Updated July 21, 2023
Introduction to Pac Man Defense
Out of the several kinds of defense against an attempt of a hostile takeover, Pac Man Defense is also one, wherein the company being targeted for such a takeover makes its attempt to take over the acquirer, that is, the target becomes the acquirer and the acquirer becomes the target, however, it is not easy in all forms of takeovers because if the target company is smaller than the acquired then the number of resources available to it are limited.
Explanation
The defense gets its name from a popular video game by the name, Pac Man, where ghost figures are chasing the player and after acquiring the required strength, the player turns around and starts chasing the same ghost figures. Therefore the same analogy is drawn in case of the hostile takeovers where the target company puts forward a better offer to buy the prospective acquirer and removes the threat of being taken over by it.
It is more of a possibility in case of a horizontal takeover in which both the companies are of the same stature because otherwise executing this strategy is limited by the resources the target company has or can raise. Smaller companies might find it very difficult to raise enough to acquire a larger company.
There are two kinds of defense mechanisms against an attempt to a hostile takeover, Pre- offer mechanism and Post-offer mechanism. It falls under the Post- offer mechanism as the purpose of this is to stall the hostile takeover and it is the initiator of a series of other defense mechanisms.
How to Execute the Pac Man Defense Strategy?
As alluded to earlier, this defense mechanism requires the target to have sufficient funds to make a counteroffer.
In this process it can take up the following few alternatives:
- Take on debt financing: If the target doesn’t have sufficient funds, it can make use of debt financing, however, it needs to be sure that it is in a position to pay back the debt it so takes, this is an important decision and therefore the target needs to weigh its pros and cons before implementing it.
- Buy back its shares from the market: The target can prevent the acquirer from buying the shares from the market by offering the shareholders a price higher than the market price.
- Sale of key assets: To make the company less lucrative, the target might sell off some of its important assets and force the acquirer to lose interest in the acquisition.
Examples of Pac Man Defense
There have been many cases in the history of the US and the world’s hostile takeover attempts:
- In July 1999, TotalFina tried to take over its rival in the oil industry Elf Aquitaine for $48 billion but in response, Elf Aquitaine offered $50.97 billion to TotalFina. However, later on, Elf Aquitaine agreed to be taken over when TotalFina offered $54 billion
- In 1999, the wall street journal reported, that Shorewood Packaging Corp tried to take over Chesapeake Corp, another player in the packaging industry. It offered the target $700 million and in its defense, Chesapeake Corp made an offer of $480 million to Shorewood. This was not the first attempt by Shorewood, there had been several rounds of offers before this in the months before this offer.
- In late 2013, Jos A Bank attempted to take over Men’s Wearhouse in a hostile manner, the latter in turn made a counteroffer to take over Jos A Bank following the Pac Man defense mechanism. These two entities were competitors and therefore such a defense was possible.
Here we see that it was used differently by different players when the opportunity came their way.
Uses of Pac Man Defense
- Prevent takeover: One of the most straightforward uses is to prevent hostile takeovers. However, this is not one of the most common uses of the same because this is not a strong enough measure. The hostile acquirer might keep up bidding for the target to finally give in.
- Raise the price offered: As in the case of TotalFina and Elf Aquitaine, Elf used the defense to increase the bid amount by almost $5 billion. This is a popular use of Pac Man defense because after the bid reaches the desired level the takeover mostly becomes a friendly takeover instead of a hostile one.
- Stall takeover: Pac Man defense is one of the first steps taken by the target so that it gains time to take up other defenses such as selling off important assets to make the company less attractive to the acquirer, or trying to buy back its share and prevent the acquirer from acquiring these from the market and so on. When clubbed with other defenses, it is very powerful.
Drawbacks of Pac Man Defense
Below are the drawbacks mentioned:
- Expensive: Pac Man defense is not an affordable defense mechanism as it is possible mostly for companies of equal size in terms of assets and resources. If a large company offers to acquire a small company then the latter doesn’t have the resources to make this defense, neither can it acquire that kind of capital as required to offer the potential acquirer for a takeover instead.
- Unsustainable: It can leave the company in an unsustainable position because it might have sold off its key assets or might have taken up more debt than it can bear to pay off. So this approach is very aggressive and may not always have a fruitful outcome. Therefore its implementation needs to be well thought out or it might backfire.
Conclusion
So we know that Pac Man Defense is a post-offer hostile takeover defense mechanism that is mostly used by target companies to put forward a counteroffer to the potential acquirer. This is mostly used in conjunction with other defense mechanisms and is not sufficient to prevent the takeover attempt individually.
It is an expensive technique and is therefore not affordable by companies of all stature in terms of the resource base. Therefore not all companies can implement it. However, when combined with a series of other defenses, it is a powerful and popular tool.
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