pac-man-defense

What Is The Pac-Man Defense? The Pac-Man Defense In A Nutshell

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.

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 company’s 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:

  1. 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.
  2. Capital raises – the target can also borrow cash from a lender or undertake a capital raise funded by retail or institutional investors. If the latter is done via a share issuance, it has the advantage of increasing the number of outstanding shares an acquiring company would need to purchase to take a controlling interest.
  3. 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 2012, Volkswagen acquired 100% of Porsche to end what had become a seven-year saga between the two companies.

Bendix Corporation and Martin Marietta

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.

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 Porsche’s 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.

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