White Knight (Definition & Strategy: All You Need To Know)

Looking for White Knight?

What is a White Knight in business?

What’s important to know about it?

Keep reading as we have gathered exactly the information that you need!

Let me explain to you what White Knight is and why it’s important!

Are you ready?

Let’s get started!

What Is White Knight

In mergers and acquisitions, a white knight refers to a hostile takeover defense strategy where the white knight acquires a target company by offering a fair consideration to save it from an undesirable hostile takeover attempt.

In other words, the white knight is a company that is “friendly” to the target rather than “hostile”.

For instance, Company ABC shareholders receive a hostile takeover bid that its board does not approve.

Company XYZ, the white knight, who is friendly to Company ABC submits a better offer to acquire Company ABC shares.

In this case, Company XYZ is considered the White Knight as it comes to the defense of Company ABC by acquiring it on better terms that the board approves.

The white knight defense strategy in M&A is one among many other defense strategies target companies can use to fend off a hostile takeover attempt.

Keep reading as I will further break down the meaning of white knight and tell you how it works.

Recommended article: What is a creeping takeover

How Does A White Knight Defense Work

A white knight defense is a specific type of defense where one company acquires another company to save it from a hostile takeover.

The way it works is that you start off with a company that receives a takeover bid from another.

The target company’s board of directors does not believe that the offer is reasonable or fair and rejects it.

The acquirer then bypasses the board and submits a hostile takeover bid directly to the target’s shareholders.

Generally, the white knight is a company that the target will solicit to explore their options.

If the solicited company agrees to buy out the target on better terms, it will then submit a takeover bid to the shareholders of the target with the board’s approval.

The board will then attempt to convince or influence its shareholders to accept the white knight’s offer rather than the black knight’s.

When the white knight acquires the target company, the target loses its independence and becomes subject to the white knight’s management.

Recommended article: What is a crown jewel defense

Other Defenses Against Hostile Takeovers

There are different types of defenses against hostile takeovers.

The white knight defense is one type of defense among others, such as the gray knight, yellow knight, white squire, poison pill, and others.

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.

Yellow Knight:

A yellow knight is a company that attempted a hostile takeover attempt against a target company and ultimately backs out and offers a merger of equals.

In other words, it’s a black knight that becomes friendly.

Typically this happens when a company attempts a hostile takeover and realizes that it will not be able to win the fight.

Instead, it offers to merge with the target company in an amicable manner and in a mutually negotiated fashion.

White Squire:

A white squire is similar to a white knight with the main difference being that the white squire does not take control of the target but buys enough shares in the target to block a hostile takeover.

The white squire becomes an important shareholder in the target company but does not have a controlling interest.

However, the white squire acquires a sufficient number of shares to prevent the black knight from attaining a controlling interest in the target.

Poison Pill:

A poison pill is a defensive strategy used by a company (target) to dissuade or prevent another company (acquirer) to pursue a hostile takeover. 

In other words, a company that is the target of acquisition can use a poison pill to make its acquisition less attractive for the acquiring company.

For example, one common poison pill is for the target company to allow its existing shareholders to purchase additional shares at a discount making it more expensive for the acquiring company to pursue the acquisition.

Recommended article: What is a management buyout

White Knight vs Black Knight

What is the difference between a white knight and black knight?

In business, there are different terms used to describe different entities involved in a hostile takeover.

First, you have the white knight.

The white knight is a company friendly to a target company that agrees to acquire the target based on a more favorable consideration than an active hostile takeover bid.

In essence, the white knight “saves” the target company from the potential hostile acquisition by another company.

Second, you have the black knight.

The black knight is a company that submits a hostile takeover bid to acquire a target company.

The bid is hostile as it is not welcomed by the target company, it is unsolicited, and the target’s board of directors does not approve of.

The objective of a black knight is to bypass the target company’s board of directors and directly convince the target shareholders to sell their shares.

If it acquires a sufficient number of shares, then the hostile takeover bid will be successful.

Recommended article: What is a Godfather offer in business

White Knight Example

Let’s look at an example of a white knight to better illustrate the concept.

Company Black is in the technology business and has been seeing the rise of Target Co in the same industry mainly due to its prized proprietary technology.

Company Black approaches Target Co’s board to discuss the potential of an acquisition.

Target Co does not believe that an acquisition will be beneficial and will not create further value, so it rejects the proposal.

However, since Company Black is convinced otherwise, it decides to submit an unwanted hostile takeover bid to Target Co’s shareholders.

Seeing that a hostile takeover is imminent and not wanting to sell to Black Company, Target Co’s board approaches Company White who is also in the same industry.

They discuss the potential of Company White buying out Target Co and the parties reach an agreement.

Company White then submits a takeover bid on better terms than Company Black’s bid with the board’s approval.

Target Co’s shareholders accept to sell to Company White as not only they have a better offer but Target Co’s board also approves the transaction.

Recommended article: What is a vertical merger

Takeaways 

So there you have it folks!

What does white knight mean in business?

In a nutshell, a white knight refers to an individual or a company that acquires a target company on the verge of being bought out in a hostile takeover attempt by a black knight.

The target company prefers the acquisition by the white knight as it is more friendly, the target company’s management remains in place, and the target continues to focus on its core business.

Hostile takeovers are generally hard to successfully complete as the target company is against it and will do what it can to prevent it from going through.

The target company has many possible defenses to fight against a hostile takeover and one way of warding off a hostile takeover attempt is to find a company to make a friendly bid to buy out the target.

Now that you know what the meaning of a white knight is and how it works in business, good luck with your research!

You May Also Like Related to White Knight Meaning