Alcan bid for Alcoa would be a rarity

While quite embarrassing to admit publicly now, part of my high-school curriculum in the '80s was plunking down many quarters into the various video games in the basement of the local mall beside my high school.

Sure, my mother complained to me that maybe those hours spent gaming might be better off spent studying. I didn't really have a solid argument to that. But, as it turns out, my mom was wrong -- there are indeed real-world business applications to video games.

Take the current Alcan-Alcoa takeover battle, for example. There is plenty of Street chatter about how Alcan might do a "Pac-Man" on Alcoa as a way to fending off Alcoa's hostile bid for Alcan.

Well, as a bona-fide Pac-Man player from the '80s, (although I was much better at Galaxian, and am a certified wizard at Missile Command), I believe I am in a good position to outline the Pac-Man hostile takeover defensive strategy for you.

A Pac-Man defence in a takeover is when the target company, in this case Alcan Inc., turns around and bids instead for the company trying to take it over (in this case Alcoa Inc.). Like the video game, Pac-Man (Alcan) would eat a power pellet (private equity or hedge fund capital, perhaps) and turn on its ghostly chaser Blinky (Alcoa). In case you were wondering, the other ghost chasers in the game were Pinky, Inky and Clyde. But I digress.

While a Pac-Man defence sounds like a pretty cool takeover defence strategy, it is extremely rare to actually happen in the corporate world. Let's look at a few reasons:

First, by buying its pursuer, Alcan would effectively be agreeing to the merger, albeit in a different format from what Alcoa started out with. Alcan would be saying, basically, "We like the idea of a merger, but we want to be in charge."

The Pac-Man takeover thus accelerates the ego game inherent in any takeover, which can often lead to poor post-merger relations or an excessive price paid.

Second, most takeovers involve a large company taking over a smaller entity. It is often very difficult for a smaller company to pull off a reverse bid, whether because of financing difficulties or due to shareholder aversion to the deal. This doesn't apply in the Alcan-Alcoa battle, as Alcoa is only slightly larger than Alcan, by market cap. Perhaps this is why some analysts are suggesting it could actually happen.

I could only find a few examples where the Pac-Man defence was actually used. Here's what happened: - Mesa Petroleum/Cities Services. In 1982, T. Boone Pickens' Mesa Petroleum Co. announced it had acquired 5% of Cities Service Co., at the time the 20th-biggest U.S. oil firm. With Cities shares in the US$20 range, Mesa offered US$50 cash per share for 46% of Cities and promissory notes for the balance of the company.

Then the Pac-Man game started. Cities, which at the time was 20 times bigger than Mesa, proposed to buy 51% of Mesa for US$17 per share, which was a US$1 premium to Mesa stock. Mesa countered by saying it would buy another 15% of Cities on the open market whether the company liked it or not. Cities then raised its bid for Mesa to US$21 per share. Shareholders tendered 41% of Mesa to Cities.

Then Gulf Oil Corp. dropped a quarter into the machine and agreed to pay US$63 per share for Cities, which was a big premium to the share price, as the complexities and the notes attached to the Mesa bid held Cities share price back.

Finally, Mesa agreed to back out of the game. It arranged to sell its Cities shares to Cities at a price that was below the Gulf offer, but still gave it a substantial profit. Cities agreed to drop its takeover offer for Mesa. Gulf paid US$5.04-billion for Cities. In a postscript, Gulf itself was later acquired. So, Mesa bids for Cities. Cities Pac-Mans Mesa. Gulf buys Cities. Mesa makes money. Got that? - Shorewood/Chesapeake. This one had it all. In 1999, Sherwood Packaging Corp. made a hostile bid for Chesapeake Corp. at US$40 per share, or US$700-million. Chesapeake then offered US