March 15, 2021 | AtoZ Markets – The white knight is known as the savior in corporate finance who also possesses good qualities and virtues. They usually offer friendly terms to companies in a difficult situation when unfriendly companies are ransacking them.
The black knight
The black knight is the unfriendly bidder in the finance world. It attempts to make a hostile takeover of a company, making them a raider.
For example, Company A looks for an established company in the area where they want to expand that we’ll call company B. Company B then rejects the offer that company A makes, thinking it will be a grave move if they accept. Company A will still proceed in an attempt to take over company B. This action makes company A the black knight in this story.
A little trivia
These terms that corporate finance uses are all derived from the game chess, where the likes of the white knight and the black knight are present.
Understanding a white knight
Company A, which is perceived to be a hostile one, wants to acquire company B. Company B’s directors think it will be a wrong decision since the company might end up ruined, so they go ahead and tell the shareholders about it, hoping they will make up their mind not to sell.
Here is when the white knight enters the story. Let’s name the white knight as company X, who has shared a good relationship with company B for a long time. It goes ahead and saves company B from a problematic situation with company A while benefiting at the same time. Company X proposes a bid, and company B approves their merge since they’ve been friends for a long time already. This merger is also an attempt to evade the hostile company A’s acquisition.
On a bright note, these black knight attacks are usually unsuccessful because an established company is naturally tough to buy if it is not for sale. Since 2000, no black knight attack higher than ten billion dollars has succeeded since they are usually unwilling to be sold.
White knight variations
The white squire
The white squire is an individual or a company similar to what a white knight does. They both help to reject a black knight attempt. The only difference between the two is that a white squire does not wish to take over but only buys just enough shares to stop a hostile company from taking over.
The grey knight
The grey knight is the third potential bidder. It is not as desirable as the white knight since it also aims to take over, but only if it outbids the white knight. However, a white squire is still better than the black knight because it poses a friendlier approach even if it has its interests.
The yellow knight
The yellow knight is initially a black knight who attempts a hostile acquisition on an unwilling company. They suddenly back out of the full purchase then offers a merger instead. This merger should also be equal to that of the company that they try to take over.