Black Knight (Definition And Strategies: All You Need To Know)

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What Is Black Knight

In mergers and acquisitions, a black knight refers to a company that attempts to acquire another company in a hostile manner through a hostile takeover bid.

Typically, the board of directors of the target company does not consider that the takeover by the black knight will bring value to the shareholders and does not give their consent.

As a result, the acquirer, or the black knight, will attempt to take over the target company by deploying strategies to bypass the board of directors.

Some takeover strategies deployed by black knights are to initiate a tender offer directly to shareholders, get into a proxy fight, or buy enough company stock in the open market to achieve a controlling interest.

About The Term “Black Knight”

In mergers and acquisitions, the term black knight is used to refer to a company looking to forcefully acquire another company through a hostile takeover attempt.

Companies that are considered to be “black knights” are companies that are looking to acquire a target company where their goals and objectives are not aligned.

In other words, the black knight is looking to pursue the acquisition to achieve its own objective regardless of the target company’s desires.

A “knight” is a term used to refer to a man who serves a lord, mounted in armor, and generally fighting on a horse.

A “black” knight is to refer to a knight who has a sinister objective.

Black Knight Definition

How do you define black knight in business?

According to Investopedia, a black knight is defined as:

As you can see from this definition, a black knight is a company that has the objective of acquiring another company in an unwelcome manner or without the board’s consent.

Purpose of Black Knight Acquisitions

Companies pursuing black knight acquisitions strategies are those looking to acquire an underperforming company to make a short-term profit.

In other words, the black knight acquirer aims to acquire a target company under its intrinsic value so it can turn things around and make money in the short term.

Black knights are generally not interested in acquiring a target company to take advantage of synergies or long-term values.

Rather, black knights have a focus on moving in, making money, and moving out.

Some strategies include cutting a lot of jobs within the target company, stripping the target company’s assets, making short-term changes to position the company for a sale, or introducing debt-funded share purchase programs.

Black Knight Acquisition Strategies

There are different types of acquisition strategies when considering a hostile takeover.

A company, the acquirer, may want to take over another company, the target, for many reasons, such as:

• To enhance the target’s business abilities
• To achieve a larger market share
• To achieve greater product and service diversification
• To reduce operational costs
• To replace the management team 

Black knights tend to make takeover attempts on companies that are underperforming and are valued below their intrinsic value.

Even though the target company’s board of directors may resist the black knight’s hostile takeover bid, black knights hope to influence the shareholders to go through with the acquisition banking on the fact that the current management team is underperforming.

To bypass the target company’s board of directors, two common hostile takeover strategies are to proceed with a tender offer or engage in a proxy fight.

A tender offer is to offer the shareholders of the target company a premium to the market value of the shares so they sell.

The black knight’s objective with a tender offer is to be able to purchase at least 51% of the shares of the target company to effectively acquire a controlling interest.

A proxy fight is when the acquirer attempts to influence the shareholders of the target company to vote out the board of directors replacing them with individuals who are more favorable to a change of control.

Black Knight Defense Strategies

How can a target company defend itself from black knights?

In some situations, target companies may have a few defense strategies to deploy to defend themselves against hostile takeover attempts.

The most common defenses against black knight hostile takeover attempts are poison pills, golden parachutes, supermajority, and finding a white knight.

A poison pill strategy is used to make the target company less attractive to the black knight by making it more costly for the acquirer to purchase a controlling interest.

Target companies can give their existing shareholders the right to buy more shares at a discount thereby diluting the stock and making it more expensive for the black knight to acquire a controlling stake.

A golden parachute provides for a very large compensation package to the current executives of the target company should they be terminated following a change of control event.

A supermajority vote is when the target company amends its stock voting rules requiring a supermajority of the shareholders to approve the acquisition.

With a supermajority, it will make it more difficult for the black knight to move forward with the takeover of the company as it must acquire a supermajority of shares in the company.

Finally, the target company may find another company, a white knight, who will agree to acquire the target company on more favorable terms.

Different Types of Knights

What are the different types of knights in business?

Quite often, acquirers can be classified as different types of knights, namely black knight, white knight, grey knight, and yellow knight.

A black knight is a company looking to acquire another company without consideration of the target company’s goals and driven by the motivation to make a quick buck.

A white knight is a company that is tasked to acquire a target company rescuing it from a black knight’s acquisition attempt and will keep the target company’s core business.

White knights will act as saviors in exchange for paying a smaller premium in acquiring the target.

A grey knight is a company that is desirable as a white knight but more appealing than a black knight.

Target companies that are attacked by black knights may prefer negotiating a deal with a grey knight although the transaction will not be ideal but will be better than falling in the hands of the black knight.

A yellow knight is a company that initially attempts a hostile takeover but will eventually move forward with the deal in a mutually negotiated manner such as a merger of equals.

Black Knight Example

Let’s look at an example of a black knight acquisition attempt.

Imagine that Company A is in a good financial position and notices that Company B is undervalued as it is underperforming.

Company A offers to acquire Company B by making a proposal to Company B’s board of directors.

Company B’s board of directors considers that the offer is not in its best interest and refuses the offer.

However, Company A continues to pursue the acquisition attempt by bypassing the board of directors.

The moment Company A decides to bypass Company B’s board of directors to execute its takeover strategy, we’ll refer to Company A as the “black knight”.

Company A’s objective is to make money fast and achieve immediate results.

As a result, they will implement changes that may have a more immediate impact on the target company, such as:

• Important job cuts
• Asset stripping 
• Repositioning the company for a sale
• Considering a merger 
• Implementing share purchase programs 

Company A’s objective is to extract as much profit and money from Company B as quickly as possible before the company loses more value.

Black Knight Meaning Takeaways 

So there you have it folks!

What Does Black Knight Mean In M&A

In finance, a company executing a hostile takeover strategy to acquire another company where the target firmly opposes the acquisition is considered a “black knight”.

A black knight metaphorically refers to a soldier fighting in a black armored vest with a “black” or “sinister” objective. 

Black knights are companies looking to forcefully acquire another company, make quick changes, and quickly cash out.

Black knights are often not interested in implementing long and complicated strategies that will take many years to come to fruition. 

Rather, black knights are there to make a profit as quickly as possible.

Now that you know what are black knights, their purpose in mergers and acquisitions, defenses against them, different types of knights, and more, good luck with your research or transaction!

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