Merger and Acquisition

Analyst Andy Kessler on Wall Street Week stated, "There are two great wall street defenses;
One is 'Nancy Reagan' Defense and the other is 'Pac Man' Defense". Do you agree?

Yes, I do agree with the given statement by Andy Kessler. However in my opinion I think Poison
Pill is the best strategy for anti takeover defense as used by Elon Musk’s Twitter takeover
strategy. But here, comparing the two defense strategies, the Pacman defense holds dominance
over the “Just Say No” defense formulated by Nancy Reagan.

Takeovers are used as a means for corporations to grow and gain entry to new markets, and the
global business environment has witnessed countless numbers of merger and acquisition
activities during the past decades (Zollo, 2003).Takeovers can be of two types: friendly & hostile
takeovers respectively. When undertaken with support from the target management it is termed
as friendly takeover, whereas when an acquirer tries to takeover the company against the will of
management, shareholders and board of directors of target company, it is termed as hostile
takeover. Since all listed companies bear some risk of being a target for a takeover, firms adopt
a set of defense propositions & strategies regularly termed as Antitakeover Defence Provisions
(ATPs), to protect them & direct their course of action incase of a hostile takeover threat.This
can also be known as Anti Takeover Strategies.These strategies could be either precautionary
such as Poison Pill Strategy, Staggered Board Strategy, Fair Price Strategy, or reactive such as
White Knight Strategy, Greenmail Strategy and Recapitalization.Lacking any protective
measures could potentially prove to be a costly measure for the firm. Much of the disagreement
surrounding takeover defenses stems from the lack of a fully developed formal analytical
framework for considering their effects.

Corporate takeovers have reached new levels of hostility in recent decades thanks to numerous
innovations in corporate acquisitions. Vulnerable (target) companies are seeking takeover
protection due to the increase in the number of sharks. Over the years, takeover protection has
become increasingly complex. Companies typically use these ATPs in advance as a preventive
measure against takeover attempts or implement some of them in response to takeover activity
observed in their respective cases.

JUST SAY NO DEFENSE STRATEGY

Named after Nancy Reagan’s anti drug campaign at the time, the “just say no” defense left it up
to a board’s judgment to accept or reject a bid no matter the price. The reason may have been
simple dislike of the acquirer or a need by the directors to keep their jobs. Whatever the real
reason, the ostensible one was based on the shenanigans of these hostile takeovers, premised
in the board’s ability to judge whether a bid was underpriced.The Nancy Reagan defense which
is simply “just say no'' strategy is a defense strategy used by the board of directors of a firm to
prevent a hostile takeover.The strategy involves refusing to negotiate and rejecting all outright
offers that a potential acquirer makes.When the board of directors of the target company meets
to consider the bid, they just say “no”. Target management often uses “Shark Repellent” type of
defense in conjunction with a long-term corporate strategy that it is pursuing. This may be a
turnaround plan to make the company profitable or may be a merger with an alternative firm
other than the one making the takeover bid. In these instances, management tries to value the
target firm using the expected value of a successful long-term strategy (or another metric
favorable to themselves) and thus claim the acquirer offer significantly undervalues the
target and should be dismissed.1
The “just say no” defense was first raised in the 1980s, a time of hostile raiders and buyouts
financed by Michael Milken’s junk bonds. Back then, companies lacked takeover defenses,
something that suited many academics just fine. These professors theorized that the takeover
market served to discipline management. If management underperformed, an acquirer would
buy the company on the cheap and operate it more efficiently. The threat of a takeover would
discipline poorly performing companies.2
The battle between Gannett and Tronc, the newspaper publisher formerly known as Tribune
Publishing, raises the question of whether a board should continue to "just say no" or capitulate
to a hostile acquirer3. The battle for Tronc has reached an unexpected conclusion, with Gannett
rumored to have raised its bid. Gannett's initial bid of $12.25 per share in April elicited a furious
and dismissive response from Michael W. Ferro Jr., Tronc's chairman and largest shareholder,
who paid $44 million, or $8.50 per share, for his initial 17 percent stake in February. Mr. Ferro,
an entrepreneur who made his first fortune in a business-to-business internet company, believes
the bid undervalues the company. Instead, he sought to transform the company, the publisher of
The Los Angeles Times and The Chicago Tribune, and carry out his vision of a new internet
media company.
So far, Ferro's independence strategy appears to be working. Several weeks later, Gannett
increased its initial bid to $15 per share. In response, Tribune sold a 12.9 percent stake to
billionaire entrepreneur Patrick Soon-Shiong for $70.5 million, justifying the sale as necessary to
protect journalism and fend off Gannett's underpriced bid. Dr. Soon-Shiong became the
company's second-largest shareholder as a result of the transaction.Tribune also avoided a
shareholder vote on its directors, despite the fact that a sizable proportion of unaffiliated
shareholder votes were cast against Mr. Ferro. The company then changed its name to Tronc
and stated its new mission as an internet-focused company.
It all raises the questions of when should a board say no and what shareholders can do about a
“just say no” defense.

1
Robert A. Prentice & John H. Langmor, SHAREHOLDER ALTERNATIVES TO HOSTILE TAKEOVERS:
RESTRUCTURINGS, AUCTIONS, AND MACMILLAN (1989)
2
https://www.awesomefintech.com/term/just-say-no-defense/

3
Solomon,S.D,2016 Aug 30,The Gamble of Tronc’s ‘Just Say No’ Defense,The New York Times
Likewise in the case of Paramount Communications vs. Time,1989 helps to establish the "just
say no" defense as a viable anti-takeover strategy.4
Here in this case,during negotiations of an acquisition between Time Incorporated (Time) and
Warner Communication Inc. 's (Warner) were being held, Paramount Communications, Inc.
(Paramount) announced its all-cash offer to purchase all outstanding shares of Time for $175
per share. Paramount’s offer to acquire Time was contingent on several conditions, one of which
is that Time has to terminate its merger agreement with Warner. Time’s board of directors
rejected Paramount’s proposal, maintaining that the Warner transaction offered a greater
long-term value for the stockholders and, unlike Paramount's offer, did not pose a threat to
Time's survival and its "culture." Paramount and two other groups of plaintiffs ("Shareholder
Plaintiffs' “), shareholders of Time thereafter separately filed suits in the Delaware Court of
Chancery seeking a preliminary injunction to halt Time's tender offer for 51% of Warner
outstanding shares at $ 70 cash per share. The Chancery Court, New Castle (Delaware) denied
plaintiffs' motion on the grounds that Time did not breach the business judgment rule in making
a tender offer. On appeal, plaintiffs asserted that Time’s tender offer triggered a Delaware
merger precedent, requiring the defendant to maximize shareholder value before the merger.
So here the issue was, did Time Incorporated breach the business judgment rule by making the
tender offer for 51% of Warner Communication Inc’s outstanding shares and the answer is no.

The state supreme court affirmed the lower court’s judgment, holding that Time Incorporated
reasonably responded to a competing offer in a reasonable and proportionate manner. Further,
Time Incorporated’s response in creating a merger would not place the transaction in violation of
the business judgment rule where plaintiffs' alleged a corporate threat solely centered on
inadequate stock value.

The Delaware courts had established precedents for corporate board actions during mergers
and acquisitions in two previous cases.5 The Delaware Supreme Court ruled in the 1985 case
involving Unocal, that directors defending their company from a raider may respond only in a
reasonable way.Meanwhile, in the 1986 Revlon case, the court ruled that if the board decides to
sell a company, it must accept the highest bid and not show any favoritism.

Fortunately for Time, the judge supported its board as the corporation's fiduciaries in this matter,
even if shareholders might well have preferred to accept Paramount's bid, adding that corporate
law does not compel directors to follow the wishes of the majority of the shares.To support the
decision for the Time-Warner merger, the judge wrote: "Directors, not shareholders, are charged

4
Paramount Commc'ns, Inc. v. Time, Inc. - 571 A.2d 1140 (Del. 1989)

5
Although the Delaware Supreme Court has never explicitly endorsed the “just say no” approach, and there are hints
that the Delaware Chancery Court may reject it, at least for target companies that have both a staggered board and a
poison pill, target managers are seen as having broad discretion to defend against an unwanted takeover bid.
with the duty to manage the firm." On appeal, the Delaware Supreme Court upheld the decision
unanimously. Thus a "just say no" defense isn't necessarily in the best interest of shareholders
since board members can employ it even if an offer is made at a significant premium to the
current share price.

Adding to this stories of companies using this tactic to hold firm and rebuff offers that, in
retrospect, they would have been better off accepting. One example is Yahoo, which engaged in
a "just say no" battle to fight off a $44.6 billion bid from Microsoft (MSFT) in 2008 and then
ended up selling off its core business several years later for $4.83 billion. 6

This also clearly illustrates that “Just say no” as a defense is a gamble. It depends on how
steely the management and board are and what the decision means for the future. There is a
negotiating element to this — adopting a “just say no” defense leaves no doubt that Tronc has
succeeded in getting more potential money7. The risk in this strategy is that Gannett goes away
instead of acquiring Tronc, leaving the company to wither like Yahoo or find its own path to
success.The “just say no” defense has lots of elements, and it is one that few companies can
pull off successfully because there is so much uncertainty. We will find out whether Tronc adds
new justification. But in the face of this, most companies these days sell, whether or not they
can mount a defense after a few rounds of negotiations. It is perhaps better to take the money
and run, provided the bid is in the range of fairness.That just may be fine, at least for
shareholders.

A recent example of a just say no merger defense is Red Robin Gourmet Burgers (RRGB)
response to a hostile bid from private equity firm Vintage Capital Management, LLC.8 Here,the
Board unanimously determined that the proposal undervalues Red Robin and is not in the best
interests of all shareholders, as the strategic plan currently being implemented by Red Robin
positions the Company to deliver greater long-term value to its shareholders than Vintage’s
proposal. The acquirer, Vintage Capital, is offering a fair value with a control premium way in
excess of the current market value when valued using the Precedent Transaction Analysis
method. However, the RRGB board claims this undervalues the company and they wish to
pursue their own strategic long-term plan. It should be noted however, at the time of writing, the
Board had engaged in dialogue with Vintage. Subsequently, the board has continued to say
“no”,thus making the exact definition of the defense a gray area.

6
Microsoft Proposes Acquisition of Yahoo! for $31 per Share,Feb 2008

7
Dennis J. Block, Jonathan M. Hoff & H. Esther Cochran, Defensive Measures in Anticipation of and in
Response to Hostile Takeover Attempts, 972 PLI/Corp 93, 101, 143 (1997).
8
Jonathan Maze,Red Robin issues statement in response to Vintage Capital, Sep 11 2019
Hence, there is a significant risk that a "just say no" defense won't be accepted by the courts. If
the price offered looks fair and shareholders support it, the board's option to "just say no" may
not be viable.Still, that doesn't mean that directors won't give it a go. Yes, failure is possible. But
so, too, is the prospect of securing the company's freedom or, failing that, at least squeezing out
a better price for the business.Therefore the legality of a "just say no" defense may depend on
whether the target company has a long-term strategy it is pursuing, which can include a merger
with a firm other than the one making the takeover bid, or if the takeover bid undervalues the
company.

Thus, a Just Say No takeover defense is surprisingly successful and can prove to be very
expensive for merger arbitrage traders. Many investors are lured into the wider spread
because of the lower Deal Closing Probability (DCP) commonly associated with hostile
takeovers. Investments are made without being aware of the risks of these deals not being
consummated as expected. Should the acquirer choose to walk away, the target stock price
will fall significantly. However, the volatility this type of defense creates in the merger spread
can provide many investment opportunities. A frequent trading strategy such as active
arbitrage using a scalping technique may increase potential profit dramatically.9

PACMAN DEFENSE STRATEGY

Now, the Pacman Defense Strategy derives its name from the famous video game with the
same name and uses a rationale such as that in the game. In the game, the eponymous
character is chased by four colored ghosts who are trying to eat him.If the Pac-Man eats a
Power Pellet, however, he can turn around and eliminate the ghosts.

Technically, it is one of the most 36 aggressive and further risky strategies undertaken by the
target company. In a pacman strategy, the target reacts to a hostile bid by acting in the exact
similar manner as does the acquirer, i.e.the target pursues the acquirer company by buying
shares of the acquirer and thus equally matches the actions of the acquirer. Since both the
acquirer and target pursue to acquire each other thus both of them rely heavily on their finances
as well as debt to pursue the other Pac-man Defense strategy is adopted by the targeted
companies to safe themselves from the hostile takeovers where the targeted companies try to
purchase the shares of the acquiring company by using its liquid assets, which makes the
acquirer company see the risk of being taken over by the targeted company, and hence the
former cease the plan to take over the latter. The purpose of the Pac-Man Defense, as with any
defensive strategy against a hostile takeover, is to make a takeover very difficult for the
acquiring company, in hopes that it will abandon the attempt.

9
Sharon Hannes, A Demand-Side Theory of Antitakeover Defenses, 35 J. Legal Stud. 475, 480 (2006)
For example, there are two companies, company A (Target Company) and Company B
(Acquirer Company), where company B wants to take over company A, and for this, company B
makes an offer to company A to buy company A at a particular time. Here, the price offered by
company B can be overvalued or undervalued for company A.Whatever value Company B
suggests, company A does not want to sell out its company at this stage. But Company B wants
to take over company A at any cost due to its future value or market.So, Company B uses
Hostile Takeover strategies to acquire company A. But, company A uses different strategies to
prevent this. Sometimes company A can make a counter offer to buy Company B.

In this game, the player has several enemies chasing him to kill. But there are so many power
pallets that the player has to eat to eat all other enemies.In the same way, in the Pac Man
Defense strategy, the target company makes a counteroffer to acquire the acquirer company or
sometimes may buy shares of the acquirer company at a premium price from the open market,
which gives threat to the acquirer company of being taken over by the target company. In a
Hostile takeover situation, the acquirer company may start buying large no. of shares of the
targeted company to gain control.At the same time, to save from a Hostile takeover, the targeted
company also starts buying back its shares at a premium price from the acquirer company and
even the shares of the acquirer company.The target company uses this strategy to make a
Hostile Takeover very difficult for the acquiring company.

This can be clearly illustrated through one of the prime cases in the Merger and Acquisition
world which is Bendix Corporation and Martin Marietta,1982, where this term had originated.

In 1982, Bendix Corp. attempted to acquire Martin Marietta by purchasing a controlling amount
of its stocks. Bendix became the owner of the company on paper.10 Martin Marietta’s
management sold off multiple business segments and borrowed over $1 billion to fight the
takeover attempt. Bendix Corporation owned over 70% of Marietta’s stock while Marietta bought
over 50% of Bendix’s stock through a tender offer.This fight damaged both companies as they
expended huge amounts of cash to buy each other’s shares. In the end, Allied Corporation acted
as a white knight and acquired Bendix Corporation.

Furthermore, in Men’s Wearhouse v Jos A. Bank, 11the Pac Man counteroffer by The Men’s
Wearhouse, Inc. in response to a prior unsolicited offer by Jos. A. Bank Clothiers, Inc. provides
a good opportunity to review the use and legal implications of this takeover defense. In October
2013, Jos. A. Bank, a major competitor of The Men’s Wearhouse, made an unsolicited proposal
to acquire The Men’s Wearhouse for $48 per share in cash for a total of approximately $2.3
billion.That proposal was rejected by the board of directors of The Men’s Wearhouse, stating
that it significantly undervalued the company and its recent growth initiatives. Although Jos. A.
Bank terminated its unsolicited offer, in November, 2013, The Men’s Wearhouse submitted a
counter-proposal to acquire Jos. A. Bank for $55 per share in cash for a total of approximately
10
Bendix. https://www.bendix.com/en/aboutus/history/history_1.jsp. Accessed July 10. 2021.
11
U.S. Securities and Exchange
Commission,https://www.sec.gov/Archives/edgar/data/884217/000104746914003266/a2219273z1
0-k.htm. Accessed on December 14 2022
$1.2 billion. The “Pac Man” counteroffer was rejected by the board of directors of Jos. A. Bank.
The Men’s Wearhouse subsequently commenced a tender offer to acquire Jos. A. Bank for
$57.50 per share in cash and has announced its intention to nominate two independent director
candidates for election to Jos. A. Bank’s board.

Besides The Men’s Wearhouse’s counter offer, there have been only a handful of cases where
the Pac Man defense was actually employed. This defense tactic has been used sparingly in
large public deals, perhaps due to the risky nature of dueling bids and the legal uncertainties of
potential outcomes.

For example, in a case where both the initial offer and “Pac-Man” defense offer succeed, the
tender of shares between the companies raise questions of whether shares one company owns
in the other are eligible to vote and through what mechanisms voting power may be exercised.
These questions are further complicated if companies are incorporated in states with significant
differences in relevant provisions of corporate statutes.

Here, there was no outstanding bid when Men’s Wearhouse made its offer to buy JoS. A. Bank,
but it was arguably in response to another unique twist in the narrative. In a move Ronald Busch
of the Wall Street Journal refers to as a “Pac-Man” offense, after Men’s Wearhouse rejected the
initial $2.3 billion bid, JoS. A. Bank Chairman Robert Wildrick suggested the company would be
“receptive to being bought instead by Men’s Wearhouse if it would pay the same 42 percent
premium Jos. A. Bank says it is offering.” JoS. A. Bank attempted to mitigate the statement by
stating it was “merely illustrating the point that Boards of Directors should carefully consider
significant cash premiums for their shares” and that “the comments were not meant, in any way,
to be inviting a counter offer.”As a company incorporated in Delaware, JoS. A. Bank would be
required under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.12 to accept a premium bid if
there is no higher bid to maximize the company’s value at sale for its stockholders’ benefits
when the sale of a company becomes “inevitable.”

Men’s Wearhouse’s proposal represented a 32% premium over JoS. A. Bank’s closing share
price before the original offer became known in October and a 45% premium over JoS. A.
Bank’s unaffected enterprise value. JoS. A. Bank’s decided to reject the offer.In fact, within two
hours, Men’s Wearhouse issued a statement that it would consider all options to make the
merger a reality. Now,both the companies stand to benefit from a merger in a mature industry
where cost cutting allows an entity to fare better.However,the negotiations do not appear to be
over. 13

The use of the Pac Man defense presents certain legal risks and complications. Because of its
limited use, courts have provided only limited guidance on the legitimacy of the Pac Man
defense. In the only two instances in which U.S. courts have ruled on this matter, they have
reviewed and upheld the use of the Pac Man defense under the business judgment rule
12
Revlon, Inc. v. Macandrews & Forbes Holdings, Inc. - 506 A.2d 173 (Del. 1986)

13
Solomon S.D, November 2013,Men’s Wearhouse Dusts Off the Pac-Man Defense, The New York Times
In this strategy, the target company has to buy enough shares to acquire the company, and that
also at a premium price. The target company should have enough funds available with it to buy
enough shares of acquiring the company to make a threat to the acquiring company’s control of
its firm.

However, in practice, a big firm wants to buy small firms from the same industry or related
industries to make a monopoly. So, in that case, the big firm makes an offer to small firms to buy
their companies, sometimes it becomes successful, but sometimes small firms don’t want to sell
their companies. If that small firm wants to compete by using the Pac Man defense strategy, it
should have enough capital/finance in the bank. Sometimes they may have enough funds to use
this strategy, but sometimes they have to arrange funds if they want to use it.For a company to
use a Pac-Man Defense effectively, the target must possess substantial resources, since it is
attempting a hostile takeover of its own. The target must have the finances available to
purchase enough shares of the potential acquiring company to be a credible threat to the
acquirer’s control of its own firm.

However there are also certain drawbacks of this strategy.The Pac-Man Defense is a very
aggressive and extremely expensive strategy, as it usually involves selling off assets or
non-core business units, or increasing the company’s debt in order to put the strategy into
action. Shareholders suffer in the aftermath if the target company is forced to sell important
assets, losing value.Thus it is a very risky strategy for either of these two since the firm which
eventually succeeds in acquiring the other would potentially end up with huge amounts of debt
from both the entities combined and would thus face a situation of financial pressure. It is worth
noting that the target company, once being pursued by the acquirer may adopt such a strategy
when it might be interested in the idea of the merger or combination with the acquirer but would
want to be in control of the merged firm.

To conclude, we can say that both of these strategies have their strengths and weaknesses.So
it is essential for the target companies to observe the most fundamental problem which is
unlimited power of directors and their corresponding lack of responsibility and accountability in
the antitakeover area when applying their strategies to increase their efficiency of takeover
defenses & impact on value creation of their company.