The target turns the offer around
A hostile bidder usually tries to buy enough shares in a target company to gain control, often by appealing directly to its shareholders. In a Pac-Man defense, the target answers with a bid for the bidder itself. It may offer to buy the bidder’s shares on the market or make a formal offer to the bidder’s shareholders.
That changes the bidder’s immediate problem. Its directors and investors must now consider whether their own company could lose control, while the target’s offer gives the bidder’s shareholders a reason to question the original takeover plan. The target is not merely rejecting the deal; it is making control of the would-be acquirer part of the contest.
Why the reversal can be costly
The tactic is most threatening when the target can make the counteroffer credible. Buying a large company takes substantial financing, and a target may have to borrow heavily, sell assets, or enlist outside investors. Those steps can burden the business even if the takeover bid fails. The bidder, meanwhile, may need to spend more to persuade shareholders to stick with its original plan—or to defend its own shares.
A counterbid can therefore raise the price and risk of pursuing the target. But it is not a magic shield: if the target cannot fund the purchase or win enough shareholder support, the move may weaken it instead. The striking reversal is that a company trying to avoid being swallowed may put its own balance sheet on the line to make the predator defend itself.
