What Is the Pac-Man Defense?

The Pac-Man defense is a defensive tactic used by a targeted firm in a hostile takeover situation. In a Pac-Man defense, the target firm then tries to acquire the company that has made a hostile takeover attempt. In an attempt to scare off the would-be acquirers, the takeover target may use any method to acquire the other company, including dipping into its war chest for cash to buy a majority stake in the other company.

Key Takeaways With the Pac-Man defense, a company that has been targeted in a hostile takeover scenario fights back by seeking to gain financial control of the situation.

The targeted company may choose to sell off certain key assets, so as to wrest them free of the potential acquisition company.

The targeted company may also choose to buy back some of its own shares from the hostile company, or try to buy some of that company's shares.

The company in danger of being taken over might fund these actions by getting outside financing, or by using its own war chest of available funds.

Understanding the Pac-Man Defense

In the actual Pac-Man video game, the player has several ghosts chasing and trying to eliminate it. If the player eats a power pellet, he may turn around and eat the ghosts.

Companies may use a similar approach as a means of avoiding a hostile takeover by turning the tables on the acquirer and mounting a bid to take over the raider. During the acquiring phase, the takeover company may begin a large-scale purchase of the target company’s stocks to gain control of the target company. As a counter-strategy, the target company may begin buying back its shares and purchasing shares of the acquiring company.

It helps substantially if the targeted company has a war chest so that it has the means to mount a Pac-Man defense. A company’s war chest is the buffer of cash kept aside for uncertain adverse events, such as taking over a company. A war chest is typically invested in liquid assets such as Treasury bills and bank deposits that are available on demand.

A smaller or equivalent company may avoid a hostile takeover by using the Pac-Man defense.

Special Considerations

For some companies, the Pac-Man defense is one of the few options available when faced with a hostile takeover attempt. Without getting aggressive and fighting back, the company may have no chance of surviving. However, on the downside, the Pac-Man defense can be an expensive strategy that may increase debts for the target company. Shareholders may suffer losses or lower dividends in future years.

Examples of the Pac-Man Defense

In 1982, Bendix Corp. attempted to acquire Martin Marietta by purchasing a controlling amount of its stocks. Bendix became the owner of the company on paper. However, Martin Marietta’s management retaliated by selling off its chemical, cement and aluminum divisions, and borrowing over $1 billion to counter the acquisition. The conflict resulted in Allied Corp. acquiring Bendix.

In February 1988, after a month-long takeover fight that began when E-II Holdings Inc. made an offer for American Brands Inc., American Brands bought E-II for $2.7 billion. American Brands financed the merger through existing lines of credit and a private placement of commercial paper.

Finally, in October 2013, Jos. A. Bank launched a bid to take over competitor Men’s Wearhouse. Men’s Wearhouse rejected the bid and countered with its own offers. During negotiations, Jos. A. Bank bought Eddie Bauer to gain more control in the marketplace. Men’s Wearhouse ended up buying Jos. A. Bank for $1.8 billion.