CFA, Finance

What is Pac Man Defense?

Pac Man Defense:

Pac Man Defense is a strategy employed by Target Company in light of facing hostile takeover situation. Target Company which faces the threat of being acquired in unfriendly manner tries to acquire the acquirer company back by making counter offer & forestall its own company being acquired. This tactic is traced back to early 1980s when Bendix Corporation (American Manufacturing & Engineering Company) tried to takeover Martin Marietta (leading supplier of construction aggregates & heavy building materials). Martin Marietta made counter offer to acquire controlling interest in Bendix Corporation to put off hostile takeover.

As shown in above image, Pac Man was very popular game where the consumption of power pallets would help the player gain strength and eat away the ghost else it would be eaten. In a similar fashion, Pac Man Defense helps the target company attempt taking controlling interest in Acquirer Company to avoid ill-natured acquisition by Acquirer Company.

How does Pac Man Defense Strategy Work?

  • Let’s take examples of Company C & Company D. Company C tries to takeover Company D in hostile fashion by proposal to acquire majority stake. Company D believes the proposal to be undervaluing its growth perception and future business trajectory.
  • Company D denies the proposal but Company C attempts to acquire majority stake and having major board representation for change in management control.
  • Company D makes another counter offer to acquire Company C by offering deal in all cash or all stock or cash & stock deal. Company D can also employ option of buying shares of Company C from financial markets to avert own acquisition. Company D can also strategically start buying its own shares thereby reducing outstanding shares & preventing Company C from acquiring majority stake.

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Funding Pac Man Defense:

  • Evaluating sell off of Target Company’s Assets:

Target Company has to provide significant financing in order to acquire Acquirer Company hence Target Company has the option to sell off its own assets which do not yield fruitful economic results. By way of selling off assets & raising cash, Target Company can avoid raising debt capital which has potential to weigh on stock price if it is unsustainable.

  • Borrowing Capital:

If the Target Company has fundamentally sound balance sheet and surplus reserves, the company can fund acquisition by way of raising debt capital. Debt capital helps in ensuring unwarranted dilution in equity. Target Company can also issue fresh equity in order to secure financing from investors.

  • Selling Non-Substantive sections of business:

Target Company can choose to sell non-essential business units or in other words, sections of business that are not key drivers of major revenues. Such selling can be initiated for raising cash & focus on near-term priority.

  • War-Chest Financing:

Company keeps contingency reserves & funds that can be employed strategically for exploiting specific business opportunities or utilise funds for emergency purposes. Target Company can resort to deploy funds from war chest & raise immediate funding for specific purposes.

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Advantages of Pac Man Defense:

  • It’s very helpful to target company in making counter offer and postpone ill-natured acquisition.
  • Pac Man Defense also signals management of both companies consider the deal sensible.

Disadvantages of Pac Man Defense:

  • It can aggravate business practices viability if the debt burden becomes unsustainable or incurs heavy opportunity cost of losing regarding pursuing other strategic initiatives.
  • Selling of assets and non-substantive business sections may lead to shareholder value erosion over time in case the acquisitions don’t yield fruitful economic outcome.

Threat Perceptions /Repercussions of Pac Man Defense:

  • Pac Man Defense with significant debt burden can act as deterrent in pursuing shareholder friendly initiatives like stock repurchases.
  • Any pursuance of Pac Man Defense runs the risks of material changes in value propositions or consumer perceptions leading to bleak economic outlook of company.


It can be very helpful strategy in avoiding unfriendly business activities if they are employed with cost considerations & potential economic outlooks over a longer horizon.

About the Author:

Ashutosh Buch is CFP (FPSB India) & has passed Level-I of CFA Program.  His primary interest lies in analyzing investments in primary & secondary markets. At present, he focuses on learning nuances of financial markets & management consulting. He remains committed to his goal of helping businesses scale up & making them ESG-friendly.

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