Pac-Man

What Is Pac-Man?

Pac-Man is a high-risk hostile takeover defense strategy that includes the target company endeavoring to obtain control of the company that bid for it overwhelmingly of its stock. This retaliatory measure is intended to deflect the prospective buyer.

Pac-Man defenses are named after the well known video game beginning out of Japan in 1980. In the game, the player has several phantoms chasing and attempting to kill it. The objective, other than eating every one of the small white circles in the labyrinth, is to strike back and eat up these equivalent aggressive and determined predators, an accomplishment made conceivable solely after consuming glimmering dabs called power pellets.

Understanding Pac-Man

In normal business rehearses, a company that needs to buy another company will make a friendly approach to the board of directors (B of D) of that target company. Subsequent to gauging its options, the target may consciously decline, leading the interested party to walk away.

However, at times, the prospective buyer could choose not to surrender. All things being equal, it could opt to hunker down and go straightforwardly to the company's shareholders to find sufficient support to supplant management and possibly get the acquisition approved.

Should takeover advances turn hostile, the target company's board has several tools at its disposal to cause some serious problems for the prospective buyer. They incorporate adopting a poison pill defense, introducing a stunned board structure, seeking a white knight, or taking the Pac-Man route.

The last option includes reversing the situation on the acquirer by postponing a bid for it. As opposed to surrender, the target company turns aggressive, buying back its shares and purchasing shares of the obtaining company in the hope that such action will scare off the undesirable predator.

Analysis of Pac-Man

Pac-Man is one of the most dangerous anti-takeover measures and is typically just thought to be as a last resort. The money required to send off such a defense can be significant, stripping away resources that could be utilized to harden the company's position and leading shareholders to endure losses and lower dividends into the indefinite future.

In the event that the target doesn't have a critical war chest to seek after this path, it very well may be forced to sell off its own assets for raise the essential funds. On the off chance that the assets offloaded are core to the company, it's reasonable to expect that continuing operations will be harmed.

War chests are planned to be utilized for acquisitions yet can be executed for defensive strategies. They are typically comprised of liquid assets that can be gotten to rapidly, for example, short-term investments, bank deposits, cash, and Treasury bills.

On the other hand, the target might opt to raise capital for its defense by assuming debt. Adding leverage means increased interest expense and possibly overextending the company's balance sheet, leaving it more helpless against a surprising market shock.

One more major trap of a Pac-Man defense is time. Orchestrating these measures takes management's consideration away from the everyday running of the business, possibly bringing about other important issues becoming neglected.

Real World Examples

The risks associated with Pac-Man defenses put many companies off investigating this path. All things considered, those daring and frantic enough to seek after such radical action can cheer up from a small bunch of situations where such an approach paid off.

The Pac-Man defense was first effectively employed in 1982. Having accumulated a controlling amount of Martin Marietta's stock, Bendix Corp. was ready to assume control over the company it had targeted.

Martin Marietta had different thoughts, however, fighting back by selling off its compound, concrete, and aluminum divisions, and borrowing more than $1 billion to counter the acquisition. Marietta purchased a lot of Bendix stock, however the two companies were financially harmed through this interaction.

However Marietta was planning to carry out a Pac-Man defense, eventually, Allied Corp. acquired Bendix, which is viewed as a white knight defensive strategy.

In 1988, American Brands sent off a fruitful Pac-Man defense, buying the company, E-II Holdings Inc., that was endeavoring to procure it for $2.7 billion. American Brands financed the merger through existing lines of credit (LOC) and a private placement of commercial paper.

Yet another model is of vehicle company Porsche endeavoring to buy Volkswagen. Beginning in 2005, Porsche endeavored to purchase Volkswagen by buying a lot of its stock. At the point when Porsche experienced financial difficulty during the 2008 financial crisis, Volkswagen executed a Pac-Man defense and bought shares of Porsche that had dropped in price, in the long run outright buying Porsche in 2012.

Features

• Pac-Man is a hostile takeover defense strategy that includes the target company endeavoring to obtain control of the company that bid for it.
• Carrying out a Pac-Man strategy costs truckload of cash and can bring about a company assuming too much debt and being forced to sell off assets.
• Pac-Man defenses are generally just thought to be as a last resort as they risk financially devastating a company for quite a long time into the future.
• This retaliatory measure is intended to hinder the prospective buyer and either ward them off or debilitate their position.