The Pac-man defense is a hostile takeover defense tactic where the target company launches a takeover bid for the acquirer in an act of corporate self preservation. The name is a reference to the Pac-Man video game in which the title character, having first been chased around a maze, is subsequently able to chase and consume the attackers. It is not necessary however for the target to actually consummate the takeover of the original potential acquirer, unless of course it makes business sense to do so. The original objective of the target is just to resist the takeover, and by buying the acquirer stock, thus owning part of the company, it may well be able to do so.
The term Pac-man defense was allegedly coined by “bid ’em up” Bruce Wasserstein. For more information on hostile takeovers, see our article Hostile Takeovers and Merger Arbitrage – What All Traders Should Know.
Pac-Man Defense Example
Once the hostile takeover has been announced, the acquiring company may begin accumulating a position in the target company’s stock in order to gain a toe hold and subsequent ultimate control. In response to this, the target company may begin buying shares in the acquiring company. These purchases may be funded out of existing cash reserves or the target can sell non-core assets in order to raise funds. Alternatively, the target can increasing its borrowings and take on more leverage.
NOTE: This act of increasing leverage and / or the possible sale of assets, by the target company in itself may add to its undesirability as a potential takeover target.
By funding the purchases in this manner, a smaller target may be able to stave of an unwanted advance from a larger predator. A Pac-man defense is a difficult situation for arbitrageurs. The stock price of the original target will decline on the announcement whilst the acquirer will rise. If the original payment was to be made in stock and a position was initiated, losses could be significant.
