Pac-Man Defense
Quick Facts
- Named after: The 1980s video game where Pac-Man eats the ghosts chasing him
- First used: Martin Marietta vs. Bendix Corporation (1982)
- Mechanism: Target launches counter-bid to acquire the hostile acquirer
- Risk: Extremely expensive; can destroy both companies
The Pac-Man defense is an aggressive takeover defense where the target company turns the tables by launching its own hostile bid to acquire the company trying to acquire it. Like the video game character who eats the ghosts chasing him, the target "eats" the acquirer instead of being eaten.
In Plain English
Someone's trying to buy your company. Instead of running away or putting up defenses, you start buying their company. Now you're both trying to acquire each other simultaneously. It's corporate mutually assured destruction—and it usually ends with both sides bleeding cash until someone blinks or a third party intervenes.
How It Works
- Company A launches hostile bid for Company B
- Company B responds by launching counter-bid for Company A
- Both companies start buying each other's shares
- Standoff ensues — neither can complete acquisition
- Resolution: One side gives up, white knight intervenes, or companies negotiate
The Classic Example: Martin Marietta vs. Bendix (1982)
The Pac-Man defense was first used—and named—during the legendary battle between Bendix Corporation and Martin Marietta in 1982.
The timeline:
- August 1982: Bendix launches $1.5 billion hostile bid for Martin Marietta
- September 1982: Martin Marietta responds with counter-bid for Bendix
- Result: Bendix acquired 70% of Martin Marietta; Martin Marietta acquired 50% of Bendix
- Resolution: Allied Corporation stepped in as a white knight to acquire Bendix
The fight damaged both companies severely. Martin Marietta had to sell multiple business units and borrow over $1 billion to finance its defense. The term "Pac-Man defense" was coined by buyout advisor Bruce Wasserstein.
Martin Marietta vs. Vulcan Materials (2011-2012)
Thirty years later, Martin Marietta Materials (a different company) attempted to acquire Vulcan Materials, a construction aggregates competitor. Vulcan responded with its own Pac-Man defense, launching a counter-bid for Martin Marietta. The legal battle and regulatory complications that followed eventually led to a settlement, with Martin Marietta abandoning its hostile bid.
Why It's Rarely Used
The Pac-Man defense is uncommon because:
- Extremely expensive: Both companies burn through cash buying each other's shares
- Mutually destructive: Both parties emerge weaker regardless of outcome
- Financing challenges: Banks may be reluctant to fund both sides of the same fight
- Regulatory hurdles: Antitrust issues often prevent competitors from merging
- Management distraction: Both management teams focused on battle, not business
SEC Concerns
In 1984, the SEC expressed "serious concern" about Pac-Man defenses but stopped short of prohibiting them. The commission acknowledged these defenses can benefit shareholders in certain circumstances, but emphasized that management must prove it's acting in shareholders' interests—not merely to keep their jobs.
When It Might Work
A Pac-Man defense makes the most strategic sense when:
- The target has significant cash reserves or borrowing capacity
- The target is actually larger or more valuable than perceived
- The hostile acquirer has vulnerable ownership structure
- Industry consolidation makes the combination logical either direction
- Shareholders of both companies might prefer the target's management
Pac-Man Defense vs. Other Strategies
| Strategy | Cost | Reversibility | Risk Level |
|---|---|---|---|
| Poison Pill | Low | High | Low |
| White Knight | Medium | Medium | Medium |
| Pac-Man Defense | Very High | Low | Very High |
| Crown Jewel | High | None | High |
Modern Considerations
Today's Pac-Man defenses face additional challenges:
- Activist investors may oppose the massive capital expenditure
- Proxy advisory firms (ISS, Glass Lewis) may recommend against
- Institutional shareholders often prefer negotiated outcomes
- Antitrust scrutiny is more aggressive for industry consolidation
Practical Takeaways
For founders: The Pac-Man defense is a nuclear option that signals you'd rather destroy value than be acquired. Only consider it if you genuinely believe your management team should run the combined entity—and you have the financial firepower to back it up.
For investors: A Pac-Man defense usually means significant value destruction for both companies' shareholders. Consider whether management is fighting for shareholders or for their own jobs. Often, the best outcome is a negotiated settlement or third-party intervention.
Related Reading
- Hostile Takeover — What triggers the need for a Pac-Man defense
- Tender Offer — The mechanism used in Pac-Man counter-bids
- Poison Pill — A less destructive alternative defense
- White Knight — How Pac-Man battles often end