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What Is Grey Knight
In business, a grey knight refers to a company that makes a higher takeover bid than a white knight.
In essence, in the scenario where a grey knight makes a takeover bid, there are several parties involved: an acquirer, the target company, a white knight, and a grey knight.
The acquirer is a company that makes a hostile takeover bid to acquire a target company.
As a defense mechanism, the target company works out a friendly arrangement with another company, the white knight, to have the white knight make a friendly takeover bid.
Then, the grey knight is a company that makes an unsolicited offer to acquire the target on better terms and conditions than the offer made by the white knight.
Although the grey knight’s offer is hostile and unsolicited, it is a more “friendly” type of hostile takeover attempt.
A grey knight is a company that may have a potential interest in acquiring the target company but remains on the sidelines to see how the hostile takeover attempt evolves.
When the time is right and after a white knight makes a offer to purchase the target, the grey knight manifests itself by making a better offer in an attempt to win the bid.
Keep reading as I will break down how grey knights work in the corporate world and how they are different than white knights.
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How Grey Knights Works
A Grey knight refers to a company that makes an “unsolicited bid” to acquire another company after a white knight has made an offer to acquire the target based on a fair consideration.
The way grey knights operate is simple.
First, there is a company (black knight) that presents a takeover bid to the board of directors of another company (target).
The target’s board of directors does not believe that the offer brings value to the shareholders and they refuse to sell.
The black knight then submits a hostile takeover bit to the shareholders of the target.
The target’s board of directors approaches a third company (white knight) to negotiate a friendly takeover bid that the board considers brings more value to the shareholders.
The target’s objective is to defend itself against the acquirer’s hostile takeover bid and sell to the white knight on better terms.
Right after the white knight submits a takeover bid, a fourth company (grey knight) submits a takeover bid better than the white knight’s bid.
The grey knight knows very well that if the target’s board was approving of the white knight’s offer, then it will be harder to refuse a better offer.
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Grey Knight Example
There are many reasons why companies attempt to acquire and take over other companies.
Larger companies may want to expand their market share, acquire a smaller company’s technologies, add additional products and services to their portfolio, or consolidate their competitive advantage in the market.
In this context, companies may enter into M&A battles where multiple entities may be involved.
Let’s look at an example of grey knight acquisition to better illustrate the point.
Let’s assume that Company A is a small company that has developed a breakthrough technology.
Company Black considers it would be great to buy out Company A.
Since Company A does not want to sell, Company Black submits a hostile takeover bid to Company A shareholders.
To defend itself, Company A engages in conversations with Company White to sell the business to it.
Company White agrees to submit a friendly takeover bid on conditions that Company A considers better than Company Black’s.
Company White therefore formally submits a takeover bid.
Now, another company, Company Grey, sees that there’s an opportunity for it to pay slightly more to acquire Company A and even with the higher acquisition cost, the takeover will bring value to its shareholders.
Company Grey then submits a higher offer than Company White.
The net result is that Company Gray submits a more friendly offer than Company Black and on better conditions than Company White.
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Grey Knight vs White Knight
The main difference between a grey knight and a white knight is that the grey knight’s takeover attempt is generally unsolicited and it is presented after a black knight and white knight have presented their bids.
A grey knight is a company that waits for a merger deal to fall through or run into problems before submitting an offer to purchase.
If the takeover bids on the target are falling through, it may submit a lower takeover bid.
However, if the takeover bid is moving forward with the white knight, it may submit a better offer to win the deal.
Grey knights are generally motivated to acquire the target for their own financial gains and strategic needs.
On the other hand, a white knight is a company that accepts to buy the target seeing that the target is looking to defend itself against a black knight.
The white knight will generally take advantage of the situation and accept to buy the target in such a way that it will generate a return on the transaction.
Typically, white knights submit an offer as they are solicited by the target or have reached a friendly takeover agreement.
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Takeaways
So there you have it folks!
What does a “grey knight” mean in mergers and acquisitions?
In a nutshell, a grey knight is a company that enters a hostile takeover attempt after a black knight and white knight have submitted their takeover bids.
Although the grey knight submits an unsolicited bid (which is hostile), it is on more friendly terms than the black knight’s offer.
However, since it files its offer after the white knight has submitted its takeover bid, the grey knight offers better takeover terms than the white knight.
This is an effective strategy when a hostile takeover attempt is not going through easily or a transaction with a white knight is not able to cross the finish line.
Now that you know what is a grey knight in business, good luck with your research!
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