Pac-Man defense

The Pac-Man defense is a defensive business strategy used 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 name refers to Pac-Man, a video game in which the protagonist 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.^[1] The term (though not the technique) was coined by buyout guru Bruce Wasserstein.

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.^[2]

The next Pac-Man defense occurred in 1988, when American Brands, fighting a hostile takeover attempt by E-II Holdings, announced a cash tender offer for E-II.^[3] In 2007, British mining giant Rio Tinto PLC, fighting off an unsolicited $131.57 billion takeover bid from Australian rival BHP Billiton Limited, considered turning the tables on its rival and launching a counterbid for BHP.^[4] In 2009, Cadbury plc considered trying a Pac-Man defense if no bid emerged to challenge Kraft Foods' hostile offer.^[5]

Internationally, perhaps the best-known case was that of Porsche and the Volkswagen Group, in which Porsche, under the leadership of Wendelin Wiedeking, led a hostile takeover of the much-larger Volkswagen Group by slowly acquiring a large stake in Volkswagen, eventually to the point of owning over 75% of the company in 2008.^[6] By October 2008, Porsche, who was enjoying record profitability, suddenly ran out of money during the financial crisis of 2007–08 and banks were reluctant to lend anymore money to Porsche, in fact, they wanted their loans paid back immediately. Ferdinand Piëch, the chairman of Volkswagen and a board member of Porsche, who was in fact the grandson of Ferdinand Porsche, founder of Porsche and a co-founder of what became Volkswagen, loaned Porsche enough money to cover their debts, and ironically, Volkswagen, whom Porsche tried to acquire, became the white knight and Volkswagen would effectively take over Porsche. The unique situation had much to do with the historical closeness of the Volkswagen Group to Porsche, and the battle between the Porsche and Piëch families (both descended from Ferdinand Porsche) for control of Porsche.^[7] However, later that year when the two companies announced an official merger, it was announced that Volkswagen would be the surviving partner.^[8]

Bibliography

• Big Deal: The Battle for the Control of America's Leading Corporations, Bruce Wasserstein, (1988, ISBN 0-446-67521-0)
• "Pac-Man Defense" http://www.investopedia.com/terms/p/pac-man-defense.asp

References

External links

• Preventive anti-takeover defenses: evidence from the French market for corporate control