In a hostile takeover situation, the Pac-man defense is a defensive strategy against the hostile takeover where the target company acquires the bidding company itself which had been initiated the takeover bid before. When the bidding company makes a hostile takeover bid, the management of the target company normally does not accept it and utilize all its efforts to create resistance.
An Example of Pac-Man Defense
Suppose, XYZ is a public limited company, which has been received a takeover bid from ABC. The management of the target company is uncertain about its future and not ready for being acquired. In order to avoid the takeover, the target company utilizes Pac-Man defense strategy by acquiring the bidding company ABC.
The cash for acquisition is arranged through “war chest”, which is the buffer of cash kept aside for future uncertain events like the case discussed above.
The named after the popular video game Pac-Man in 1980s, in which Pac-Man after taking power pellet, eat the ghosts that were chasing him before.
Why it matters
The Pac-Man defense strategy enables management to create a shield against takeover however for making an acquisition, the acquirer may increase its debt resulting in losses or decreased dividend for shareholders.