Yellow Knight
It is a predatory firm that planned a hostile acquisition but then backs out, reconsiders, and suggests a merger of equals with the target business.
What Is a Yellow Knight?
A yellow knight is a predatory firm that planned a hostile acquisition but then backs out reconsiders, and suggests a merger of equals with the target business.
Against the wishes of its management, Yellow Knight aggressively tried to buy a business but later changed heart, backed off, and suggested working together in a merger.
"If you can't beat them, join them" is the philosophy of Yellow Knights. They could abandon the takeover attempt for a variety of reasons.
They frequently alter their tactics after realizing the target will cost more and/or have stronger takeover defenses than anticipated.
The Yellow Knight can unexpectedly find itself in a precarious negotiating situation, prompting it to withdraw or suggest a cooperative merger as a compromise.
A harsh refusal can put the yellow predator in a precarious negotiating position and convince it that a friendly merger is the only viable alternative to seize the target's assets.
The potential acquirer is convinced that it lacks the necessary resources to execute the purchase by the target organization's strong resistance.
The proposal of a friendly merger by the corporation instead of a hostile takeover can also respond to a change in the target company's situation.
One of the reasons could be the destruction of the target company's vital assets or a reduction in revenue due to a natural disaster, a political coup, or any other such event.
It may seem to the acquirer that getting the target firm through a merger would better use its resources because it will require more than originally envisioned.
The yellow knight does a complete 180-degree reversal, from wanting to bully the target into submission and swallowing it up to suggesting that they work together as an equal force.
Based on the previous effort at the hostile acquisition, some pessimism and skepticism continue to permeate the new merger negotiations.
The color yellow reflects fear or cowardice.
The former aggressor gives up on its takeover plan out of worry that it won't work and will have wasted significant resources.
Yellow knights could be viewed as frail when they abandon a takeover plan and withdraw to consolidation discussions.
The two companies involved in the case are the predator, which seeks to acquire, and the prey, which aims to avoid being bought.
On the other hand, combining two businesses is similar to getting married.
The phrase "yellow knight" is harsh since it implies that the rival bidder suddenly became nervous and abandoned the takeover attempt, leaving them in a weak position for negotiation.
An unfriendly takeover may be too expensive or otherwise problematic, but the administration of a yellow knight may still decide that the objective organization would be valuable.
Factors for a Yellow Knight to Consider
Numerous elements should be considered to ensure the alliance is advantageous, like when the acquirer abandons the hostile takeover attempt and agrees to a merger with the target company.
These factors consist of the following:
1. Financial Impact
Boosting revenue and net profits is the priority of the acquirer.
To determine whether or not the acquisition's goal is achievable, the acquirer must first examine the Earnings per Share (EPS). Accretive or dilutive are the two possible results of a share swap between merging companies.
The newly merged company's EPS is generally higher than the acquirer's pre-merger EPS, indicating higher value, making an accretive merger the best option. The two companies' relative Price-to-Earnings (P/E) ratios determine whether the merger will be accretive or dilutive to shareholders.
The merger will be accretive if the acquiring firm's P/E ratio exceeds the target firm's P/E ratio. It can also affect whether a deal is accretive, dilutive, or financed with cash or debt.
Because the potential revenue from cash will usually never be larger than the equity earnings obtained by the new company, deals financed with cash are virtually always accretive. Dilutive transactions, however, are sometimes good deals.
For instance, the rewards of cost savings brought about by increased efficiency and economies of scale can take some time to reap for the newly joined company.
2. Value
Once the two companies merge, the buyer should consider the value created. The acquiring business should assess the likelihood of increased cash flow from the merger, a decreased cost of capital, and long-term growth potential.
Ideally, a faster growth rate in terms of sales, productivity, and client acquisition results from a merger.
The combined firm's productivity in several areas, including finances, operations, market dominance, personnel, and tax benefits, should be more advantageous than the productivity of the individual companies.
Synergy, or the idea that the whole is more than the mere sum of its parts, is the term used to describe this greater positive impact.
Synergy can be operational-referring to cost savings-or financial-referring to enhanced income or profitability.
3. Asset Sale and Stock Sale
The asset sale vs. stock sale should also be considered.
A stock sale refers to acquiring the target's stock, whereas an asset sale refers to achieving the target's assets.
While sellers typically favor stock sales, asset sales are preferred by buyers.
Other Types of Knights
The buying company in mergers and acquisitions (M&A) might be compared to a knight in one of four colors.
In addition to yellow knights, there are also:
1. Black Knights
In contrast to yellow knights, black knights make hostile, unwelcome takeover offers and defend their positions.
The target company's board of directors typically does not agree to the black knight's acquisition because they do not believe it will benefit the shareholders.
The objectives of the black knight and the target company's board of directors are usually different. So these predators give nightmares to the latter as they push their way into positions of authority.
It does not immediately strive to become its "friend," like an eagle that swoops down to seize its victim.
2. White Knights
The supportive forces charged with rescuing the target from the grasp of another potential buyer with intentions to drain it dry to make a quick profit are known as white knights, the opposite of black knights.
To protect the company's core operations or to negotiate better takeover terms, company authorities frequently look for a white knight.
The white knight might agree to take on this position for certain rewards, including paying a lower premium to gain control than would otherwise be necessary under competitive bid conditions.
3. Gray Knights
Gray knights fall midway between white and black knights, as their color would imply. However, they are at least seen as a more enticing alternative than the latter, even though they are less desirable than the former.
It is the second aggressive bidder in a business takeover attempt.
When a persistent, uninvited predator approaches, gray knights take advantage of the perception that they are a kinder alternative to a hostile black knight and use that as a negotiation chip to secure a better deal.
Types of Mergers
The merger structure can be categorized in several ways, depending on the terms between the two firms.
Market extension, horizontal, conglomerate, product extension, and vertical mergers are some types of mergers.
The goal of the commercial transaction and the relationship between the merging companies determine the type of merger.
1. Market Extension Mergers
When two companies that sell the same product in different markets unite, this is known as a market extension.
When a company believes its market is small or wants to introduce its products to new markets, it takes this action.
It aids in expanding the consumer base and market and improving the products.
The most well-known instance is when RBC Centura Inc. bought Eagle Bancshares Inc., an American company, in 2002. With this transaction, RBC had the opportunity to trade in Atlanta's financial markets and establish itself in the North American market.
2. Horizontal Mergers
It is a kind of merger that takes place between businesses that are engaged in the same or related industries.
It helps to gain a competitive advantage.
An example of a horizontal merger is the integration of Facebook, Whatsapp, Instagram, and Messenger.
3. Conglomerate Mergers
When a parent business buys subsidiaries, a conglomerate is formed that spans multiple industries. The resulting company is typically big and multinational.
It happens between two completely unrelated businesses.
Alphabet, AT&T, Thomson Reuters Corporation, 3M, etc.., are a few examples of conglomerates.
4. Product Extension Mergers
A product-extension merger occurs between businesses that sell related items in the same market, unlike a market-extension merger.
It boosts market share, broadens both companies' product offerings and consumer bases, and provides a competitive edge.
An example of a product-extension merger is Pizza Hut and PepsiCo. In 1977.
5. Vertical Mergers
This merger involves two or more businesses that are involved in various stages of the production process.
It aids in maximizing synergies, minimizing expenses, assuring quality control, and achieving greater profitability.
For example, the merger between Google and Android.
Benefits of a Merger
One advantage of a merger is the opportunity for quick expansion without the need to launch a brand-new company. In addition, there is a solid basis for lowering the cost of capital and accelerating growth and returns.
Any of the following factors could lead one corporation to seek a merger with another:
1. Greater profitability
Increased productivity, economies of scale, or lower costs result in higher profits.
In addition, businesses merge to achieve advantages like improved market bargaining power, increased access to funds, higher production volume yielding reduced costs, and more.
2. Corporate Expansion
A business that wants to grow in a particular region may merge with a different, similar company already established in that region.
A merger or acquisition can save businesses time, effort, and money compared to beginning from scratch, even though opening a subsidiary or branch is always an option.
3. Unlocking Synergies
Synergies are frequently defined as "one plus one equals three": the value that results from two businesses collaborating to create something far more potent.
Synergy occurs when two businesses' combined worth exceeds the sum of their values.
4. Acquisition of assets
The merged entity acquires all the assets of both corporations.
5. Market Expansion
When two businesses merge, the resultant entity gains a larger market share and outperforms its rivals. Greater financial stability results from mergers and acquisitions for both parties engaged in the deal.
Increased economic power can result in more market share, improved customer influence, and reduced competitive threat. Larger businesses are typically more difficult to compete against.
A wider consumer base is typically made available by merging two businesses, frequently by opening doors to new markets.
Although both friendly and aggressive takeovers might ultimately be beneficial, a cooperative merger frequently serves the interests of both parties the best.
As a result, turning from a hostile acquirer to a yellow knight is typically a stroke of luck.
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