In business, a white knight is a friendly investor that acquires a corporation at a fair consideration with support from the corporation's board of directors and management. This may be during a period while it is facing a hostile acquisition from another potential acquirer (black knight) or it is facing bankruptcy. White knights are preferred by the board of directors (when directors are acting in good faith with regard to the interest of the corporation and its shareholders) and/or management as in most cases as they do not replace the current board or management with a new board, whereas, in most cases, a black knight will seek to replace the current board of directors and/or management with its new board reflective of its net interest in the corporation's equity.
The first type, the white knight, refers to the friendly acquirer of a target firm in a hostile takeover attempt by another firm. The intent of the acquisition is to circumvent the takeover of the object of interest by a third, unfriendly entity, which is perceived to be less favorable. The knight might defeat the undesirable entity by offering a higher and more enticing bid, or strike a favorable deal with the management of the object of acquisition.
The second type refers to the acquirer of a struggling firm that may not necessarily be under threat by a hostile firm. The financial standing of the struggling firm could prevent any other entity being interested in an acquisition. The firm may already have huge debts to pay to its creditors, or worse, may already be bankrupt. In such a case, the knight, under huge risk, acquires the firm in crisis. After acquisition, the knight then rebuilds, or integrates the firm.
A number of variations of the term have been used and these include: a gray knight which is an acquiring corporation or individual that enters a bid for a hostile takeover in addition to the target firm and first bidder, perceived as more favorable than the black knight (unfriendly bidder), but less favorable than the white knight (friendly bidder). Also, a white squire, which is similar to a white knight except it only exercises a significant minority stake, as opposed to a majority stake. A white squire does not have the intention, but rather serves as a figurehead in defense of a hostile takeover. The white squire may often also get special voting rights for their equity stake.
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Hostile firms' strategies
The strategy that is usually employed by a hostile firm is making an offer more lucrative than the white knight's, so that the shareholders consider rejecting the white knight's bid. This, however, can lead to bidding wars and finally to overpaying, by one or the other, for the target firm.
Another option is known as the "NL strategy". Here, the hostile firm allows the white knight to move ahead and waits for the acquisition to take place. Once things are settled between the two entities, the hostile firm launches a takeover offer for the white knight. This takeover offer is generally a hostile one. The target (firm being bid on) can enter into standstill agreements with the white knight to prevent it from turning into a gray knight.
Examples
1953 – United Paramount Theaters buys nearly bankrupt ABC
1980 – Renault buys a controlling stake in American Motors, which saves the struggling American automaker from bankruptcy
1982 – Allied Corporation buys Bendix Corporation in a situation involving the "Pac-Man defense". Allied is drafted in when the company that Bendix tries a hostile takeover on fights back by buying up Bendix stock in attempt to create a reverse hostile takeover.
1984 – Chevron Corporation acquired Gulf Oil after Gulf tried being a white knight to Citgo in 1982 in order for Citgo to avoid a hostile takeover by T. Boone Pickens. Pickens then turned his attention to Gulf, leading to the Chevron–Gulf deal.
1984 – Sid Bass and his sons buying significant interest in Walt Disney Productions as a defense against Saul Steinberg's hostile bid for the company.
1987 – Kluwer Publishers merges with Wolters Samson as a defensive move against an attempted hostile takeover of Kluwer by Elsevier
1998 – Compaq merges with financially weak DEC
2001 – Dynegy attempts to merge with Enron to cover Enron's massive debts (the merger failed as it became obvious that Enron had been committing fraud, resulting in the Enron scandal)
2003 – SAP was seen by analysts as the most likely to help defeat Oracle's hostile bid for PeopleSoft, but it came to nothing
2006 – Severstal almost acted as a white knight to Arcelor as the merger negotiations were in place between Arcelor and Mittal Steel Company
2006 – Bayer acted as a white knight to Schering as the merger negotiations were in place between Schering and Merck KGaA