For our web development business we had an individual putting all of the web business company names in their meta tags, so that when people searched for your company they would come up, we asked them 3 times to remove it from their keywords or legal action would be taken, eventually they did. It was an underhand way of taking business away from us. So tread carefully. It might cause you more bother than its worth. Pitching for the same keywords on the other hand should be fine, unless its a unique one to their product or service which may be trademarked.
I've encountered this - so have first hand experience.
Ethically - it's completely up to you whether you want to use competitor names on your adwords.
Legally with Google - they will happy display it unless the company in question has sent google a request to stop anyone other than themselves use that name in adwords - they have to write to Google's California office with all their trademark paperwork for Google to review - this process takes about 8 weeks. If they haven't done this, you can use their name.
I've used other's brand names in the past and occasionally the company will ring you to ask you to stop your advertising - you can quote them the legal info or usually I just say that to aid relationships I will remove it - cos it's easier.
It would feel below the belt to use their name, I know that I would be extremely unhappy if anyone did using my name.
I'd probably be happiest waiting until they are officially bust, and then I guess that their customers are back on the open market.
But in the real (offline, yes it does exist) world, if you had a list of a competitors customers, and you knew that they customers was severley wobbly, would you feel it unethical to send them a letter outlining your services?
No harm giving the customers a choice of companies - plus when your competitor goes under, you name should be fresh in their minds.
If you speak to the competitor company when they go under, they may even email their customers and recommend using you as there new supplier...I've seen companies do that before.
Someone's using my name in a ppc campaign - they must be an affiliate as it goes straight to my site - they're not supposed to do that - it gave me quite a surprise!