Pac Man Defense

Presented by:Ridhi Mohan ; Navdeep Singh Kohli ; Shubham Singhal

Literally

• The name refers to the star of a video game Pac-Man, in which the hero 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. The term (though not the technique) was coined by buyout guru Bruce Wasserstein.

Figuratively

To employ the Pac-Man defense, a company will scare off another company that had tried to acquire it by purchasing large amounts of the acquiring company's stock. By doing so, the defending company signals to the acquiring company that it is resistant to a takeover and will use the majority, if not all, of its assets to prevent the acquisition.

The resisting company may even sell off non-vital assets to procure enough assets to buy out the acquirer. Often, the acquiring company sees the potential risk of being taken over as motivation to halt pursuit. 

Concerns

• 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.

Examples

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

• 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 incident was labeled a "Pac-Man defense" in retrospect.

Pruning Deadwood in hostile takeovers.

• Bendix a diversified manufacturing company with 1981 sales of over $4 billion, bid for a majority outstanding shares of Martin Marietta a major defense contractor and manufacturer of chemicals aluminum and other products with 1981 sales of over $3 billion. Martin Marietta responded by bidding in turn for control of Bendix and thereafter the intensity of context rapidly escalated.

Both bids succeeded, if it can be called success. Perhaps that is why the contest captured so much attention. Other targets, cities service and NLT, for example had used a counter tender offer as a defense but none had actually made the threatened purchase . Here however Bendix and Marietta each acquired 50% of other and therefore of itself. The financial and other implications were frightening . Martin Marietta which before this episode had a debt to total capital ratio of 27% borrowed $900 million in effect to repurchase its own shares thereby shrinking its equity base so that its new total debt of $1.3 billion became about 80% of its total capital. But for the merciful intervention of allied corporation which agreed to acquire Bendix the two financially crippled combatants would have found themselves in a novel deadlock in which each sought to convert its majority stock position into working control.

Porsche and

Volkswagen!! Integrat

ion? Acquisit

ion?

Facts

With annual sales of more than $151 billion, Volkswagen is Europe's biggest carmaker, 16 times the size of Porsche, which generates annual sales of about $9.3 billion. But through a series of highly leveraged financial deals that began in 2005, Porsche acquired a voting stake of 50.8% in VW. In January, Porsche said it planned to raise its stake to 75% in 2007.

"The tail is no longer wagging the dog."

• VW sold 6.27 million cars in 2007• VW is Porsche's most important parts supplier.• Porsche saw itself as a white knight, coming in

to shield VW from any potential raider.• VW cost Porsche dearly as it piled up a $12

billion mountain of debt to finance stock purchases.

• Porsche's biggest obstacle was Piech.

Porsche piled up a $12 billion mountain of debt to finance stock

purchases. With the sports carmaker beginning to struggle

under the weight of that debt, Porsche and Piech met in

Salzburg, Austria on Wednesday to end the feud. Following

that meeting, Porsche issued a statement declaring that the two

companies aimed to "develop a corresponding basis for

decision-making on the future structure of the common group."

"The tail is no longer wagging the dog."

Merging VW and its 19 billion-plus euros in net cash with a much smaller Porsche weighed down by 1.5 billion in net debt is a tough deal to sell to VW's preferred shareholders, who must approve the deal by an 80 percent majority.

Thank you

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