defense hinges on the target company’s financial capability to acquire a significant stake in the acquiring company. Funding for this defense can come from selling non-essential assets, raising capital through loans or equity issuance, or tapping into a company’s reserve of readily liquid assets known as a “war chest.”
Real-world Examples: Notable instances of the Pac-Man defense include the Porsche and Volkswagen saga, where Volkswagen ultimately acquired Porsche after a series of takeover attempts, Bendix Corporation and Martin Marietta’s back-and-forth struggle, and Wolverhampton & Dudley’s use of the strategy in the brewing industry.
Costly Strategy: Implementing the Pac-Man defense can be an expensive and resource-intensive endeavor for both the target and acquiring companies. It may involve significant financial transactions, legal battles, and complex maneuvers.
White Knights: In some cases, a third party, known as a “white knight,” may step in to resolve the situation by acquiring one of the involved companies. This can bring an end to the hostile takeover battle.
Historical Significance: The Pac-Man defense represents a creative and aggressive response to hostile takeover attempts and has played a role in shaping the strategies used in corporate takeovers and mergers.
Dependence on Financial Strength: The effectiveness of the Pac-Man defense is contingent on the target company’s financialstrength and ability to outbid the acquiring company, making it a high-stakes maneuver in the world of corporate finance.
Evolution of Corporate Strategies: The Pac-Man defense reflects the dynamic nature of corporate strategies and the lengths to which companies may go to protect their interests and independence in the face of hostile takeover threats.
Gennaro Cuofano is a CRO and tech executive who has worked in AI since late 2015, starting with bringing NLP, natural-language generation, voice and chatbot products to the marketing industry. His background is in law and finance: he holds a Master's degree in Law and an International MBA with an emphasis on corporate finance (LUISS Business School and the University of San Diego, 2012), and worked as a financial analyst at a real-estate investment firm in San Diego and as an assistant controller. His work focuses on business model strategy, business engineering and, more broadly, structural analysis: how companies make money, read from their own filings. He created FourWeekMBA and leads research there and at The Business Engineer, his newsletter on AI and business strategy, with over 95,000 subscribers and more than 1,000 published analyses. His writing has also appeared on Entrepreneur (for example, How to Digitize a Family Business in Europe) and HackerNoon. Find him on LinkedIn and Substack. See how we source.
