DEFINITION of 'Pac-Man'

Pac-Man is a high-risk hostile takeover defense tactic in which the target firm tries to take over the company that has made the hostile bid by purchasing large amounts of the would-be acquirer's stock. The Pac-Man defense is supposed to deter the would-be acquirer, which would not want to be taken over itself. Pac-Man, the video game, originated in Japan in 1980 and provided an apt visual depiction of how a targeted firm could turn the tables on an aggressive and determined gobbler.

BREAKING DOWN 'Pac-Man'

In normal business practices, a company that wants to buy another company will make a friendly approach to the Board of Directors of that target. The target may respectfully decline and the interested party could leave it that. On the other hand, the company could keep trying to convince the target's board to agree to be acquired, usually by upping the offer price. If the target's board still resists the offers, the hopeful acquirer in most cases ends its approaches. However, if it is truly intent on buying the other company, it could go hostile.

To thwart a hostile takeover, a company can execute a few maneuvers such as adopting a poison pill defense, installing a staggered board structure, or seeking a white knight. The Pac-Man defense tactic is considered extreme, as it involves actions that may be fundamentally detrimental to the company. The target may sell off its own assets or borrow heavily to finance purchases of the would-be acquirer's stock to prevent the takeover. If assets sold are core to the company, continuing operations will be damaged; if the company leverages itself too much by taking on added debt to purchase shares of the hostile bidder, it will increase interest expense and leave its balance sheet more vulnerable to an unexpected market shock. Also, there is the issue of management distraction in running a Pac-Man defense.

The Pac-Man defense does not always work, but it was first successfully used in 1982 by Martin Marietta to prevent a takeover by Bendix Corp. In 1988, American Brands used it successfully against E-II, and Totalfina used it in 1999 to prevent a takeover by Elf Aquitaine.

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