White Knight
A company or investor that comes to the rescue of another company that faces an unfriendly/ hostile takeover.
What is a White Knight?
A white knight is a company or investor that comes to the rescue of another company that faces an unfriendly takeover, also known as a hostile takeover.
The term comes from the strategy board game chess.
As with chess, the knight has its counterpart, the “black knight.” This unfriendly investor may be an individual or a company that tries to interfere or sabotage a friendly takeover by making a competing offer or using other tactics to disrupt a takeover deal.
In a hostile takeover scenario, the target company is usually on the verge of being acquired by the black knight, usually an investor or rival company.
However, the white knight acquires the company by offering a bid higher than the hostile investors. Similarly, the knight can also be the buyer of a struggling company that may owe a lot of money to creditors or is bankrupt.
A white knight comes to the aid of a struggling company either by their desire or at the request of the struggling company. This creates a defense against a possible hostile takeover attempt.
Usually, white knights have a friendly relationship with the company targeted for a hostile takeover. Their goal is to preserve its operations and assets.
The friendly knight may also be a larger and more established company with enough resources to protect the target company from being dismantled or restructured by the black knight.
The knight can also take other actions to prevent a hostile takeover, for example:
- Buying a large number of the target company’s shares to dilute the ownership of a potential hostile investor.
- They can also work with the company’s management and board of directors to develop a defense strategy. For example, implementing a “poison pill” or entering into a “golden parachute agreement.”
What is a hostile takeover?
A hostile takeover is a type of corporate acquisition; the public sees these deals as controversial because they can implement significant changes in a company—for example, changes in management, operations, and business strategy.
These changes can affect the acquired company’s workforce, and events can negatively affect the company’s workforce and its shareholders, including job losses for the employees.
The takeover occurs when a black knight acquires a target company without the approval of management or the board of directors.
The hostile activist can buy a controlling stake in the targeted company’s shares in the open market; then, the black knight can force the target company to accept their terms.
Let’s expand on how a hostile activist can gain control of a company:
- The acquirer, the hostile investor, may gain control of the company by using a tender offer to buy a certain number of shares from existing shareholders at a specific price–usually at a premium.
- The acquirer may also purchase shares in the open market, which grants the acquirer a stake to gain influence or control over a company. At a certain point, transactions must be disclosed, which can prompt a hostile takeover defense, such as a white knight defense.
- The acquirer may influence shareholders to give him their proxy votes; with enough proxy votes, the acquirer can then use that control to replace the target company's board of directors and gain control.
Examples of hostile takeovers
Hostile takeovers do not occur as often as they used to back in the day. A recent example was Elon Musk’s hostile bid for Twitter. Eventually, Twitter’s board of directors agreed to the deal since they looked after the shareholder’s best interest.
Let’s take a look at previous hostile takeovers:
1. Oracle and PeopleSoft
The Oracle Corporation and PeopleSoft, a company that makes H.R. software, signed an agreement to merge in December 2004.
The deal was worth about $10.3 billion. Oracle and PeopleSoft had been negotiating and fighting in court for 18 months.
After the deal, the newly formed company became the second-largest seller of software applications.
2. AOL and TimeWarner
Before announcing its plans to acquire Time Warner Inc. for $165 billion, AOL, a smaller company, had been acquiring several other companies, such as Netscape and MapQuest.
The merger with Time Warner, worth a combined total of $350 billion, was the largest in history when it was completed.
3. Vodafone AirTouch and Mannesmann AG
On February 4, 2000, Vodafone AirTouch officially acquired Mannesmann in the largest merger in history, according to Goldman Sachs, Vodafone's financial advisor for the deal.
Mannesmann, a German telecom and engineering company, had resisted Vodafone's hostile takeover attempt for three months before finally agreeing to the merger.
As a result of the acquisition, Vodafone became the largest publicly traded company in Europe and the fourth largest in the world, with a market capitalization of around $365 billion.
Examples of white knights
It could be said that possibly the biggest white knight activist in the history of the U.S. is no other than J.P. Morgan, not the bank, but the actual individual who became a banking legend.
J.P. Morgan bailed out the U.S. from a possible collapse not once but twice. Let’s look at other friendly activist examples:
- During the 2008 financial crisis, Warren Buffet’s investment company, Berkshire Hathaway, stepped in to provide financial support to the struggling investment bank, Goldman Sachs.
- In 2018, Disney came to the rescue of 21st Century Fox, facing a hostile takeover by Comcast. Disney offered to buy 21st Century Fox at a higher price than Comcast, and regulators eventually approved the deal.
- In 2008, JPMorgan Chase acquired Bear Stearns to protect it from a potential hostile takeover.
JPMorgan Chase, which had a long-standing relationship with Bear Stearns, stepped in to acquire the company and provide it with the support it needed to survive the financial crisis. - Another example of a white horse takeover occurred in 2013 when Michael Dell and Silver Lake Partners acquired Dell Inc. to protect it from a potential hostile takeover by activist investor Carl Icahn.
- Dell Inc. was a struggling technology company facing pressure from Icahn and other investors to go private. Michael Dell, the company's founder, and CEO, partnered with Silver Lake Partners to acquire Dell Inc. and take it private, thus protecting it from a potential hostile takeover.
Note
John Pierpont Morgan was an American financier and banker born in 1837 in Hartford, Connecticut. He was regarded as one of the most influential figures in finance during his time.
He founded J.P. Morgan & Co., which later became J.P. Morgan Chase & Co., one of the largest and most successful banks worldwide.
Variations on the White Knight
A white squire is a term used in finance to refer to an investor or organization that provides financial support to a company facing a hostile takeover.
The term white squire is similar to a white knight but may refer to an individual or company not as powerful or well-known.
The squire may not have the same resources or influence as the knight. However, the squire is usually as motivated as the knight in helping the company to maintain its independence and protect the interest of the shareholders.
The white squire does not buy a company but a stake enough to block a hostile takeover. This may buy the company enough time to set a defensive strategy.
When the hostile investor rescinds his bid, the squire sells his shares. In return or as an incentive to partake in the blockage of a hostile takeover, the squire may receive a seat on the board of directors, generous dividends, or discounted shares.
Gray Knight and Yellow Knight
In corporate takeovers, a gray knight is a third party that enters the bidding process after another party (its white counterpart), and the target company has made an initial offer.
This particular knight is a blend of its white and black counterparts. Thus it is referred to as a gray knight.
The gray knight makes a higher offer than the first bidder, often unsolicitedly. A gray knight's offer may be motivated by financial gain, but it is typically seen as more friendly than its more hostile counterpart.
The gray knight is the middle ground between a friendly investor and a hostile investor. It is seen as more appealing than hostile investors—the lesser of the devils, so to speak.
A yellow knight is a company that initially plans to make a hostile takeover attempt but then backs out and proposes a merger instead.
The yellow knight changes composture after they realize that the targeted company has set up a strong defense against a hostile takeover or that the company will cost more.
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