Legal Definitions - Pac-Man defense

The Pac-Man defense is an aggressive strategy used by a company that is facing an unwanted takeover attempt. Instead of simply defending itself against the acquisition, the target company turns the tables and attempts to acquire the original bidder company. This is typically achieved by making its own offer to buy a controlling stake in the bidder company's shares, effectively trying to "gobble up" its attacker.

Here are some examples to illustrate the Pac-Man defense:

• Imagine "InnovateTech," a rapidly growing software firm, receives an unsolicited takeover bid from "GlobalCorp," a much larger, diversified technology conglomerate. Instead of negotiating or seeking other defensive measures, InnovateTech's board, believing GlobalCorp is undervalued or possesses strategic assets they desire, announces its own tender offer to acquire a significant portion of GlobalCorp's shares, aiming to gain control of its former suitor.

  This illustrates the Pac-Man defense because InnovateTech, the original target, aggressively counters by attempting to acquire GlobalCorp, the original bidder, thereby turning the tables on the takeover attempt.

• Consider "Precision Parts Inc.," a specialized industrial manufacturer, which finds itself the subject of a hostile takeover bid from "MegaMachinery Corp.," a larger competitor seeking to consolidate the market. Rather than simply resisting, Precision Parts' leadership identifies that MegaMachinery has a substantial debt load and a valuable, but underperforming, robotics division. Precision Parts then launches a public tender offer to acquire MegaMachinery's outstanding shares, aiming to take control of its larger rival and integrate the valuable robotics division into its own operations.

  Here, Precision Parts, initially the company being targeted for acquisition, employs the Pac-Man defense by making a counter-offer to acquire MegaMachinery, the company that first sought to acquire it.

• Suppose "LocalGrocer," a successful regional supermarket chain, receives an unsolicited offer from "NationalFoods," a struggling but larger national chain looking to expand its footprint. LocalGrocer's management, confident in their own financial health and seeing an opportunity to acquire NationalFoods' prime real estate locations and distribution network at a potentially low price, decides to make a counter-tender offer to purchase a controlling stake in NationalFoods.

  This demonstrates the Pac-Man defense as LocalGrocer, the initial target of an acquisition, responds by attempting to acquire NationalFoods, the company that originally sought to buy it.