PAC MAN Defense

Updated on March 22, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is the PAC MAN Defense?

Pac-man Defense strategy is adopted by the targeted companies to safe themselves from the hostile takeovers where the targeted companies try to purchase the shares of the acquiring company by using its liquid assets, which makes the acquirer company see the risk of being taken over by the targeted company, and hence the former cease the plan to take over the latter.

Key Takeaways

  • The Pac-Man Defense strategy saves targeted companies from hostile takeovers.
  • In this strategy, the target company buys sufficient shares to acquire the company at a premium price, so purchasing enough shares to develop the company’s shares may threaten the acquiring company’s control.
  • It is a costly strategy as it costs heavily to the target company. Borrowing cash, selling assets to arrange funds and buyback of the outstanding shares are the different approaches to setting the funds for utilizing the strategy.

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PAC MAN Defense Explained in Video

 

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How does PAC MAN Defense Works?

PAC Man Defense is a strategy to prevent Hostile Takeover from saving one company to buy out another company without the target company’s will.

For example,

  1. Suppose there are two companies, Company A (Target Company) and Company B (Acquirer Company), where company B wants to take over Company A, and for this, Company B makes an offer to Company A to buy Company A at a particular.
  2. This price offered by Company B can be overvalued or undervalued for Company A.
  3. Whatever value Company B suggests, 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 Future ValueThe Future Value (FV) formula is a financial terminology used to calculate cash flow value at a futuristic date compared to the original receipt. The objective of the FV equation is to determine the future value of a prospective investment and whether the returns yield sufficient returns to factor in the time value of money.read more or market.
  4. 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 the Pac-Man defense strategy get its name?

Have you ever played the famous PAC Man game shown in the below image?

PAC MAN Defense - Image

source: freepacman.org

I am sure everyone has played this.

How to use a PAC MAN Defense Strategy?

It is an expensive strategy as it costs a lot more to Target Company.

  • As in this strategy, the target company has to buy enough shares to acquire the company, and that also at a premium price. The target company should have enough funds available with it to buy enough shares of acquiring the company to make a threat to the acquiring company’s control of its firm.
  • In practice, a big firm wants to buy small firms from the same industry or related industries to make a monopoly. So, in that case, the big firm makes an offer to small firms to buy their companies, sometimes it becomes successful, but sometimes small firms don’t want to sell their companies.
  • If that small firm wants to compete by using the PAC MAN defense strategy, it should have enough capital/finance in the bank. Sometimes they may have enough funds to use this strategy, but sometimes they have to arrange funds if they want to use it.

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

It is the easiest and the best way to arrange funds against the 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 the 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 sharesOutstanding SharesOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more have been increased.

#2 – Sell Assets and Stocks to Arrange Funds

As we know, in the PAC MAN defense strategy, the target company needs enormous funds to prevent a hostile takeover, so sometimes the 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 that will not be useful shortly. The challenge is to prevent a hostile takeover by the acquirer company, so selling its non-useful assets would be a great idea compared to borrowing cash from a third party.

#3 – Buyback of its Outstanding Shares

The targeted company can use this method also against a hostile takeover situation. The company may buy its outstanding shares from the open market, which will make the non-availability of shares for the acquirer company in the open market. By buyback of shares Of SharesShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.read more from the open market, the share price will also increase, so the acquirer company has to pay more to buy shares of the targeted company in the open market.

Conclusion

  1. PAC MAN’s Defense strategy is used against the Hostile Takeover situation by the targeted company.
  2. 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.
  3. This strategy is an extremely expensive strategy that might increase debt for the targeted company. The company has to sell its assets to arrange funds to succeed in this strategy.
  4. It is extremely aggressive and rarely uses a defensive strategy.
  5. Sometimes this strategy is also used in situations when the board and management are in favor of acquisitionAcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more by other companies. Still, they disagree about which company they should sell to.

Frequently Asked Questions (FAQs)

Has the Pac- man Defense been successful?

This defense strategy has been successful in some cases. However, it is considered risky since acquiring the hostile bidder’s company is expensive. Therefore, the process is not guaranteed to successfully ward off the takeover attempt.

What is the crown jewel Pac-Man Defense strategy?

The crown jewel Pac-Man Defense strategy refers to an anti-takeover approach used in mergers and acquisitions by the target company through selling expensive assets to lessen the hostile takeover attempts.

What are the alternatives to the Pac-Man Defense?

Several alternatives to this strategy include the poison pill defense, the golden parachute defense, and the white knight defense. Each of these strategies involves different tactics to control the hostile takeover attempt

This article has been a guide to Pac Man Defense Strategy in M&A. Here, we discuss how Pac Man Defense works and how you can use this strategy to prevent a hostile takeover. You may learn more about M&A from the following articles –

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