The corporate world is a strange place and something keeps happening every now and then. Let it be Microsoft buying the Nokia Cell phone division or Internet companies such as Google and Facebook acquiring any competition whatsoever evident. How can a smaller or equivalent company avoid hostile takeovers tactfully? Generally, there have been very few cases where a company has opposed acquisition, but this is a topic of interest. There are different mechanisms that can help a company avoid a hostile takeover such as Pac-Man Defense.
According to investopedia.com, 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 turns around and tries to acquire the other company that has made the hostile takeover attempt. This term has been accredited to Bruce Wasserstein, chairman of Wasserstein & Co.”
In simpler word, Pac-Man Defense is a business strategy where a firm avoids a hostile takeover by purchasing the acquiring company/competition. This mechanism has been named after the game Pac-Man. According to expert, applying the Pac-Man defense might not yield fruitful results every time, but this mechanism is of practical importance. Some companies often use Pac-Man Defense as a tool for vengeance. Pac-Man Defense is an excellent strategy against hostile mergers and acquisitions.
How is it related to the Pac-Man Game?
For a better understanding of the Pac-Man defense, it is crucial to understand the rules of Pac-Man game. In Pac-Man game, the player has several ghosts chasing it and these ghosts have the capacity to eliminate the player. However, if the player eats a power pellet, he gets the capability to eat away the ghosts by simply turning round. So, the game you enjoyed in your childhood serves an even bigger purpose in the business world.
Real world companies use a similar approach to avoid a hostile takeover. The acquiring phase of a company starts with a large-scale purchasing of the target company stocks by the acquiring company. The motive lies in gaining the control of the target company. As a counter-strategy, the target company might start purchasing not only their shares but also the shares of the attacking company to gain an upper hand.
What is the primary drawback of Pac-Man Defense?
Pac-Man defense has been practiced numerous times in the past few decades. However, this strategy comes with some important drawbacks. First, Pac-Man Defense is an extremely expensive strategy, which might increase debts of the counter-acting company. In some cases, shareholders might have to suffer losses or lower dividends in the upcoming years. The primary reason to apply Pac-Man Defense is to avoid a change of leadership of the target company. Let us find out some of the most famous Pac-Man Defense incidents.
Famous Pac-Man Defense Examples
Bendix Corporation and Martin Marietta
One of the most famous examples of Pac-Man Defense was witnessed in 1982 when Bendix Corporation tried to overtake Martin Marietta by purchasing controlling amount of its stocks. On papers, Bendix Corporation became the owner of the company. However, Martin Marietta’s management replied aggressively by selling off its Chemical, Cement, and aluminium divisions. In addition to it, the company borrowed over $1billion to counter the acquisition. The conflict ended with the acquisition of Bendix Corporation by the Allied Corporation.
However, the Wall Street did not appreciate this strategy because the debt of Martin Marietta rose up to $1.2 billion in the process. But the company did well in the following years and got out of its debt to a point when they owed only $500 million in 1983. It was one of the first and most aggressive acquisition process observed in the corporate world.
Best examples of Pac-Man Defense
- Cities Service vs. Mesa Petroleum (1982)
- American Brand vs. E-II (1987-88)
- Wolverhampton & Dudley vs. Marston Thompson & Evershed (1998)
- Elf Aquitaine vs. TotalFina (1999)
- Chesapeake Corp. vs. Shorewood Packaging Corp. (1999)
- Rio Tinto PLC vs. BHP Billion Ltd. (2007)