Definition: The Pac-Man Defense is a defensive mechanism used against the hostile takeover, wherein the target firm turns around the table and acquires the firm that has made the hostile bid or has initiated the takeover.
In other words, a defensive strategy in which the firm facing the threat of hostile takeover “turns the tables” by acquiring its would-be buyer. This defense strategy has got its name from the popular video game Pac-Man, in which the Pac-Man initial objective is to escape the ghosts chasing him and once he consumes the power pill, he is able to turn around and eat the ghosts that are trying to eat him in a maze.
If any firm makes an aggressive or hostile bid on any other publicly traded company, which is not acceptable to the target firm, then it may use all the possible methods to take over the acquiring company. Such as, the target company may purchase the acquiring company’s stock by using its war chest. What is War Chest? The war chest is the buffer of cash maintained by the company and is kept aside to be used against the uncertain adverse events.
A war chest is usually invested in the liquid assets such as Treasury bills, bank deposits, etc. that are readily available on demand. Thus, it is generally used in the acquisition and takeover of another company or businesses and hence, the Pac-Man defense strategy also makes use of these funds to resist the hostile takeover.