The Pac-Man defense is a defensive option to stave off a hostile takeover in which a company that is threatened with a hostile takeover "turns the tables" by attempting to acquire its would-be buyer.
A major example in U.S. corporate history is the attempted hostile takeover of Martin Marietta by Bendix Corporation in 1982. In response, Martin Marietta started buying Bendix stock with the aim of assuming control over the company. Bendix persuaded Allied Corporation to act as a "white knight," and the company was sold to Allied the same year. The incident was labeled a "Pac-Man defense" in retrospect.
In 1984, Securities Exchange Commission commissioners said that the Pac-Man defense was cause for “serious concern,” but balked at endorsing any federal prohibition against the tactic. The commissioners acknowledged a Pac-Man defense can benefit shareholders under certain circumstances, but emphasized that management, in resorting to this tactic, must bear the burden of proving it isn’t acting solely out of its desire to stay in office. One concern is that the money spent to gain control of the intruding company, which includes payment for the services of lawyers and other professionals needed to mount that defense, represents substantial funds that could have otherwise been used to improve the company’s business or increase its profits.[1]
The next Pac-Man defense occurred in 1988, when American Brands Inc., fighting a hostile takeover attempt by E-II Holdings Inc., announced a cash tender offer for E-II.[2] In 2007, British mining giant Rio Tinto PLC, fighting off an unsolicited $131.57 billion takeover bid from Australian rival BHP Billiton PLC, considered turning the tables on its rival and launching a counterbid for BHP.[3] In 2009, Cadbury plc considered trying a Pac-Man defense if no bid emerged to challenge Kraft Foods' hostile offer.[4]
The name refers to the star of a video game Pac-Man, in which the hero is at first chased around a maze of dots by 4 ghosts. However, after eating a "Power Pellet" dot, he is able to chase and devour the ghosts.[5] The term (though not the technique) was coined by buyout guru Bruce Wasserstein.
Internationally, perhaps the best-known case was that of Porsche and the Volkswagen Group, in which Porsche slowly acquired stake in the much larger Volkswagen Group, eventually to the point of owning over 50% of the company in 2009. However, later that year when the two companies announced an official merger, it was announced that Volkswagen would be the surviving partner.