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Corporate Securities Info
Reverse Pac-Man strategy

By Raul J. Palabrica
Philippine Daily Inquirer
First Posted 19:51:00 01/21/2010

Filed Under: Stock Activity, Economy and Business and Finance

NO, TODAY?S ARTICLE HAS NOTHing to do with Manny Pacquiao who, because of his string of ring victories, has earned the sobriquet Pacman, a name associated with a video game that was popular some time ago.

Rather, it?s about a business strategy used in the United States during the ?90s when takeover artists set their eyes on profitable, but underperforming, public corporations.

Something similar, although in reverse form, appears to be happening in the local scene.

Earlier this month, San Miguel Corp. announced its plan to acquire a 49-percent stake in Top Frontier Holdings Inc., which owns 28 percent of SMC?s stocks.

Top Frontier purchased those stocks last December from the SMC Retirement Fund. The same shares were earlier bought by the Fund using some of the money lent to it by SMC itself.

Aside from Top Frontier, another major SMC stockholder is Q-Tech Alliance Holdings Inc. which owns 19.9 percent of the erstwhile food and beverage conglomerate.

Top Frontier intends to later acquire all of Q-Tech Alliance?s SMC shares.

If these moves materialize, Top Frontier would wind up controlling, inclusive of its existing 28 percent ownership, 47.9 percent of SMC?s stocks.


When this happens, Top Frontier would have to make a tender offer for the rest of the SMC shares and, in the process, further increase its holdings.

With Top Frontier becoming SMC?s largest stockholder and SMC itself acquiring 49 percent of Top Frontier, SMC would become co-owner of the corporation that will have majority control over it.

Confusing? Not really.

The rather unique setup is a product of the special status that the law grants to corporations. They are given a personality (termed juridical to differentiate it from natural persons) that is separate and distinct from that of their stockholders.

Thus, the fact that SMC is majority-owned by another corporation does not divest SMC of its original standing as an independent corporation.

Although Top Frontier may later, for all intents and purposes, call the shots in SMC, the latter shall continue to act, and be treated, as a corporation with its own set of directors, financial statements and other attributes that arise from having its own certificate of registration.

The plus factor for this arrangement is, SMC?s management appears to be in good terms with the executives of the company that is poised to gain majority control over SMC.


If it were otherwise, a fight for control over SMC (which can be nasty and expensive considering the huge financial resources of the contending parties) would be inevitable.

Before, when hostile takeover moves were in vogue in the US, one of the measures used by threatened businesses to fend up that action was the so-called Pac-Man defense.

By way of background, in the Pac-man video game, the character that is able to swallow all his opponents emerges as the winner.

Using the same approach in a hostile takeover, if a company is suspected to be plotting to gain control of another company and that action is opposed by the target company, the latter fights back by buying majority of the stocks of the ?invader.?

Faced with this counter-strike, the uninvited investor would either be forced to end the takeover effort or buy out (at a higher price, of course) its stockholders who may be inclined to sell their shares.

The outcome could be financially disastrous to the rebuffed company. It would be saddled with the target company?s stocks that it may not be able to sell for a profit, or the buyout may exhaust its coffers without meeting its objective.

Open arms

The target company does not, however, come out unscathed even if its Pac-Man defense succeeds.

The money spent to gain control of the intruding company, which includes payment for the services of lawyers and other professionals needed to mount that defense, represents substantial funds that could have otherwise been used to improve the company?s business or increase its profits.

For the management of the target company, that is a small price to pay for retaining their cushy positions. Whether or not the status quo would be in the best interests of their stockholders is a different story.

Going back to the SMC-Top Frontier deal, SMC not only graciously welcomes the entry of its prospective controlling stockholder, it has even agreed to subscribe to its stocks!

That?s the best vote of confidence that a target company can give to its prospective acquirer.

With the ?open arms? policy, the price of SMC shares in the stock market is expected to remain stable, if not appreciate because of the anticipated smooth transition in corporate control.

How long that cordial relationship between the two companies will last is a big question mark.

In the meantime, the professionals whose services would have been tapped in a proxy fight between two financial giants are probably gnashing their teeth in frustration over the loss of potential professional fees and charges.

(For feedback, please write to .)

Copyright 2015 Philippine Daily Inquirer. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.




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