A white knight is a defense strategy employed by a target firm that is looking to avoid being acquired in a hostile takeover. Instead of falling into the hands of an unfriendly bidder, the target company seeks out a white knight—a friendly individual or corporation that acquires it at fair consideration. An acquisition by a white knight is often preferred, as it generally results in better compensation for the investors and allows existing management to remain in place.
Key Takeaways
- A white knight is a hostile takeover defense.
- A friendly company purchases the target company instead of the unfriendly bidder.
- While the target company still loses some independence, the white knight is more favorable to shareholders and management.
- A white knight is just one of many strategies companies can employ to avert a hostile takeover.
How a White Knight Works
Takeovers can be either friendly or unprompted. The latter is considered hostile if the acquiring company attempts to gain control of another without the consent of the target’s board of directors. In such cases, companies employ various strategies to defend themselves, one of which is the white knight strategy.
Officials from the target firm may seek a white knight to preserve the company’s core business or negotiate better takeover terms—a saving strategy named for its depiction as a savior.
Here’s how it works:
- The target might seek another acquirer to stave off the unfriendly bidder, often termed the black knight.
- The white knight makes an offer to purchase the target, typically at a premium to the hostile acquirer’s bid, aligning with the target’s shareholders and management.
- Once the acquisition is complete, the white knight may choose to retain the target’s management and/or business operations.
The concepts of white knights and black knights originate from the adversarial nature of chess, portraying the white knight as the savior and the black knight as the adversary.
Special Considerations
Some notable hostile takeover attempts include:
- AOL’s $162 billion purchase of Time Warner in 2000
- Sanofi-Aventis’ $20.1 billion acquisition of biotech company Genzyme in 2010
- Deutsche Boerse AG’s blocked $17 billion merger with NYSE Euronext in 2011
- Clorox’s rejection of Carl Icahn’s $10.2 billion takeover bid in 2011
However, successful hostile takeovers are rare, usually ending with significant bargaining up to shareholder and board satisfaction. Large, unwilling companies especially pose more difficulties in this scenario.
White Knight vs. Other Knights
In addition to the white knight, other “knight” strategies exist in the world of corporate defenses:
- Black Knight: This party makes an unwanted, hostile takeover bid. The target typically employs many defenses, such as a poison pill, to prevent the acquisition.
- Gray Knight: A less favorable bidder than the white knight but still friendlier than the black knight. The gray knight emerges as a third potential bidder in a situation where the target remains contended.
- Yellow Knight: Initially planning a hostile takeover, this entity eventually proposes a merger of equals instead.
White Knight vs. White Squire
Similar to the white knight, a white squire is a strategic investor or company that acquires a significant stake in a target firm to fend off hostile takeovers. Unlike the white knight, the white squire only buys a portion of the shares, allowing the target to maintain independence.
Iconic Examples of White Knights
Noteworthy instances include United Paramount Theaters’ 1953 acquisition of the nearly bankrupt ABC, Bayer’s 2006 rescue of Schering from Merck KGaA, and JPMorgan Chase’s 2008 acquisition of Bear Stearns.
The Difference Between White Knights and Poison Pills
White knights involve friendly investors who intercept and purchase companies vulnerably targeted by hostile bidders. In contrast, a poison pill is a strategy employed to prevent outright acquisition by repurchasing enough outstanding shares to dilute and discourage unfriendly purchase intents.
What is a Hostile Takeover?
A hostile takeover is defined by an unlabeled acquisition attempt by an acquiring company designed to gain control over a target without board approval. Target firms can employ defensive strategies, such as white knights and poison pills, or outright rejection of offers.
Defense Strategies Against Hostile Takeovers
Options include the white knight, poison pill, golden parachute, crown jewel, or pac-man defense mechanisms.
The Bottom Line
A white knight defense involves a strategic, friendly acquisition aimed to save a company from an unfriendly bidder’s grip. Though not securing the target’s absolute independence, it ensures the benign terms and company’s equitable sale on its own rational terms.
Related Terms: Black Knight, Gray Knight, Yellow Knight, Poison Pill, White Squire.
References
- The New York Times. “How the AOL-Time Warner Merger Went So Wrong”.
- U.S. Securities and Exchange Commission. “Sanofi-aventis Announces Non-Binding Offer to Acquire Genzyme”.
- Euronext. “L’accord de fusion entre Deutsche Börse AG et NYSE Euronext donne naissance au plus grand opérateur boursier du monde”.
- The Clorox Company. “Clorox Confirms Receipt of Unsolicited Conditional Proposal From Carl Icahn”.
- Perrigo. “Perrigo Shareholders Convincingly Reject Mylan’s Tender Offer, Expressing Confidence in Perrigo’s Long-Term Strategy”.
