There is a sentence in the schweser material that I do not get,
“In practice, the Pac-Man defense is rarely used because it means a smaller company would have to acquire a larger company”
why does it mean so? Did the author mean, in order for the target to present a counter offer it should be a large company to afford it?
No, it means that the smaller company would have to increase levels of debt in order to acquire the bidder. It is expensive, risky and laborious. That’s why it is a rare defense strategy against hostile takeovers.
Do not get why is a small company in the first place that would use this method?
Big company A is trying to buy small company B.
Small company B’s defense – Pac-Man – is to try to buy big company A.
Here’s a recent example: https://blogs.wsj.com/moneybeat/2013/10/11/dealpolitik-jos-a-banks-pac-man-offense-against-mens-wearhouse/.
Got you, thanks for the elaboration!
My pleasure.