Wall Street and the Pac-Man Defense

Do you remember Pac-Man? A Japanese company named Namco first released the rudimentary video game in May 1980, several months before Ronald Reagan was elected President of the United States for the first time. It quickly became an iconic product of the 1980s, and one of the most widely celebrated video games in history.

Oddly enough, the Pac-Man game has reappeared in the news recently, thrust into the headlines by a classic Wall Street corporate battle. Six weeks ago, a relatively small but venerable men’s fashion retailer named Joseph A. Bank Clothiers dropped its hostile takeover bid for Men’s Wearhouse, a larger discount clothing outlet.

So how did the board members of Men’s Wearhouse respond to this unwelcome suitor after Bank dropped its bid? One week later, the board members turned the tables and launched their own hostile takeover bid for Bank!

At that bizarre moment when the hunter became the hunted, Bank suddenly found itself in a defensive crouch. And now Bank is striving to avoid the very merger that it had previously espoused, when it initially played the role of the stalker and not of the target.

This Men’s Wearhouse strategy is known on Wall Street as the Pac-Man Defense. Its name refers to the brief moments in the video game when the gamer’s Pac-Man avatar is suddenly blessed with the ability to “gobble up” its ghostly enemies Inky, Blinky, Pinky, and Clyde, and is no longer forced to flee from them. During those moments, Pac-Man reverses course and pursues the four “would be” hunters.

Wall Street first developed the Pac-Man defense in the early 1980s, at a time when the video game was achieving its heights of popularity. The 1982 Martin Marietta – Bendix Corporation takeover battle represented the first application of the strategy.

Interestingly, many financial analysts believe that today’s proposed merger of Bank and Men’s Wearhouse, a men’s fashion retailer and a complementary discount clothing outlet, is a sensible one. And Bank is not arguing the point; instead, it is claiming that the Men’s Wearhouse acquisition offer does not fully reflect the value of the Bank franchise, repeating the very claim that Men’s Wearhouse previously made about Bank’s previous offer!

In other words, the Pac-Man offer / counter-offer process appears to represent an incredibly elaborate (and thus extremely costly) passive – aggressive mating dance between two compatible organizations that have already accepted the logic of a business combination.

But then why waste all this effort on the dual takeover battles? Why not simply ask the board members of the two firms to either hash out a deal, or to forget about it?

Wall Street does not appear to have an answer to this question. Thus, the mating dance continues unabated.

If you were a board member of Joseph A. Bank, what would you do?