Pac-Man Defense

The target company "turning the tables" in a hostile takeover situation

What is the Pac-Man Defense?

The Pac-Man Defense is a strategy used by targeted companies to prevent a hostile takeover. In the strategy, the target company will turn around and try to take over the acquirer. The purpose of the Pac-Man Defense is to make a takeover very difficult for the acquiring company in an M&A Process.


Pac Man Defense theme


Example of the Pac-Man Defense

Consider the following example:

  1. Company A is attempting a hostile takeover of Company B by purchasing shares of Company B for a controlling interest.
  2. Company B realizes this and employs a Pac-Man Defense.
  3. Company B uses its assets or even sells off its non-core business units to purchase shares of Company A.
  4. Company A sees the potential risk of being taken over by Company B and thus stops their hostile takeover attempt.


Notice that in the example above, Company A is attempting a hostile takeover of Company B. Realizing this, Company B attempts its own hostile takeover of Company A.


Pac-Man Defense Diagram


Strategy in the Pac-Man Game

Recall from the Pac-Man game that the player must avoid ghosts that are trying to chase and eliminate the player. In the game, if the player eats a power pellet, he or she is able to turn around and eliminate the ghosts.

Hence, in a Pac-Man Defense strategy, the company that is being taken over by another company purchases shares in the acquiring company. The strategy was dubbed the “Pac-Man Defense” as the companies involved were, similar to the game, “gobbling” each other up.


How to Employ a Pac-Man Defense Strategy

For a company to use a Pac-Man Defense, the target must possess substantial resources, since it is attempting a hostile takeover of its own. The resources needed for the strategy are usually made available through:

  1. Selling its own assets: The company can use its assets or sell off non-vital assets to generate enough resources.
  2. Selling non-core business units:  The company can sell off non-core business units to generate enough resources.
  3. Borrowing cash: The company can borrow cash from lenders to generate enough resources.
  4. War chest: A war chest is a storage of cash kept by a company in the event of adverse events. A ‘war chest’ include liquid assets such as Treasury bills and bank deposits and can be liquidated to generate resources.


The Main Drawback of the Strategy

As can be seen above, the Pac-Man Defense is a very aggressive and extremely expensive strategy, as it usually involves selling off assets, non-core business units, or increasing the company’s debt to pull off. Often, shareholders suffer losses in the following years of a Pac-Man Defense.


Real-life Example of a Pac-Man Defense

One famous example of a company using the Pac-Man Defense happened in 1982 when Bendix Corporation tried to take over aggregates and heavy building materials firm Martin Marietta by purchasing a controlling interest via several stock purchases.

Martin Marietta’s management retaliated by selling off its Chemical, Cement, and Aluminum divisions and borrowed over $1 billion to counter the takeover attempt. Bendix Corporation owned over 70% of Marietta’s stock while Marietta tendered to it over 50% of Bendix’s stock. This fight damaged both companies as they used up their cash to buy each other. In the end, Allied Corporation acted as a white knight and acquired Bendix Corporation.


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