Pac-Man Defense is a business strategy adopted by a publicly listed firm to ward off a hostile takeover situation. In this defense tactic the targeted firm counter attacks and tries to acquire the other company which initially made an offer to take over the targeted company.
Here, the invading company facing counter attack may have to end its takeover efforts and buyback shares at a higher price from its shareholder base who might be trying to sell the shares. This can be financially as well as magisterially distressing for the company as it deviates them from their objectives.
This term was coined by Bruce Wasserstein. It was derived from the legendary Pac-Man video game where the Pac-Man is being chased by the ghosts. The Pac-Man is able to turn the tables by eating the power pellet and instead of being chased, it starts chasing the ghosts. Here, the ghosts can be the invading company i.e. the company trying to purchase the targeted company and the Pac-Man can be the targeted company which in turn tries to start eating the ghosts i.e. the intruding company.
This term originated in the year 1982 during the takeover battle between tow aerospace rivals, when Martin Marietta Corporation started bidding for Bendix Corporation, the very company that was trying to take it over. The deal got over with Bendix being sold to Allied Corporation and Martin Marietta ended up with quite a large debt and with major chunk of its stock with Allied Corporation.
Pac-Man shouldn’t always be the strategy of defense because there is a lot of money involved to acquire the intruding company. The funds used for payment for services of professionals to resist the takeover as well as money paid for the legal proceeding including lawyers’ payments, documentation etc. can otherwise be utilized to improve the fundamentals of the company thereby increasing shareholders’ returns.