What is White Knight?
A white knight is an investor who is considered friendly for the company as that person acquires the company with the help of the company’s board of directors or top-level management at a fair consideration so that the company can be protected from the hostile takeover attempt by the other potential buyer or from bankruptcy.
How does it work?
When a company becomes a target for a hostile takeover, then the company needs to be saved by somebody who would help the company grow. At this point, the concept of the white knight comes into existence.
It is an individual or a company that takes over a target company and saves it from a hostile takeover from a black knight (a black knight is an individual or a company that takes over a company by force). By being taken over by a white knight, the company still can’t remain independent. But it’s far better than being taken over by a black knight.
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Source: White Knight (wallstreetmojo.com)
Examples of White Knights
- In the year 1953, the American Broadcasting Company was nearly bankrupt. At that time, United Paramount Theatres came in rescue for American Broadcasting Company (ABC) and acted as a white knight by buying ABC.
- In the year 1984, Walt Disney Productions faced a hostile bid from Saul Steinberg. Sid Bass and his sons acted as white knights and saved Walt Disney by buying significant portions of the same.
- In the year 1998, Digital Equipment Corporation is in pretty bad shape. At that time, Compaq came to rescue. By merging with Digital Equipment Corporation at that time, Compaq acted as a white knight.
- In 2006, there was ample talk about the merger of Mittal Steel and Arcelor. At that time, Severstal acted as a white knight to Arcelor.
- In the year 2008, JPMorgan Chase acquired Bear Stearns. At that time Bear Stearns was struggling to keep their stock price up. And if JPMorgan Chase would not have acquired them, they would need to file for insolvencyFile For InsolvencyInsolvency is when the company fails to fulfill its financial obligations like debt repayment or inability to pay off the current liabilities. Such financial distress usually occurs when the entity runs into a loss or cannot generate sufficient cash flow.read more. At that time JPMorgan Chase acted as a white knight.
How can the target company save itself by finding out a white knight?
source: moneycontrol.com
Since the year 2000, it was found that whenever there was a hostile takeover; it didn’t amplify the value of the company. The unwilling target company which was taken over by force couldn’t amount to more than $10 billion.
So, we can easily state that no hostile takeover was ever successful. Every company, thus, whenever they become a target for a hostile takeover, they need to make a great effort to find out a white knight.
Otherwise, the near future of the target company would be the following –
- There would be no independence/autonomy in the company. And as a result, the company will lose its way and they need to adhere to the whims of a black knight.
- Secondly, the company would lose its vision, its values, and its future.
- Thirdly, the company wouldn’t be able to create value for its employees, customers, and stakeholders.
For a business, this is the worst scenario. And that’s why it’s important to find someone out who would take over the company in preferred terms (even when there won’t be full autonomy). In a few cases, it also acts as a savior for companies that are going to be bankrupt.
But, every target company doesn’t need such a savior. If the target company is way bigger or one of the largest companies in the industry, they need any knight even when they face a chance of a hostile takeover.
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