A:

To employ the Pac-Man defense, a company will scare off another company that had tried to acquire it by purchasing large amounts of the acquiring company's stock. By doing so, the defending company signals to the acquiring company that it is resistant to a takeover and will use the majority, if not all, of its assets to prevent the acquisition. The resisting company may even sell off non-vital assets to procure enough assets to buy out the acquirer. Often, the acquiring company sees the potential risk of being taken over as motivation to halt pursuit.

The attempted acquisition of Martin Marietta (NYSE:MLM) by Bendix Corporation in 1982 is a popular example of the Pac-Man defense. Martin Marietta's management responded to Bendix Corporation's takeover attempt by selling non-core businesses in order to attempt a takeover of its own - of Bendix Corporation. In the end, Martin Marietta's use of the Pac-Man defense proved successful, as the company survived the acquisition attempt and Bendix Corporation was bought by Allied Corporation.

For more on this topic, read Corporate Takeover Defense: A Shareholder's Perspective.

This question was answered by Bob Schneider.

RELATED FAQS
  1. What is the Pac-Man defense?

    The Pac-Man defense is a strategy in which a company that is facing a hostile takeover from another company essentially turns ... Read Answer >>
  2. How can a company buy back shares to fend off a hostile takeover?

    Learn about why a business might use a stock buyback to thwart a hostile takeover attempt by reducing its total assets and ... Read Answer >>
  3. What's the difference between a merger and a hostile takeover?

    Understand the difference between a merger and a hostile takeover, including the different ways one company can acquire another, ... Read Answer >>
  4. How can a company resist a hostile takeover?

    Learn about some of the defense strategies a public company's board of directors might employ to prevent a hostile bidder ... Read Answer >>
  5. Why is buying a utility stock known as defensive move?

    Utility stocks are known as defensive stocks for investors due to the fact that consumer demand will remain high even when ... Read Answer >>
  6. How effective is a poison pill defense against a hostile takeover?

    Learn about the different types of poison pill strategies that target companies use to prevent hostile takeovers, and understand ... Read Answer >>
Related Articles
  1. Small Business

    What is a Takeover?

    A takeover happens when one company makes a bid to acquire a target company.
  2. Investing

    Pinpoint Takeovers First

    Use these seven steps to discover a takeover before the rest of the market catches on.
  3. Investing

    Trademarks Of A Takeover Target

    These tips can lead you to little companies with big prospects.
  4. Investing

    Mergers And Acquisitions: Understanding Takeovers

    In the dramatic world of M&As, battleground terms meld with bizarre metaphors to form the language of the game.
  5. Investing

    What Happens To The Stock Prices Of Two Companies Involved In An Acquisition?

    When one firm buys another, the effect is predictable. The acquiring company’s stock falls in value, while the target company’s climbs.
  6. Small Business

    What's an Acquisition?

    In corporate terms, an acquisition is the purchase of a company or the division of a company. Some acquisitions are paid in cash, while others are paid with a combination of cash and the acquiring ...
  7. Investing

    Reverse Takeover

    Learn more about this type of takeover and how companies use it to avoid IPOs.
  8. Small Business

    How To Profit From Mergers And Acquisitions Through Arbitrage

    Making a windfall from a stock that attracts a takeover bid is an alluring proposition. But be warned – benefiting from m&a is easier said than done.
  9. Investing

    Guard Your Portfolio With Defensive Stocks

    Find out how these securities can protect you from a market bust.
  10. Insurance

    Key Players In Mergers And Acquisitions

    Strategic acquisition is becoming a part of doing business. Discover the different types of investor groups involved.
RELATED TERMS
  1. Pac-Man

    A high-risk hostile takeover defense in which the target firm ...
  2. Pac-Man Defense

    A defensive tactic used by a targeted firm in a hostile takeover ...
  3. Defensive Acquisition

    The act of firms acquiring other firms and assets as a defense ...
  4. Hostile Takeover

    The acquisition of one company (called the target company) by ...
  5. Busted Takeover

    A highly leveraged corporate buyout that is contingent upon the ...
  6. Acquisition

    A corporate action in which a company buys most, if not all, ...
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  6. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
Trading Center