Pac-Man Defense

What it is

The Pac-Man defense is a takeover-defense tactic used by a target company when faced with a hostile acquisition attempt. Instead of surrendering, the target turns the tables by attempting to acquire the hostile bidder. The goal is to deter or disrupt the acquirer’s plans by creating a counter-threat that makes the original takeover costly or unworkable.

How it works

• The target company launches a bid to buy shares of the hostile bidder, or buys back its own shares that the bidder has acquired.
• To fund these actions the target may:
• Use cash reserves or a “war chest” (liquid assets such as Treasury bills or bank deposits).
• Sell noncore assets.
• Raise debt or obtain outside financing.
• The counterbid can force a bidding war, change negotiating leverage, or create regulatory and financial complications that discourage the original acquirer.

When it’s used

• Typically employed in hostile takeover scenarios where the target has few other attractive defense options.
• More feasible for targets that are financially strong enough to fund a counterbid or can quickly raise capital.
• Often considered a last-resort, high-risk strategy when simply negotiating or adopting poison pills is insufficient.

Advantages and disadvantages

Advantages
– Can immediately shift momentum and put the acquirer on the defensive.
– May stop a takeover without having to sell the company.
– Signals to shareholders and markets that management will aggressively defend independence.

Disadvantages
– Very expensive: can significantly increase the target’s debt or deplete cash reserves.
– May require selling valuable assets or cutting dividends, harming long-term shareholder value.
– Escalates conflict and can lead to prolonged, complex litigation or regulatory scrutiny.
– Success is not guaranteed; a counterbid can still fail or be outmaneuvered.

Notable examples

• 1982 — Bendix Corporation vs. Martin Marietta: Bendix attempted to acquire Martin Marietta. Martin Marietta’s management responded by selling divisions and borrowing heavily (over $1 billion) to counter the takeover. The battle ultimately led to Allied Corporation acquiring Bendix.
• 1988 — American Brands vs. E-II Holdings: After E-II made a takeover bid, American Brands countered and ultimately acquired E-II for $2.7 billion, financing the deal through existing credit lines and a private placement of commercial paper.
• 2013–2014 — Men’s Wearhouse vs. Jos. A. Bank: Jos. A. Bank launched a bid for Men’s Wearhouse; Men’s Wearhouse countered and both parties made strategic moves (including Jos. A. Bank’s purchase of Eddie Bauer). Men’s Wearhouse eventually acquired Jos. A. Bank for about $1.8 billion.

Key takeaways

• The Pac-Man defense turns a hostile takeover into a counter-takeover attempt by the target company.
• It can be effective at deterring an acquirer but is costly and risky, often involving significant borrowing or asset sales.
• Management must weigh immediate defensive benefits against potential long-term damage to shareholder value.