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What is the PAC MAN Defense?
PAC MAN Defense is a term used in Merger & Acquisition. PAC MAN defense is a technique or strategy used in Hostile takeover situation in which the target company attempts to take control of the acquirer company before the acquirer company takes control of it.
How PAC MAN Defense Works?
PAC Man Defense is a strategy to prevent Hostile Takeover to save one company to buy out by another company without target company’s will.
- Suppose, there are 2 companies, Company A (Target Company) and Company B (Acquirer Company), where company B wants to take over the Company A, and for this, Company B makes an offer to Company A with the intention of buying Company A at a particular
- This price offered by Company B can be overvalued or undervalued for the Company A.
- Whatever value Company B is suggesting, Company A does not want to sell out its company at this stage. But Company B wants to take over Company A at any cost due to its future value or market.
- So, Company B uses Hostile Takeover strategies to acquire Company A. But Company A uses different strategies to prevent this. Sometimes Company A can make a counteroffer to buy Company B.
How does Pac Man defense strategy got its name?
Have you ever played the famous PAC Man game which is shown in below image?
I am sure everyone has played this.
- In this game, the player has several enemies chasing him to kill. But there are so many power pallets which the player has to eat so that the player may eat all other enemies.
- In the same way, in PAC MAN Defense strategy, the target company makes a counter offer to acquire the acquirer company or sometime may buy shares of acquirer company at a premium price from the open market which gives threat to acquirer company of taking over by the target company.
- In the Hostile takeover situation, the acquirer company may start buying of large no. of shares of the targeted company to gain control of the target company.
- In the same time, to save from Hostile takeover, the targeted company also starts buying back its shares at a premium price from acquirer company and also the shares of acquirer company.
- The target company uses PAC Man Defense strategy to make Hostile Takeover very difficult for the acquiring company. We can say PAC MAN Defense is a Hostile Takeover attempt of a Hostile Takeover attempt.
How to use a PAC MAN Defense Strategy?
Pac Man Defense Strategy is an expensive strategy as it costs a lot more to Target Company.
- As in this strategy, the target company has to buy enough no. of shares of acquiring the company and that also at a premium price. The target company should have enough funds available with it so that it can buy enough number of shares of acquiring the company to make the threat to the acquiring company’s control of its own firm.
- In practical, a big firm wants to buy small firms from the same industry or different related industries to make the monopoly in the industry. So, in that case, big firm make an offer to small firms to buy their companies, sometime it become successful, but sometimes small firm doesn’t want to sell their companies.
- So, if that small firm wants to compete by using PAC MAN defense strategy, they should have enough capital/finance in the bank. Sometimes they may have enough fund to use PAC MAN Defense strategy but some time they have to arrange funds if they really want to use this strategy.
So, at that time, those firms start to arrange funds to use Hostile Takeover against a Hostile takeover attempt.
There are various ways to arrange the funds for using this Strategy, some of them are mentioned below:
#1 – Borrowing Cash
This is the easiest and the best way to arrange funds against Hostile Takeover attempt. The company can lend money from traditional lenders, Banks, issuing new bonds and additional stocks. By issuing more shares, it can help in two ways, 1st they can arrange cash for buying shares of acquiring firm and second, the acquiring firm has to buy more shares of the targeted firm to make it more than 50% shareholding as outstanding shares have been increased.
#2 – Sell Assets and Stocks to Arrange Funds
As we know that, in PAC MAN defense strategy, target company needs huge funds to prevent a hostile takeover, so sometime target company may have to sell its assets if the company doesn’t want to increase more debt burden in its book. The company can sell assets which are not going to be useful in the near The challenge at this stage is to prevent a hostile takeover by acquirer company, so selling its non-useful assets would be a great idea as compared to borrowing cash from the third party.
#3 – Buy-Back of its Outstanding Shares
The targeted company can use this method also against hostile takeover situation. The company may buy its outstanding shares from open market which will make non-availability of shares for acquirer company in the open market. By buyback of shares from the open market, the share price will also increase, so the acquirer company has to pay more amount to buy shares of the targeted company in the open market.
We can summarize the PAC MAN Defense strategy in the following points,
- PAC MAN Defense strategy is used against Hostile Takeover situation by targeted company.
- It is a strategy in which the target company attempts to take control of the acquirer company before the acquirer company takes control of it.
- This strategy is an extremely expensive strategy which might increase debt for targeted company or company has to sell its assets to arrange funds to make this strategy successful.
- It is an extremely aggressive and rarely used defensive strategy.
- Sometimes this strategy is also used in the situation when the board and management are in favor of acquisition by other company but they disagree about which company should they sell to.
This has been a guide to what is Pac Man Defense Strategy in M&A. Here we discuss how Pac Man Defense works and how you can use the Pac Man Defense strategy to prevent a hostile takeover. You may learn more about M&A from the following articles –