Black Knight
A business that makes an uninvited, hostile takeover offer
What is a Black Knight?
A business that makes an uninvited, hostile takeover offer is known as a black knight. An acquisition proposal by a corporate or an individual that the target firm rejects is referred to as a hostile takeover.
In a metaphorical sense, the knights' color represents the takeover's nature. A takeover is a procedure through which one corporation submits a bid to take over or buy another company. The knight in black, in particular, has an aggressive, unpleasant, and hostile character.
Because these acquiring companies sometimes have malevolent motives, the target firm's management frequently does not wish to sell to one. As a result, these businesses try to take over a firm without going through the board of directors.
Key Takeaways
- A business that makes an uninvited, hostile takeover offer is known as a black knight.
- Because these acquiring companies sometimes have malevolent motives, the target firm's management frequently does not wish to sell to one. As a result, these businesses try to take over a firm without going through the board of directors.
- After the management of a target company declines an acquisition offer, a black knight (acquirer) may use a variety of strategies to seize control of the business:
- Tender Offer
- Proxy Fight
- A target firm can safeguard itself from unwanted hostile takeovers through a variety of different tactics:
- Poison Pill
- Golden Parachute
- Supermajority
- White Knight
- They frequently target poorly handled businesses, have high expenditures, might operate more profitably as a private firm, or have other issues that may be resolved to increase their value.
- Acquirers are often categorized as one of the four categories of knights based on the nature of their bid. Besides black, other forms of knights include:
- White Knight
- Grey Knight
- Yellow Knight
Reasons for a Takeover
A company may decide to conduct a takeover as part of its strategy for a variety of reasons, including:
- Expand the market share
- Improve efficiency and other business abilities
- Utilize scale economies
- Product portfolio diversification
- Ensure better distribution
- Invest in intangibles (brands, patents, trademarks)
- Diversify to spread risk.
- Removing barriers to entering into target markets
- Get rid of the competition
Example
For instance, two publicly-listed companies, Company X and Company Y. Company X, want to enter a new market where Company Y is already well-established.
Company X makes an acquisition offer to Company Y's Board of Directors. After contemplation, Company Y decides it is not in its best interest to accept the offer.
Suppose Company X carries out a takeover bid after being rejected by Company Y's board of directors. In that case, it is referred to as a hostile takeover, and Company X will be regarded as a "black knight."
The goal of Company X is to generate quick cash and provide results.
As a consequence, they will make adjustments that will have an immediate effect on the target firm, such as:
- Significant layoffs
- Asset exploitation
- Preparing the firm for sale
- Contemplating a merger
- Implementing share purchase programs
Company X aims to wring as much money and profit out of Company Y as soon as possible before the Company's worth continues to decline.
Hostile Takeover Strategies
After the management of a target company declines an acquisition offer, a black knight (acquirer) may use a variety of strategies to seize control of the business:
1. Tender Offer
A tender offer is a proposal to buy shares of the target company's stockholders at a price over market value. Then, bypassing the board of director's approval, the takeover firm launches a tender offer straight to shareholders.
The goal is to buy enough shares to take control of the target business (>50% ownership).
Example: The current share price of Company ABC is $20.
The current shareholders may receive a tender offer of $40 per share from Company XYZ (black knight) undertaking a hostile takeover, subject to the ability to buy the controlling interest (at least 51% of the existing shares).
2. Proxy Fight
In a proxy fight, the acquirer attempts to get the target company's current shareholders to remove the board of directors.
This makes it simpler to take over the business since it is anticipated that the new board members would be more amenable to a change in control.
Example: A hostile takeover of Company A is being attempted by Company B. By using a proxy war tactic, Company B convinces a significant proportion of Company A's shareholders to vote the current board of directors out of office.
After the current board of directors is dismissed, shareholders will elect new board members, who will be required to accept a buyout offer.
Typically, a company's management doesn't want a black knight to take over since its objectives don't align with the target company's.
Nevertheless, the knight in black will still seek to acquire a company by launching a tender offer to shareholders, waging a proxy fight, or attempting to purchase the required quantity of company shares on the open market.
These want to acquire a sizable controlling interest that will allow them to apply public pressure on management and influence the target's board of directors.
They often succeed in rallying support from other shareholders, enhancing their influence, and raising the likelihood that their demands will be accepted because the majority of the firms they pursue are underperforming.
These characters typically prey on failing businesses trading below their actual worth. Like raiders, their main objective is to generate a swift profit rather than create long-term value.
Defenses Against a Hostile Takeover
A target firm can safeguard itself from unwanted hostile takeovers through a variety of different tactics:
1. Poison Pill
A poison pill technique is employed to reduce the acquirer's interest in the target firm. This strategy involves raising the cost of acquiring a controlling stake in the target company's shares.
An example of a poison pill plan would be to offer current shareholders the chance to purchase more shares of stock at a reduced price. However, due to the stock being diluted, more shares will need to be acquired by the acquirer to obtain a controlling interest.
A golden parachute is a significant monetary award offered to corporate executives if the firm is acquired or when the executives are fired. It is a contract between a firm and its employees.
When a company's senior management is let go due to corporate restructuring, they typically get significant perks such as cash bonuses, medical coverage, stock options, severance compensation, retirement benefits, etc.
For instance, Jim Kilts, CEO of Gillette, received a golden parachute of $165 million after Procter & Gamble acquired his business.
3. Supermajority
The Company's voting rules may be amended by a supermajority resolution requiring the approval of at least 70% of the Company's shareholders for any acquisition.
As a result, a black knight would have to buy more shares to seize control of the target firm, which would be more challenging.
3. White Knight
A white knight is a benevolent potential acquirer who intervenes and conducts a friendly acquisition of the target to block a hostile takeover by a black knight.
Because white knight wants ownership of the target firm and not operational management, they are regarded as the Company's savior.
The existing management and the Company's central business unit are often acceptable to the white knight (as opposed to possibly selling it off or shutting it down).
Criticism of Black Knights
Like raiders, they frequently target poorly handled businesses, have high expenditures, might be operated more profitably as a private firm, or have other issues that may be resolved to increase their value.
They demand quick outcomes. Generally speaking, these aggressors won't hesitate to implement significant, divisive reports to increase earnings, share prices, and bank accounts.
Aggressive employee layoffs, asset stripping, and business preparation for a sale or merger are common strategies. Another prominent strategy is to implement debt-funded share buyback schemes.
Some of these predators' tactics might improve the Company's situation. On the other hand, perhaps some might ruin it.
These knights sometimes have little regard for the long-term consequences of their choices or the financial well-being of stockholders who want to hang around.
All that counts is that they generate money and secure profit before the possible crash and burn of the target they butchered and stole.
Types of Knights
Acquirers are often categorized as one of the four categories of knights based on the nature of their bid:
1. White Knight
A white knight firm is the one that has been entrusted with acquiring a target company to save it from a knight in black's takeover effort and will maintain the target company's primary operation.
As stated previously, white knights will perform the role of saviors in exchange for a lower target acquisition cost.
2. Grey Knight
A firm whose takeover bid is more appealing than the one from a knight in black yet as attractive as the one from a knight in white is referred to as a grey knight.
To avoid falling into the black knight's clutches, target organizations under assault may opt to negotiate a deal with a grey knight, even if the transaction will not be perfect.
3. Yellow Knight
A yellow knight business initially makes a hostile and aggressive takeover bid but ultimately completes the transaction by mutual negotiation, such as a merger of equals.
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