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December 2, 2013 12:00 pm
In the neon arcade world of Pac-Man, the game’s greedy protagonist has only one sure-fire way of avoiding the clutches of the ghosts that pursue him: turning the tables and eating them instead.
The corporate defence tactic that draws its name from the eat-or-be-eaten video game returned to the dealmaking landscape last week as suit retailer Men’s Wearhouse tries to block the overtures of a rival with a takeover offer of its own.
For two months, the Men’s Wearhouse board had been unyielding in its refusal to entertain a takeover bid by Jos A Bank, dismissing as “opportunistic” an offer that represented a 42 per cent premium to the retailer’s then share price.
But in what appears to be a tacit acceptance of the logic behind an enlarged company, Men’s Wearhouse then made a $1.2bn offer that would see it gobble up its smaller rival.
The decision to deploy the Pac-Man defence is the latest twist in battle to control America’s multibillion-dollar discount menswear market. It also heralds the return of a dealmaking manoeuvre, out of fashion for a generation, that has yielded some unusual results.
In September 1982, aerospace company Martin Marietta took the unprecedented step of responding in kind to a takeover bid by its rival Bendix Corp.
The ensuing dust-up dragged on for a month and ended without clear victory for either company. Instead, Allied Corp, which entered the fray to help Bendix vanquish Martin Marietta, swallowed Bendix for $2bn. Martin Marietta, while avoiding the ignominy of being taken over, was left nursing a debt burden four times larger than it started with, having borrowed $1bn to fund its own takeover effort.
Since then, the tactic has been used sparingly.
In 1998, Marston Thompson & Evershed, the UK brewery, responded to interest from long-time sparring partner Wolverhampton & Dudley by launching a bid of its own. The defence pushed W&D to increase its original £262m offer by 9 per cent.
A year later, Elf Aquitaine fired up a $51bn Pac-Man defence against TotalFina. The result – again, after a protracted fight – was a friendly deal that created one of the world’s largest oil producers, Total.
The same year, Chesapeake reacted to a $700m offer from Shorewood, a rival packaging company, with a particularly brutal Pac-Man defence. In addition to launching a $500m counterbid, Chesapeake bought 15 per cent of Shorewood’s shares, sued the company’s board and, eventually, saw it sold to a third party.
“Going with the Pac-Man basically means management are recognising that the deal makes sense, but are desperate to keep their jobs. It is good for the executives, but pretty rough for shareholders,” says a banker who has been involved in such a deal.
Since 1999, there have been just five examples of the Pac-Man defence being used, according to data from Dealogic. This reflects the flaw inherent to the tactic: more often than not, a target deploys the same industrial logic as its original bidder.
Going with the Pac-Man basically means management are recognising that the deal makes sense, but are desperate to keep their jobs
- A banker
In doing so it undermines its own rationale for a defence.
In the case of the Men’s Wearhouse/Jos A Bank tussle, both companies have acknowledged the logic for non-organic growth. Beyond a shock move by either to branch into womenswear or haute couture, there is an absence of other competitors to buy.
Robert Wildrick, Jos A Bank’s chairman, has said he would be happy to engage with Men’s Wearhouse if it makes an offer.
Another likely driver for a deal is the common shareholder interest between the two companies. Activist investor Eminence Capital owns big positions in both retailers. A host of large institutional investors also have holdings in both companies.
For the shareholders without this common interest, the eat-or-be-eaten question remains, with one side getting paid a premium for their stock and the other getting to keep a stake, and management team, in an enlarged group.
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