The Pac-Man defence is a strategic move used by a target company in a hostile takeover attempt, where the target company attempts to turn the tables and take over the company that is attempting the acquisition. The name is derived from the classic Pac-Man video game, where the main character “Pac-Man” eats up the dots, effectively “turning the tables” on the adversary. In the context of mergers and acquisitions (M&A), the Pac-Man defence is a defensive tactic used by a company to fend off hostile bids by buying out the acquiring company.

Understanding the Pac-Man Defence

When a company is subject to a hostile takeover, it may use the Pac-Man defence to resist the acquisition by acquiring the bidder instead. This tactic flips the situation, where the target company attempts to acquire the aggressor company, often making the hostile takeover too expensive or undesirable for the acquirer. It can result in the acquirer backing down or negotiating a more favorable deal for the target company.

Key Features of the Pac-Man Defence

1. Hostile Takeover Reversal: The target company turns the tables by attempting to acquire the company that initiated the hostile bid.
2. Strategic Counterattack: This defence requires the target company to have significant financial resources, or access to capital, to buy shares in the acquiring company.
3. Increased Costs for the Acquirer: By launching a counter-offer to acquire the bidding company, the Pac-Man defence can increase the financial burden on the acquirer, potentially making the takeover too costly or unappealing.
4. Shareholder Support: For the Pac-Man defence to be successful, the target company must gain the support of its shareholders, convincing them that this strategy is in the best interest of the company.
5. Complex Negotiations: The Pac-Man defence can lead to complicated negotiations and may result in a prolonged takeover battle, which can disrupt the operations of both companies.

How the Pac-Man Defence Works

1. Hostile Bid: The acquirer makes a bid to purchase the target company, often at a premium to the market value, but without the target’s consent.
2. Implementation of the Defence: In response, the target company, if financially capable, starts buying shares in the acquiring company or initiates its own acquisition attempt.
3. Increased Offer: The target company might offer a premium price for shares of the acquirer to make the deal more attractive to shareholders of the acquiring company, increasing the financial burden on the acquirer.
4. Negotiation or Abandonment: The acquirer, faced with the possibility of losing control or having to pay a higher price, may abandon the takeover attempt or enter into negotiations to settle the situation.

The Pac-Man defence typically works best when the target company has enough capital or access to financing to mount a successful counterattack, and when the acquiring company is not in a strong position to resist such an aggressive move.

Common Challenges Related to the Pac-Man Defence

• Financial Feasibility: The target company must have significant financial resources or access to financing to acquire shares in the bidder, which may not always be the case.
• Prolonged Conflict: The strategy can lead to a lengthy battle, consuming resources and potentially harming both companies involved.
• Shareholder Resistance: Shareholders of the target company may not always agree with the strategy, especially if it leads to dilution of their ownership or a longer, more uncertain process.
• Potential Damage to the Companies: Hostile takeovers and aggressive defensive strategies can damage the reputation and operations of both companies, leading to loss of value or market instability.

Step-by-Step Solutions for Implementing the Pac-Man Defence

1. Evaluate Financial Resources
   • The target company must assess its financial capacity to buy shares in the acquirer. This may involve securing additional financing or structuring a deal that makes the acquisition of the acquirer feasible.
2. Secure Shareholder Support
   • Gaining the support of shareholders is crucial. The target company must demonstrate that the Pac-Man defence will provide greater value for them, either through potential gains from the acquisition or through improved terms.
3. Launch a Counteroffer
   • If the financial resources are available, the target company should make a public offer to acquire the acquirer, typically offering a premium above the current market price.
4. Engage in Negotiations
   • If the strategy proves successful and the acquirer is not willing to continue the hostile takeover, the target company can enter into negotiations to either settle the takeover or create a new mutually beneficial arrangement.
5. Monitor Market and Regulatory Reactions
   • The target company should continuously monitor market and regulatory reactions. Regulatory approval may be required for both acquisitions, and changes in market conditions could affect the feasibility of the defence.

Practical and Actionable Advice

• Use the Pac-Man Defence as a Last Resort: The Pac-Man defence can be a costly and disruptive strategy. It is often better used as a last resort when other defensive measures, such as poison pills or white knight acquisitions, have failed.
• Strengthen Financial Position: Companies should maintain a strong balance sheet and capital reserves to make the Pac-Man defence feasible, should the need arise.
• Communicate with Shareholders: Transparent communication with shareholders is essential to ensure they understand the strategy and its potential benefits.
• Prepare for Extended Conflict: Be prepared for a prolonged battle, which can tie up resources and distract from normal business operations.

FAQs

What is the Pac-Man defence?

The Pac-Man defence is a strategy where a target company in a hostile takeover attempts to acquire the acquirer, effectively turning the tables on the aggressor.

When is the Pac-Man defence used?

It is used when a company is facing a hostile takeover and seeks to fight back by acquiring the company that initiated the hostile bid.

How does the Pac-Man defence work?

The target company buys shares in the acquirer, making the takeover attempt more expensive or unappealing, often leading to a reversal of the hostile takeover.

What are the risks of the Pac-Man defence?

The risks include high financial costs, shareholder resistance, and the possibility of prolonged conflict that can harm both companies involved.

Is the Pac-Man defence always successful?

No, the Pac-Man defence can fail if the target company cannot secure enough capital or shareholder support. Additionally, the acquiring company may find other ways to counter the strategy.

What other defences can be used against hostile takeovers?

Other defences include poison pills, white knight acquisitions, staggered boards, and golden parachutes.

Can the Pac-Man defence result in a merger?

Yes, in some cases, the two companies may negotiate and reach a settlement that leads to a merger of equals rather than a continued hostile takeover.

Does the Pac-Man defence impact the stock price?

Yes, the stock prices of both the target and acquirer can be highly affected by the announcement of the Pac-Man defence, as it leads to increased uncertainty and volatility.