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Black Knight

Updated on May 23, 2024
Article byPriya Choubey
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Black Knight Definition

A Black Knight refers to a company displaying hostile takeover intentions, and it makes an unfair bid to acquire the target company. However, the target firm’s management often defies such unfriendly acquisitions, fearing that the acquirer’s objectives may not be in the company’s best interest. They view such offers as those made in bad faith.

Black Knight

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Such entities only aim to make considerable profits quickly from a troubled target company, assuming the latter has fixable issues, or it offers them certain specific advantages. Hence, if the board of directors refuses the bid, the black knight often resorts to an unethical takeover, like entering into a proxy battle or directly approaching the shareholders to make the tender offer.

Key Takeaways

  • A black knight company refers to a hostile bidder, typically one that seeks to acquire a target company against its wishes. Hence, the target enterprise is hardly ever responsive to such takeovers.
  • Such acquirers generally face resistance from the target firm’s management and board, as their intentions are perceived negatively. Target companies typically believe the hostile bidder has malicious intent, not holding the company’s and its shareholders’ best interests.
  • The prominent strategies a black knight adopts when the management refuses its offer are entering into a proxy fight or attempting to convince the shareholders with a lucrative tender offer.
  • Some ways to avoid hostile takeovers include certain defenses. They are categorized as white knight, poison pill, golden parachute, PAC-man, greenmail, and litigation defenses.

Black Knight Explained

Black knight companies are known for making unfriendly acquisition attempts. The goals of such entities are often misaligned with that of the target company. They usually proceed with the takeover intending to maximize their market share, change the management, attain cost efficiency, improve overall business abilities, or diversify their business. The only objective is to benefit through unilateral decision-making, which enables the company to acquire the target firm and profit from it. A black knight does not usually keep the acquired or target company’s business or financial interests in view.

The acquirer may adopt two significant strategies for a hostile takeover. The first one is to propose a tender offer to the shareholders, who can pressure the board of directors to give in to this unfair acquisition demand. The other is to enter a proxy fight, where the black knight may influence the shareholders to replace the existing board.

However, the target company can respond in various ways to thwart hostile takeovers. Here are a few strategies these companies might adopt:

  1. White Knight Defense: Using this method, the target company seeks a friendly investor to purchase a significant stake, making the takeover attempt more complex and costly for the acquirer.
  2. Crown Jewel Defense: Per this defense mechanism, the target company sells off valuable assets to reduce its appeal, thereby decreasing the potential benefits of the takeover.
  3. Poison Pill Defense: To combat the hostile takeover, the target company issues extra shares at a discount, diluting the hostile bidder’s ownership and increasing the takeover cost.
  4. Golden Parachute Defense: This is another clever strategy where key executives are promised generous compensation if the company is taken over, making the takeover more expensive for the acquirer.
  5. PAC-Man Defense: This is a strategy where the target company counters the takeover attempt by bidding for the aggressor, creating uncertainty and reversing the situation.
  6. Greenmail Defense: In this form of defense, the company buys back its shares from the hostile bidder at a premium, making the takeover less attractive financially.
  7. Litigation Defense: As the name indicates, the target company resorts to legal action, claiming the takeover violates regulations and causing delays and complications for the acquirer.

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Types

Black knights may come in two other types or forms. Their approach keeps them from being identified directly as black knights. However, they may have similar intentions. These types have been discussed below.

  1. Grey Knight: A gray knight is a competitor to a black knight, but such a company is friendly compared to the latter. A gray knight acquirer offers a more reasonable bid. However, they take advantage of the situation to negotiate a profitable deal with the target company.
  2. Yellow Knight: These companies make an unwanted or unpalatable offer initially. However, they change their plan later and offer a deal with a merger of equals.

Examples

Let us understand how black knight strategies and defenses work in business through the following examples:

Example #1

Suppose Company A has been underperforming for the last two years, and Company B is its only competitor. Company B makes a bid to purchase Company A and offers 40% less than the fair book value of Company A. The Board of Directors at Company A refused the offer. However, Company B convinced the shareholders of Company A to remove the board members and destabilize the enterprise. With this happening, it is clear that Company B is a black knight that entered into a proxy fight to gain control and force its acquisition decision on Company A.

Example #2 – Oracle Corporation

In 2003, when PeopleSoft, a company specializing in business software, announced it had entered into a merger deal with J.D. Edwards, Oracle that initiated a hostile takeover targeting PeopleSoft. The attempted acquisition brought several questions and troubles as the deal between PeopleSoft and J D Edwards was almost concretized at that point.

PeopleSoft’s shareholders knew they would lose their ownership stake if Oracle took over since the black knight had no intention of accommodating any PeopleSoft shareholders, people, or products post-acquisition. However, the board gained customer confidence and safeguarded PeopleSoft’s interest by introducing the Customer Assurance Program. This program promised cash payments to existing customers if Oracle withdrew support for licensed PeopleSoft products within 4 years of the acquisition. This was one of the most talked about black knight takeovers at the time.

Criticism

Black knight companies, known for their hostile takeover tactics, encounter criticism due to their predatory nature. Let us understand why black knights face flak.

  • Self-centered approach: These firms focus on immediate financial gains at the cost of employee welfare, community interests, and the sustainability of the acquired business.
  • Destructive objectives: A black knight often comes with ulterior motives with respect to the target firm, like laying off employees, sale or merger, or debt-funded share-repurchase programs, among other objectives.
  • Target company growth problems: Hostile takeovers can result in workforce reductions, decreased investment in research and development, or be detrimental to the long-term prospects of the acquired company, among other things.
  • Unethical practices: Such takeovers can generate an atmosphere of instability and anxiety among employees, disrupt industry equilibrium, and undermine ethical business standards.

Black Knight vs White Knight

Black Knight and White Knight are terms commonly used in corporate takeovers. They differ in the following ways:

BasisBlack KnightWhite Knight
DefinitionA black knight refers to a company that initiates a hostile takeover by proposing an unappealing bid to the target company.A white knight is a friendly third company that assists the target company by presenting a competing offer to the hostile acquirer.
ApproachThe approach is typically aggressive or hostile. The approach is collaborative. 
Acquirer’s ImageThe acquirer is seen as a PredatorThe acquirer is perceived as a Savior or Rescuer
GoalsThe bidder has a self-centered approach and damaging objectives that don’t align with the target company goals. The white knight and the target company have shared objectives that align well with each other’s independent plans.
ProposesAn unfair and unappealing bid is made to proceed with an aggressive or hostile takeover against the wishes of the target company.A friendly, appealing, and fair bid initiating a more favorable and amicable merger or acquisition proposal is presented to the target company.
Board and Management’s ResponseThe target company usually opposes or resists this hostile act.The target company is more amenable to such offers and supports and endorses friendly acquisitions. 
IntentionThe aim is to gain control of the target company and its assets, potentially altering its strategic direction. It prioritizes preserving the target company’s assets, workforce, and organizational culture. 
ResultHostile takeover attempts by black knights can lead to conflicts, strained relations, and negative public perception.They often lead to more amicable resolutions, potentially resulting in positive outcomes for all parties involved.

Frequently Asked Questions (FAQs)

1. What does a black knight represent?

The black knight is a term used to denote the people, entities, characters, or figures with villainous and evil intentions. In literature, such characters are recognized as those wearing black armor; they often signify darkness and death. They are believed to have a mysterious, unpredictable, and dangerous persona. When this reference is extended to business and corporate finance, a black knight is a company interested in taking over another company, usually without agreement or assent.

2. Is a black knight takeover always hostile?

By definition, black knight acquirers are known for their hostile takeover strategies as they are ready to adopt unethical means for acquiring a target company.

3. Is a white knight takeover better than a black knight acquisition?

The primary aim of a black knight company is to benefit from aggressively acquiring a business entity facing challenges. Hence, in many ways, a white knight takeover may be considered better as the white knight usually has similar vision, strategy, or goals as the target company.

This article has been a guide to Black Knight and its definition. Here, we compare it with white knight, explain its types, examples, and criticism. You may also find Some useful articles here –

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